Nutrien - Q1 2024

Transcript

Operator (participant)

Welcome to Nutrien's 2024 first-quarter earnings call. At this time, all participants are in a listen-only mode. A Q&A session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jeff Holzman, Vice President of Investor Relations. Please go ahead.

Jeff Holzman (VP of Investor Relations)

Thank you, Operator. Good morning and welcome to Nutrien's first-quarter 2024 earnings call. As we conduct this call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions is contained in our quarterly report to shareholders as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions. I will now turn the call over to Ken Seitz, Nutrien's President and CEO, and our CFO, Pedro Farah, for opening comments before we take your questions.

Ken Seitz (President and CEO)

Good morning and thank you for joining us today to review our first-quarter 2024 results and the outlook for our business. Nutrien delivered Adjusted EBITDA of $1.1 billion in the first quarter, supported by improved crop input margins, increased fertilizer production, higher sales volumes, and lower operating costs. Nutrien Ag Solutions' Adjusted EBITDA of $77 million was well above the prior year, driven by strong grower demand and a normalization of margins in North America. Retail crop nutrient sales volumes were up 17%, and per-ton margins increased by more than 15% compared to the compressed levels in the first quarter of 2023. We continued to grow our proprietary crop nutritional and biostimulant gross margins through differentiated product offerings and expanded manufacturing capacity. These high-value products enhance margins for Nutrien and improve quality and environmental performance for our growers.

Gross margin for crop protection products increased by 12% in the first quarter as margins in North America recovered to normalized levels. We continued to see pressure on crop protection margins in Brazil due to the persistence of high inventory levels in the channel. We reduced our crop protection inventory in Brazil by approximately $150 million over the past 12 months and will continue to tightly manage purchases as the market stabilizes. Our Australian retail business delivered strong results and was a significant contributor to our first-quarter retail earnings, highlighting one of the advantages of serving growers in diverse geographies. First-quarter earnings for potash, nitrogen, and phosphate were down from the prior year due to lower benchmark prices. However, our results reflect progress on a number of operational initiatives that contributed to higher operating rates, increased sales volumes, and lower costs.

In potash, we increased production by 15% year-over-year and lowered our controllable cash cost of production to $56 per ton. We continue to advance automated mining initiatives that are providing safety and productivity benefits for our operations. North American potash sales volumes increased by more than 50% compared to the prior year, supported by low channel inventories and more normal buying behaviors. We achieved this volume growth by flexing our granular potash production capability and leveraging our extensive North American distribution network. Offshore potash sales volumes were up 18% in the first quarter, driven by strong demand in key international markets and improved supply chain performance. We increased nitrogen and phosphate production despite some weather-related outages, leading to higher sales volumes compared to the prior year. We adjusted our nitrogen production mix to optimize margins, resulting in increased downstream sales of urea and nitrogen solutions in the quarter.

To summarize, we are encouraged by the strength of demand and continued market stabilization that we saw in the first quarter. Our results demonstrated the capabilities of our flexible, low-cost production assets and downstream distribution network to efficiently supply crop inputs to growers around the world. Now turning to the market outlook for the remainder of 2024. U.S. corn and soybean planting has progressed in line with historic average levels, and fertilizer application rates have been strong. Wet weather has recently delayed fieldwork in some parts of the Corn Belt, and combined with production concerns in other key global growing regions, has provided support for crop prices. In Brazil, crop margins for 2023 planted crop were compressed, which impacted grower sentiment.

Prospective soybean margins, based on 2024 prices and projected input costs, are currently well above 2023 levels, which is anticipated to support Brazilian planted acreage and crop input demand in the second half. Global potash supply and demand is relatively balanced to begin 2024, and we maintained our full-year global potash shipment forecast of 68-71 million tons. North American demand has been strong, and we believe distributors will attempt to end the spring season with limited inventory, which would support healthy engagement in the second half. Brazilian potash demand has strengthened in the second quarter, and prices have increased by approximately $30 per ton over the past three months. We have seen good movement to Southeast Asian markets to start the year, supported by lower inventory levels and favorable economics for key crops such as palm oil and rice.

Standard-grade potash prices in this region have recently softened due to a seasonal lull ahead of anticipated contract settlements. In China, there has been a step change in potash consumption, reflecting strong affordability and as part of a long-term strategy to increase domestic food production. China's potash consumption increased by around 2 million tons in 2023 to over 17 million tons. At the same time, China's domestic potash production declined by around 1 million tons. We believe these factors are behind a push to maintain higher port inventories and an increase in strategic reserves. Global nitrogen markets have fluctuated in 2024, driven by seasonal buying patterns, production outages, and uncertainty over Chinese urea export restrictions and India's import requirements. The U.S. nitrogen supply and demand balance remains relatively tight, in particular for ammonia and UAN, with net nitrogen imports down 21% on a fertilizer-year basis compared to the historical average.

We expect inland nitrogen prices to remain firm through the spring season and then follow the typical seasonal reset for summer fill. North American gas prices are advantaged compared to Europe and Asia, and based on the forward curve, we anticipate this favorable position to continue on a multi-year basis. I will now turn it over to Pedro to provide more detail on our guidance assumptions and capital allocation plans for 2024.

Pedro Farah (CFO)

Thanks, Ken. As highlighted in our news release, we have maintained our 2024 retail earnings and fertilizer sales volume guidance ranges as market conditions and operational performance have progressed in line with our previous expectations. For retail, our full-year adjusted EBITDA guidance is unchanged at $1.65 billion-$1.85 billion. The midpoint of this range represents an increase of approximately $300 million compared to 2023. Our outlook includes an expectation for increased crop nutrient sales volumes and margins for our North American retail business in the first half and improved crop input margins in Brazil during the second half of the year. In April, we initiated a process to divest our retail assets in Argentina, Chile, and Uruguay. This region accounts for approximately 3% of our global retail sales and around 2% of adjusted EBITDA.

The decision reflects our focus on core geographies and actions that enhance the quality of our earnings and cash flow. Our 2024 retail guidance reflects a full year of earnings from these assets, as we currently do not have a timeline for completion of the divestiture. We maintain our annual potash sales volume guidance range of 13-13.8 million tons and expect a more even split between first and second half compared to 2023. We are taking proactive measures ahead of potential Canadian rail import strikes, but if there is a labor disruption, we could see an impact on second-quarter sales volumes. Our nitrogen sales volume guidance remains in the range of 10.6-11.2 million tons. At the midpoint, this represents an increase of approximately 500,000 tons over last year, with the majority of this growth planned for upgrade products such as urea and nitrogen solutions.

We benefited from lower North American natural gas in the first quarter as we are likely hedged coming into the year. With a softening in prices during the first quarter, we saw an opportunity to hedge a portion of our North American natural gas requirements for the remainder of 2024. Total planned capital expenditures of $2.2 billion-$2.3 billion is projected to be down $400 million compared to 2023. This total includes investing capital initiatives that drive organic growth in retail and operational improvements in potash and nitrogen. The focus in retail is to further expand our proprietary products portfolio, drive retail network optimization, and enhance our digital capabilities. In addition, we will continue to evaluate tuck-in acquisition opportunities in North America and Australia.

The majority of planned investment capital in our fertilizer operations are related to mine automation projects in potash and the completion of low-cost brownfield expansions in nitrogen. These investments support the achievement of our mid-cycle sales volume growth scenario and improve the efficiency of our operations. Back to you, Ken.

Ken Seitz (President and CEO)

Thanks, Pedro. To reiterate, we continue to see strong demand for crop inputs and increased market stability. We delivered solid operational performance in the first quarter and are maintaining our full-year retail earnings and fertilizer sales volume guidance ranges. Our focus remains on strategic initiatives that enhance our ability to serve growers in our core markets, maintain the low-cost position and reliability of our assets, and position the company for growth. We are hosting an Investor Day in New York on June 12th, where we plan to further outline our strategic priorities and capital allocation plans. Registration is open on our website, and we hope to see many of you in person that day. We would now be happy to take your questions.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press * followed by the number 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press * followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Joel Jackson. Please go ahead. Mr. Joel Jackson, you are now open for asking your question. Please go ahead.

Joel Jackson (Analyst)

Hi, sorry. Good morning. Thanks for taking my question. Your mid-term guidance, as you can get to over $1.9 billion retail EBITDA guide, mid-cycle commodity prices, assuming commodity prices stay where they are now, is that something you can get to in 2025? What do you have to do this year in the business to perceive that? And obviously, you're going to see a 2% or 3% reduction maybe next year if you do sell these non-Brazilian and South American retail assets. Thanks.

Ken Seitz (President and CEO)

Yeah, thanks, Joel, and good morning. Yeah, when we've talked about mid-cycle, it really is we talk about normalization of margins and growth in proprietary products in retail, and that's where we talk about the $1.9 billion-$2.1 billion of EBITDA in our retail business, contributing to that $7-$7.5 billion that we talk about in the mid-cycle. We talk about prices, and we can go commodity by commodity, but really, in some commodities, we're not that far to your point, we're not that far off mid-cycle pricing today, a little bit lower in some nitrogen products today and depending on the region in potash as well. But then it is volume as well. We have our brownfield and reliability projects that we're funding and our nitrogen business that from 2023 levels could add 1.5-2 million tons, ultimately getting to 12 million tons.

That assumes some better gas reliability in Trinidad as well. As we've talked about, we've also made the investments to add 1-2 million tons of potash over the mid-cycle. So you put that all together, you say $1.9-$2.1 billion in our retail business, some incremental tons in nitrogen and some gas in Trinidad that gets you to 12 million tons of nitrogen stabilization, normalization of prices at the mid-cycle, and some extra tons in potash, the 1-2 million tons. That's where we say 7-7.5 million as a mid-cycle.

Operator (participant)

Your next question is from the line of Mr. Andrew Wong from RBC Capital. Please go ahead.

Andrew Wong (Associate Director)

Hey, good morning. Thanks for taking my question. So potash demand in China looks like it may have taken a step change last year. Your peer, Mosaic, also said something similar to your commentary. So what do you think is driving that growth? They've recently introduced more GMOs into the market. Could that be driving yields and demand for more potash? And just given that pretty positive view on China, could the demand in China be stronger than the guidance that you have in your global outlook? Thanks.

Ken Seitz (President and CEO)

Yeah, no, thanks for the question, Andrew. And yeah, we would, as sort of the primary driver, point to food security in China. And yeah, the Chinese know what potash does for yields and for plant health and for disease resistance and have obviously been growing those volumes. But with this heavy focus on domestic food security, and we see that in export volumes for other fertilizer crop nutrition as well, that yeah, there's this push on domestic food security. But I'll hand it over to Jason Newton to talk more about that.

Jason Newton (SVP and Chief Economist)

Yeah, good morning, Andrew. Yeah, Ken hit it right with the concerns about food security. And if we go back 8 years or so from today, we saw relatively stagnant demand growth for nutrients in China and subsequently also a plateauing of crop production. And we've seen that Chinese supplies of grain have been at a large deficit to demand since 2020 and large import volumes as a result. And since that time, the government's put a priority in boosting crop production. And we've seen strong demand across all nutrients in China. Talk about the step change in potash that we saw in 2023. Also saw 7% growth in Chinese urea consumption in 2023 and growth in phosphate as well. And so we've seen the increase in nutrient demand to aim to boost crop production and getting moving back toward that historical trend of nutrient demand growth in China.

Operator (participant)

Your next question is from the line of Jacob Bout from CIBC. Please go ahead.

Jacob Bout (Analyst)

Hi, good morning. Wanted to get your thoughts on the growth in potash volumes both in North America and globally. And I guess, barring a strike in North America, first off, the strength you saw in the first quarter, does that extend into second quarter and to the second half? Maybe just talk a bit about thoughts on in-market inventory levels. And then internationally, with Belarus and Russia fully ramped up at or exceeding pre-war levels, do you expect them to be much more competitive as you move through the year? Thank you.

Ken Seitz (President and CEO)

Morning, Jacob. So yeah, with respect to growth in potash in North America and globally, I'll hand it over to Mr. Tarsi, Jeff Tarsi, our head of retail, to talk about what he's seeing on the ground there. But it really is owing to entering the year with very low inventories and now strong application rates. But I'll hand it over to Jeff. And then yeah, globally, we talked earlier this year about where we would see we thought we would see recovery, and indeed, that's where we're seeing it. But I'll hand it over to Mark to talk about the global piece. Yeah, and I'd just say on the FSU volumes, I'll hit that one. Yeah, we are seeing and have been seeing those volumes come back into the market. But in terms of competitiveness, we are seeing a higher cost to serve.

And whether that is the Belarusian volumes with the Murmansk port, which is delayed, that's we think another $40 a ton, or whether it's Belarusian volumes by rail into China, we think if you're going to try and do that, it's probably $280 a ton on a delivered basis. So we could talk about shifting trade flows and redistribution of potash on the planet, but actually, we think it's the opposite of what you said. We think it's leading to a higher cost to serve. But yeah, just back on what we're seeing in North America, Jeff.

Jeff Tarsi (EVP and President, Nutrien Ag Solutions)

Yeah, Jacob. Thanks. And if I look at the North American market in the first quarter, I even go back to the fourth quarter of 2023, we saw strong demand in the fourth quarter. We continued to see strong demand in the first quarter as well. And as I look at it across really the U.S., I think pricing is attractive to growers, and I think that we've seen some really strong rates. That's not surprising because we pulled a very large crop off in 2023, so we had a lot of replenishing to do. And I know as well as we go forward, we're expecting our volume to be up on a full-year basis and our margins to be up as well in North America on a full-year basis. With that, Mark, I'll hand it over to you.

Mark Thompson (EVP, Chief Strategy and Sustainability Officer)

Yeah, thanks, Jeff. Good morning, Jacob. So maybe I'll just come back to the top on your questions and kind of some of the messaging that Ken provided. I think first, you look at the global picture. I think the most important factor here is that not a lot has changed in our view over the last three months. So we continue to see a very balanced market from a global perspective in 2024. As we've said, our view of global shipments in 2024 remains unchanged at 68-71 million tons. On the demand side of the equation, we continue to expect about 2 million tons of growth over last year.

We see that coming from the same markets that we've been talking about, the biggest contributor to that being Southeast Asia and other Asian markets outside China, and other shipment gains coming in Europe, India, and Latin American markets outside of Brazil. On the supply side, not a lot has changed there either from our initial view coming into the year. We expect that 2 million tons of growth to be met from the FSU, Canada, and Laos. We'd see that sort of being split about 50% coming from the FSU. We've seen a little bit of variability month-to-month in the supply out of the FSU, but I'd say largely consistent with our expectations. Then that other 50% being balanced between Canada and Laos.

So I think to reiterate, overall, with lower price volatility, attractive price levels relative to nitrogen and phosphates, and then just a more normalized supply-demand balance and environment, we've seen the year start strong from a shipment perspective. Yeah, I think back on your question about starting Q1 strong, I think as we said in our commentary and have talked about today already, we see that first-half, second-half balance being more evenly split this year. So we had a historically strong fill program in North America in Q1, one of our stronger in the last 10 years. I'd say what we're seeing seasonally, to pick up on Jeff's comments in Q2, is strong demand at the retail level and the grower level. And those tons are really going to ground in progress with planting activity, which is about an average pace.

So we're watching weather closely, and if weather cooperates, we expect it'll be a fairly normal second quarter. So overall, we're encouraged by what we see.

Operator (participant)

Your next question is from the line of Ben Isaacson from Scotiabank. Please go ahead.

Ben Isaacson (Analyst)

Thank you very much, and good morning, everyone, and congrats on the quarter. Ken, in your press release, you called out twice, actually, about enhancing the quality of our earnings and free cash flow. Can you talk a little bit about what that means? How do you define quality? What is the strategy to achieve this? And is the sale of these non-core assets in LATAM, ex-Brazil, is that part of that? Thank you.

Ken Seitz (President and CEO)

Yeah, absolutely, Ben. And we do intend to talk more about exactly that in Investor Day. But when we say quality of earnings, it is something that we talk about as being sustainable. And that's hence the focus on reliability in nitrogen. You'll have seen that we took, I would say, a somewhat painful outage at our Borger facility last year. And because of some reliability concerns, that's paying dividends for us today. We have changed our operating model at Trinidad so that we can optimize gas utilization when it's available. That's paying dividends for us. And you see that reflected in our operating rates in the first quarter this year. And we're going to seek to focus on that and continue and make that a ratable thing for shareholders. You see us making investments in mine automation in potash, and really that is obviously a safety benefit.

But there's a productivity benefit as we continue to expand our underground footprint that we're focusing on that cash cost of production. You saw in the first quarter at $56. That's quite a competitive outcome, and we're going to continue to focus on that. And the example that you provide on Argentina is a great one, Jacob, where it's a stable business, but with the currency controls and the macroeconomic environment there. And for something that represents 3% of our retail sales, 2% of retail EBIT, it really is focusing on quality of earnings, but our ability to convert to cash as well because we know the ultimate importance of cash. So focusing across the network, maintaining conviction around capital allocation priorities. And we could talk about the things that we're doing as well in terms of proprietary products, network optimization, and digital investments.

Those investments are returning high-quality earnings, proprietary products with its $1 billion in gross margin contribution in 2023 and then a 15% five-year CAGR on our biostimulants and crop nutritionals. Those are very high-quality earnings that we can also convert to cash. So I just said a number of things there, Ben, but we'll talk more about that in Investor Day. But really, those are the types of things that we're just absolutely focused on to have ratable, high-quality earnings that we can convert to cash because, of course, we know the importance of cash.

Operator (participant)

Your next question is from the line of Adam Samuelson from Goldman Sachs. Please go ahead.

Adam Samuelson (Analyst)

Yes, thank you. Good morning, everyone. Was hoping to maybe dig a little bit more on the potash side and just the cadence and geographic mix of shipments over the balance of the year. Just given your own sales in the first quarter, there's effectively no growth left. And I appreciate that you had a very strong North America fill program in 1Q and 3Q last year. It's probably not going to be tough to repeat in North America. But also, Canpotex's mix of sales to offshore Asia, which should be the predominant source of global demand growth this year, was lower year-over-year.

So just help us think about how we should think about that progression through the year, kind of the likelihood that we'd end the U.S. season or the North America season with inventories empty that could draw in another strong fill program in the second half or risk that that maybe carries over and you see weaker wholesale shipments domestically kind of over the balance of the year. Thank you.

Ken Seitz (President and CEO)

Yeah, thanks for the question, Adam. So yeah, we are maintaining our guidance with the midpoint of 13.4 million tons. And that's because as we look out into the balance of the year, yep, there's a risk of strike and those sorts of things. But as we go market to market and as we see what's happening on the ground, we have maintained that guidance range. And by the way, that does include some strike risk as well. But I'll hand it over to Mark here to maybe talk through what we're seeing region by region.

Mark Thompson (EVP, Chief Strategy and Sustainability Officer)

Thanks, Ken. Yeah, good morning, Adam. So look, I think maybe just again to start at the top, as I mentioned earlier in the call, we'd see that first-half, second-half split being relatively balanced and even this year. And so again, on the first half, we did see a very strong fill program in Q1 and continuing to see good demand in Q2. But we see that being a relatively normal first-half picture, assuming that weather cooperates. I think if you step back and you look at kind of the total picture in terms of offshore shipments for us and domestic, I think a 35% domestic, 65% offshore is a good way to think about the business for the full year. And there's nothing that we've seen that would change our expectations around that.

If you zoom in on a couple of markets in terms of how we've started the year, just to get to your question on geographic mix, we saw very strong granular demand to start the year. Brazil has been a very stroerthose end-market shipments and the proportion of offshore shipments, certainly granular markets have started off on a stronger foot. I would say in Southeast Asia that shipments are up to start the year over last year, which is very important because we see that as being the single largest contributor by market to the growth in global demand this year.

I think as we move through the year, our expectation is that as we see even one of the international contracts get settled and we expect that India would be first, we'll see further momentum in demand out of Southeast Asia, which should provide firming in standard-grade demand and potentially some firming in price stability in those markets moving into the latter part of the year. I think just to finish off on North America and your question on inventories, I think you've heard Jeff talk earlier in the call about the position that Nutrien Ag Solutions is taking. I'd say that's very consistent with the rest of our customers. Demand's been very healthy for potash in North America this spring for the reasons that we talked about.

But our expectation is that the channel's going to attempt to end the season very empty or as empty as they can. And so again, we think that's very healthy and normal. That's a return to normal behavior in the buying channel. And so we think, again, that would set us up for second-half demand in North America that would once again be healthy given all the factors that we've talked about. So I think you step back from that. And in the North American market, we'd actually expect a market size in North America quite similar to what we saw last year. So all of those factors, again, point us to the fact that the market's playing out largely as we had expected so far. And we're encouraged by the stability we've seen.

Operator (participant)

Your next question is from the line of Steve Byrne from Bank of America. Please go ahead.

Steve Byrne (Analyst)

Yes, thank you. I have a couple for Jeff Tarsi. Last fall, I believe your business had a significant amount of soil sampling and nutrient testing. And my question for you is, with the strong fourth quarter and first quarter application rates, would you assess nutrient levels in all of the regions where you have a retail business? Is it back to more normal fertility levels, or do you think there's more to go here after a couple of years of below-normal applications? And then just secondly, if you would comment on how you would rank the levers that you can pull to drive the EBITDA growth in retail, is it more U.S. bolt-ons, or is it more on your proprietary side of crop chems and seeds and biologicals?

Jeff Tarsi (EVP and President, Nutrien Ag Solutions)

Thanks, Steve, and good morning. From your question pertaining to the soil sampling, and I think I've said this before, for many, many years, we always tried to figure what percent was an art and what percent was a science. Today, I'd say that 90% of our applications are a science based off of a soil sample. We did have extensive sampling last fall. We had, with a good early break earlier in the year, we continued to see very healthy sampling coming in in the first quarter as well. So I do think that we're getting back to much more normal buying patterns. I think you heard that mentioned a little bit before by Mark. I see that from my grower perspective as well. I think that we continue to pull off really high crop yields.

And anytime we're pulling off high crop yields, then we're going to be replenishing that soil with NP and K. And so I think we probably are getting much closer to normal than we were two years prior when higher prices scared some growers off. Again, I said a little bit earlier this morning, I think the prices that we sit at today are attractive to growers. And I would expect, somewhere in line with what USDA is forecasting for crop yields this year, I would expect, again, for a very healthy fall application season as well as it relates to North America and Brazil from that standpoint as well. When you talk about the levers in retail, I think we have several levers in retail.

I know what sits closest to my heart is always organic growth because, to me, that's one of the easiest things we can achieve. So trying to increase customer share of wallet, we've worked hard to grow our seed portfolio, and we're still in that process of growing that business. So I still think we have opportunity there. Obviously, we have ample opportunity across our Loveland Products line. We're very fortunate to have that platform within our retail organization. We think it creates significant opportunities for us. If I look at how we've started the quarter this year around Loveland Products, our margins are up across all shelves about just under 8% globally and over 14% from a U.S. perspective. Our biostimulant and nutritional segments continue to grow at a double-digit pace. And we're really excited about what that shelf provides for us.

And we're seeing our crop protection margins come in a lot stronger as well. And so I think what you'll see, and we'll share more of this at Investor Day as well, is some of our plans to grow that shelf of our proprietary business in international markets where we don't have a retail presence. And that excites me a lot. Ken mentioned network rationalization. And we continue to strive to rationalize our network with some of the work we do around our GrowthX project where we're taking branches and building one and closing the other four in. We think that brings a lot of efficiency to our business. And then we're still going to very opportunistically look at tuck-in acquisitions. Those have worked really well for us, particularly in North America and Australia. And we'll continue to look at those opportunities.

Then the last thing I'm going to mention, and this is always at the top of our radar, is controlling our controllables from an expense standpoint. I hope I touched on what you asked there, Steve.

Operator (participant)

Your next question is from the line of Michael Tupholme from TD Cowen. Please go ahead.

Michael Tupholme (Analyst)

Thank you. You spoke earlier in the call about numerous operational initiatives within your fertilizer segments as benefiting the quarter's results. Can you provide an update as to where you're at with some of those improvement initiatives and what you're still working on and how we should think about the impact on costs in potash and nitrogen specifically as we move through the balance of the year?

Ken Seitz (President and CEO)

Yeah, no, definitely, Mike. Thank you. So yeah, I'll hand it over to Trevor to just provide an update on, one, the reliability work that we've done, but then also status of our brownfield investments that we're making to add capacity. And then maybe Chris Reynolds to talk about mine automation, but the other work that we're doing at our operations to reduce costs. And as an example, we increased our ore times cut by automation by 40% last year. So we are certainly on a journey here to move to sort of full autonomous or tele-remote mining, which, again, contributes to cost and productivity in addition to safety. But Trevor, over to you.

Trevor Williams (Operations Manager)

Hey, good morning. And thanks for the question. Just a couple of things. And I'm going to take you back to our Q3 earnings call last year when we really talked about some of the challenges we had and some of the more specific actions that were taken to really drive both reliability improvements as well as reliability or sorry, utilization-type activities across our fleet. Primarily focused on Trinidad and Borger, as we talked about last year, and really happy to be able to talk to the fact that as a result of those actions that we took last year - and Ken mentioned that earlier on in terms of one of his responses - is we did see a step-change improvement in terms of both capacity utilization with respect to our Trinidad asset. And that really is related to the availability and how we utilize gas at that facility.

And again, Ken mentioned, we did invest some money. We took the time and invested a significant amount of energy into our Borger facility. And we're really starting to see those pay off in terms of in 2024. Now, we also talked about a little bit in terms of, as Ken mentioned, while we did see some minor weather impacts this year in terms of earlier Q1, again, the focus we put on winterization and really setting our assets up for success here late last year, again, really paid some dividends in terms of where we are. So a simple example, if you look at just in terms of our strategy in Trinidad, we are operating at about a 10% increase in terms of overall gas utilization, capacity utilization, which is a big step-change.

In terms of the debottleneck side with respect to some of our growth side, we did complete several smaller debottlenecks in Q4, late Q3, early Q4 of last year, primarily at Geismar and a little bit at Borger. Those, in combination with the reliability items that I talked about and Ken mentioned, we're going to add about a little over 1 million tons over the course of the next several years in terms of capacity and reliability additions. With that, I'll pass it over to Chris for some comments on the potash side.

Chris Reynolds (SVP, Potash Operations)

Yeah, good morning, Mike. Thanks for the question. As Ken mentioned, we've been really pleased with our progress in terms of the automation of our mines and fleets and even an increase in the ores that we cut in 2023 compared to 2022. We've seen that progress continue here in the first quarter as well. That's one of the benefits when you have six low-cost, low-emission mines across our network, and we spread that automation across the five conventional underground mines. The learnings that you can get across the network, which accelerates that performance and that experience. So that's one of our main areas of concentration for improving our cost. Then there are numerous continuous improvement projects we have, again, spread across that network of six mines.

And so the biggest one is the automation, but then there's a number of other smaller continuous improvement projects we're focused on as well.

Operator (participant)

Your next question is from the line of Vincent Andrews from Morgan Stanley. Please go ahead.

Vincent Andrews (Analyst)

Thank you. Good morning, everyone. Would love to hear your thoughts sort of on the reconciliation of the nitrogen market year-to-date in particular in North America, just sort of how you think through the movement in prices recently with the sort of factual data on the reduction in imports year-to-date versus normal. So we'd just like to hear your thoughts on how and why that played out and also what you think the shape of the rest of the year will look like.

Ken Seitz (President and CEO)

No, that's good, Vincent. Thanks for the question. There are a number of moving parts there, to be sure. So I'll hand it over to Jason Newton to talk about sort of the macro and the fundamentals in the near term, and then over to Mark to talk about the market.

Jason Newton (SVP and Chief Economist)

Sure. Good morning, Vincent. Yeah, as mentioned, the dynamics differ product by product in nitrogen, and we've seen various movements through the year to date. If we look at ammonia to start - and that's where you mentioned - if we look at the U.S. trade balance, the ammonia market has been tight. We saw early, strong spring ammonia applications in the U.S. And those two factors led to, in combination with production outages in the U.S., led to tight supply and demand for ammonia and support for U.S. ammonia prices. In addition, if we look globally, the trade east and west of Suez has been impacted by challenges in shipping through the Red Sea. And so shipments from the Middle East to west of Suez markets have been constrained because of that.

So to some extent, we've seen stronger ammonia pricing than we would have expected through the year, and it's relatively flat overall. The urea market, I'd say we'd see relatively normal price seasonality. We started the year relatively strong. You can see if you look on slide 26 in our deck, of the three major nitrogen products, the urea trade balance has been most balanced in the U.S. And that, in our minds, is evidence that buyers are proactive in positioning themselves for spring. And we have seen, in the last couple of weeks, a spring application, and planting progress has slowed with the weather that we've seen.

And so that, in combination with a weaker-than-expected Indian tender result, the anticipation of Chinese supply, which has kind of been off and on, and some uncertainty there in terms of when that supply will actually be available, that's put some pressure on urea prices, which at this time of year, as northern hemisphere demand is wrapping up and the time to get it into market is drawing to a close, is pretty normal. And just to finish on urea, we do see that coal prices have moved ceaselessly lower, but in-market prices within North America have maintained a large premium to the import benchmarks, which is typical for this time of year.

Mark Thompson (EVP, Chief Strategy and Sustainability Officer)

Yeah, and Vincent, it's Mark. Thanks for the question. Jason covered the macro really well, so maybe just talk for a minute about what does it mean for us as we look through the remainder of the spring from an order book or commercial perspective. When we look at our total expected mix for Q2, we would anticipate about 60% of our nitrogen volumes going to the ag market and the remaining 40% going to industrial customers. As we've talked about many times, that industrial volume is either under a contract or linked to formula pricing. And so really, when we're talking about what's left for us, it's in the ag order book. And today, we would be about 60% sold across all products for the second quarter. And we did layer in a decent portion of this volume before we saw more volatility at NOLA and urea.

I think just to pick up on one of the points that Jason mentioned in our business, when you look at that pricing dynamic for urea in North America, inland pricing has held at more stable premium levels due to tighter supply-demand balances in those regions. And this is a point where the geographic mix of our business, the location of our plants, the product mix flexibility that we have really is a benefit. And of course, as Trevor just talked about, enhanced reliability and completion of the brownfields is giving us flexibility to move between products and really optimize margins in these more volatile environments. And so as Jason said, we do expect a typical post-spring reset for our business. But this position of our tons and how we've approached the market has probably provided some buffer versus the volatility we've seen at Nola urea.

Operator (participant)

Your next question is from the line of Christopher Parkinson from Wolfe Research. Please go ahead.

Harris Fein (Analyst)

Great. Thanks. This is Harris Fein for Chris. Just a quick one from me on the retail side. Maybe if we can just discuss a little bit more how the regional performances are kind of stacking up against each other, U.S. versus Australia versus Brazil, and what you're hearing on the grounds in each region that maybe differs from the others. And then in the U.S., just any concerns you might have on U.S. farmer profitability in the context of we've been hearing that maybe they've been a little bit slower to monetize the crop, and there's a little bit more grain than normal on-site that they're holding onto still. If you can just touch on that, thanks.

Jeff Tarsi (EVP and President, Nutrien Ag Solutions)

Yeah. So thanks. This is Jeff, and I'll answer those questions. And first of all, I would characterize the first quarter from a Nutrien Ag Solutions perspective as a very normal quarter with very solid results. And what was really impressive to me is our EBITDA was up $100 million year-over-year with really a return to strong margins in fertilizer volume. But our chemistry as well showed remarkable recovery from a GP standpoint, and we're at historical to above historical. If I look at it across geographies, I'd tell you that North America performed very strongly, and that was without a whole lot of activity in Canada through the first quarter. And I'd tell you that Australia was very consistent, right in line with where we thought they would be through the first quarter.

I think we mentioned several times that the recovery in Latin America, and particularly in Brazil, is taking a bit longer than most people anticipated. We still think we'll see some recovery in the second half of the year. If I look at and listen to most of our suppliers, most of them are talking for more of that recovery to come in early 2025. Again, if I'm looking at it by geography, extremely pleased with North America, very consistent in Australia, and a slower recovery in Latin America.

Ken Seitz (President and CEO)

I think it's fair to say, Jeff, that in terms of the health of the grower, we're coming off a couple of good years here where balance sheets continue to be strong on the farm. And we've seen some strengthening in corn and soybean prices over the last week given some weather concerns. And crop input prices are competitive. Obviously, they've come off. So while affordability and margins aren't what they were a few sorry, what margins were a few years ago, it's still going to be a relatively good year.

Jeff Tarsi (EVP and President, Nutrien Ag Solutions)

Yeah. And look, we'll see in the very southern extremes of the North American market, we'll see some crop shift there. And I think that's reflective in looking at a 90 million-acre projected corn acres. We've seen a pretty good shift from corn to soybeans in that geography. But I think we'll be fairly normal when we look across the Corn Belt areas. We don't ever see a lot of drastic shifts in acreage. From that standpoint, as Ken just mentioned, the last week, we've seen some recovery in commodity pricing, which comes at a great time when we're really engaged in putting our inputs across these acres. And as Ken mentioned, our growers are coming off really 3-4 years of a very healthy environment for agriculture. We still see balance sheets as extremely strong.

As indicative of activity in the first quarter, we think that growers are very engaged in putting the inputs needed to produce a top crop.

Operator (participant)

Your next question is from the line of Richard Garchitorena from Wells Fargo. Please go ahead.

Richard Garchitorena (Analyst)

Good morning and nice quarter. So just digging into the retail business, I was wondering if you could just give us some color on what you are assuming for the year in terms of crop protection volumes and pricing. We've heard from your crop protection peers, pricing is going to be down year-over-year. And then in terms of the volume recovery, what are you expecting embedding in your forecast in the back half of this year? And then just on a related note, pricing in general, you talked about nitrogen and what you're seeing on the supply-demand side. On potash, are you assuming flat pricing in the retail business as well? Thanks.

Ken Seitz (President and CEO)

Yeah. So quickly hand it over to Jeff. Yeah, I mean, you'll have to differentiate between what we're seeing in North America in crop protection, certainly in Brazil, where it's lagging, and we still see a lot of high-priced volumes in the channel. But yeah, Jeff, over to you on crop protection, and then maybe a few words about potash from a retail perspective.

Jeff Tarsi (EVP and President, Nutrien Ag Solutions)

Yeah. As I mentioned a bit earlier, as I look at crop protection and look at the first quarter, number one, I was quite pleased, again, with the recovery and our margin rates, GP, on the crop protection side of things. I think globally, we were up about 300 basis points quarter-over-quarter with crop protection margins. Even the wider variance, as I look at the North American market, when I look at it from a revenue perspective, I think we were off slightly, maybe 4% for the quarter globally on a crop protection standpoint. A lot of that has to do with lower-priced glyphosate and glufosinate. I think from a unit standpoint or volume standpoint, it would probably be very similar. Look, we've worked extremely hard, especially in a high-interest rate environment. We've worked extremely hard to bring our inventory down.

If I sit here today on a total perspective from an inventory side of things, we're off just under $1.5 billion of inventory. That's equally split pretty much so by crop protection and fertilizer. So that puts us in a good position. We want to run our inventories extremely low from a balance sheet standpoint. That'll give us some very opportunistic, we hope, buying opportunities in the fall from that standpoint. I think I mentioned earlier. If I look at Australia and North America from a crop protection, that's a bit of a different picture from the Latin America and Brazil market. Again, crop protection is a real drag today in that Brazilian market. But what I am very pleased with in that market, I think Ken mentioned earlier that we were down about $150 million of inventory.

That's just on crop protection. We brought our overall inventory down there to $300 million. So we're really working to get ourselves in a better inventory position. We'll see a recovery in those crop protection margins, however, when we see the whole industry get to that same inventory level going forward. And I think you asked some questions about how we see pricing for the fall and stuff. And I think assuming fairly stable potash market and pricing as both Mark and Ken responded to earlier, we see that pricing pretty stable. And again, if we pull the type of crop off that we think we're going to pull off this year, then we should see strong demand this fall.

Operator (participant)

Your next question is from the line of Steve Hansen from Raymond James. Please go ahead.

Steve Hansen (Analyst)

Yes. Good morning, Lyman. Thank you for the time. I'm just curious here, sticking to the theme of reliability, I'm curious how you feel about the resiliency of your logistical export capabilities. I recognize you can't control strike actions, of course, across your supply chain, including one that might come this month. But I am thinking just about the terminal issue that hit the Pacific Northwest last fall, the lengthy strike in Vancouver last year. You've often talked about a third export valve in the U.S. Gulf in the past. Is that still an idea you want to pursue? And just any broader commentary around how you think about that reliability of the export network? Thanks.

Ken Seitz (President and CEO)

Yeah. Thank you, Steve. Thanks for the question. And I would say for the things that are in our control, we feel very good about the resilience and reliability of our network. And in fact, we would consider it to be the most extensive and competitive in the world. And that is obviously our loadout capabilities at our mine sites. It is our capabilities across our network in North America, our nitrogen network. It's our capabilities right through warehousing trucks and into our customers in North America and then offshore through terminals, as you say. And with Canpotex, we do have access to multiple terminals. Obviously, the main one is on the north shore of Vancouver, Neptune Terminals, but we send a lot of volume through Portland. And we have an outlet in Saint John, New Brunswick as well.

In fact, while that's a long journey via rail, depending on what's happening in the Panama Canal, that is a great outlet for us for the east coast of Latin America. So we do have optionality. And we have that optionality as well for ports off the Gulf Coast. And we have used, in fact, used those terminals, including our own in North Carolina. And so we continue to maintain that optionality. And we believe that we've proven that so that when we do have these things that are out of our control, we can right through that value chain, preposition product, fill the channel to the extent that we can, and minimize the impact of the things that are out of our control. We've proven that time and time again.

Indeed, that's the work that we have done today in preparation for what might be over the coming weeks with some of the challenges with rail. So we'll see about that. But hence, maintaining our guidance range, including some of those things that are out of our control because we have that extraordinary and extensive and competitive network.

Jeff Holzman (VP of Investor Relations)

Operator, we have time for one more question.

Operator (participant)

Thank you. Your last question is from the line of Edlain Rodriguez from Mizuho Group. Please go ahead.

Edlain Rodriguez (Analyst)

Thank you. Good morning, guys. Just one quick one. I mean, I know for you guys, you don't think the potash contracts with China and India are as important as they used to be in the past, but somehow they still loom large in our mind. Given the recovery in the potash scene in the global market, would you be disappointed if those contracts settle at a lower price than the current prices that they have now?

Ken Seitz (President and CEO)

Yeah. We're watching those markets closely, obviously. Edlain, thank you for the question. Those are standard-grade markets. You're right that while we have sort of reduced reliance on those contract markets, particularly China, it is also true, to your point, that we've seen a bit of a seasonal pause in standard-grade markets as some of the other spot markets for standard-grade watch the contract process. So I'll hand it over to Mark, who sits on the Canpotex board and is watching the evolution of the inventory levels in the contract markets and how those discussions are going.

Mark Thompson (EVP, Chief Strategy and Sustainability Officer)

Yeah. Thanks, Ken. Good morning, Edlain. Yeah. So I think, again, as Ken mentioned and I mentioned earlier in the call, we've seen really good momentum in certain markets, including some of the standard markets, to start the year. But again, as you mentioned, while those contracts, particularly China, is less meaningful both from a Canpotex sales mix and just overall global volumes than it was previously, we still think that's one of a number of indicators that'll allow standard volume to keep moving throughout the remainder of the year. I think just a bit of color in terms of how we're thinking about those. If you look at India first, in India, shipments and the vessel lineup are off to a stronger start in 2024 so far versus last year. And we would view the inventory levels in India as actually being below historically average levels.

So consistent with what we've said before, we do still think India is going to be the first to conclude an offshore contract. And we see the potential for import economics to remain favorable. We do see the potential that any reduction in contract price, the positive of that would be that that could be passed along by the government in the form of the maximum retail price, which would, again, stimulate demand down at the farm level. So when we look at all those factors combined with expectations for more favorable rainfall, all these factors support our view that we do think there's going to be growth in Indian shipments this year, which would be a positive overall for demand.

Then I think just from a China perspective, to reiterate some of the points that Ken made earlier in the call, through Q1, we've actually seen very strong shipments to China. And there does appear to have been a step change in consumption and demand that's continued. And that underscores the importance of potash and crop nutrients for the agricultural market there. And with those new higher levels of consumption and lower domestic production, the doubling of the strategic reserve target to 3 million tons, we do think that higher absolute inventories will become more normal in China to meet the country's needs. Probably can't speculate on the timing of the contract at this point, but we've seen good demand out of China without a contract. And we continue to believe that our global demand estimate is going to hold for the year.

Operator (participant)

There are no further questions at this time. I would like to hand the call back to Jeff Holzman for some closing remarks. Please go ahead.

Jeff Holzman (VP of Investor Relations)

All right. Thank you for joining us today. We look forward to seeing you on June 12th for our investor day. Have a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.