Nutrien - Q4 2023

Transcript

Operator (participant)

Greetings, and welcome to Nutrien's 2023 fourth quarter earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow after the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference call 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 fourth quarter 2023 earnings call. As we conduct this call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material 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 are 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, President and CEO, and Pedro Farah, our CFO, for opening comments before we take your questions.

Ken Seitz (President and CEO)

Good morning. Thank you for joining us today as we recap our 2023 results and provide an outlook for the business and our strategic priorities for the year ahead. Nutrien delivered adjusted EBITDA of $6.1 billion in 2023. We generated $5.1 billion in cash from operations, supported by the countercyclical release of working capital in retail. In response to changing market conditions, we took several actions during the year to enhance free cash flow, including a reduction in planned capital and operating expenditures of approximately $400 million. We maintained a balanced approach to capital allocation, investing to sustain and grow our assets, and returning a total of $2.1 billion to shareholders through dividends and share buybacks.

As the year progressed, we saw increased market stability and strong fertilizer demand in North America, supported by improved grower affordability and extended fall application season and low channel inventories. Demand in key offshore markets also increased in the second half. However, the level of market stabilization varied by product and geography. Crop nutrient sales volumes for our global retail business increased by 10% in 2023, as growers worked to replenish nutrients in the soil. Due to the strength of grower demand in all regions, we ended the year with retail fertilizer inventories down 10% compared to the prior year. Crop protection sales volumes and margins in North America returned to normalized levels in the later part of the year, and we continued to be opportunistic in our approach to restocking inventories.

In Brazil, we significantly reduced our crop protection inventories in the fourth quarter, but margins remained challenged due to the persistence of higher inventory in the channel. For the full year, Nutrien Ag Solutions delivered Adjusted EBITDA of $1.5 billion, down from the record prior year and well below the level we would view as normalized earnings. We tightly managed inventory and advanced a number of strategic initiatives that position our retail business for growth in 2024 and beyond. One of the areas of growth is our proprietary products portfolio. In 2023, these high-value products contributed gross margin of $1 billion, including increased sales and margins from our proprietary plant nutritional and biostimulant product lines.

Gross margin for our crop nutritional products has grown at an annual rate of 15% over the last five years, and we plan to continue to invest in our supply capabilities through differentiated product offerings and expanded manufacturing capacity. We completed a number of tuck-in acquisitions in 2023 and will pursue targeted opportunities in our core markets going forward. As it relates to Brazil, the long-term prospects for agriculture are positive, and it remains an important crop input market for Nutrien. In the near term, our focus will continue to be on the integration of recent acquisitions and optimizing our cost structure in this market. In potash, we delivered adjusted EBITDA of $2.4 billion in 2023, down from the prior year's record due to lower realized prices.

North American sales volumes increased significantly in the second half of the year, supported by low channel inventories and a strong fall application season. We utilized our network flexibility to increase granular potash production and position products across our distribution channel in anticipation of higher seasonal demand and prices in North America. Our offshore potash sales volumes also increased in the second half of 2023, driven by stronger demand in Brazil and China, while net realized prices were impacted by lower global benchmarks and higher logistics costs associated with outages at Canpotex export terminals. Our potash controllable cash cost of $58 per ton was flat year-over-year, demonstrating our focus on maintaining a low-cost position. We advanced mine automation products that enhance productivity and safety, increasing our annual potash ore tons cut using autonomous mining technology by 40% in 2023.

Turning to nitrogen, we generated $1.9 billion in adjusted EBITDA in 2023, as lower benchmark prices more than offset lower natural gas costs compared to the prior year. We completed major maintenance turnarounds at our Geismar and Borger plants in the second half and initiated actions at our Trinidad facility that are expected to support higher operating rates going forward. We completed our phase I GHG abatement program in 2023, which will be a key contributor to reducing greenhouse gas emissions. This included a carbon capture project at Redwater that increased our low carbon ammonia production capability to 1.2 million tons. In phosphate, we delivered full year adjusted EBITDA of $470 million, and focused on operational efficiency and product mix opportunities that enhance margins and cash flow.

We completed maintenance turnarounds at our Aurora and White Springs plants that enabled higher operating rates in the second half and are expected to support increased volumes in 2024. To summarize, following a period of unprecedented market volatility, we are encouraged by the increased market stability and recovery in demand that occurred in the second half of 2023. During this time, we focused on initiatives that strengthened our core business, maintained the low-cost position and reliability of our assets, and positioned the company for growth in the years ahead. Now turning to the outlook for 2024. Global grain stocks-to-use ratios remain historically low, as tightening supplies of wheat and rice have offset increased corn production in the U.S. and Brazil. Crop prices have declined from the historically elevated levels in 2022, but lower input prices have resulted in improved demand.

In North America, we witnessed the strength of fertilizer demand during the fall season, and it has carried through to healthy grower prepay commitments and a strong seed order book for spring planting in 2024. In Brazil, there is some uncertainty over Safrinha corn plantings in 2024. However, soybean acreage is projected to expand, and we anticipate seasonal strength in fertilizer imports during the second and third quarters. For potash, we expect global demand will continue to recover towards trend levels in 2024, with shipments projected between 68-71 million tons. In North America, we are seeing strong potash demand ahead of the spring application season as channel inventories were tight to start the year. We expect increased potash demand in Southeast Asia, driven by lower inventory levels and favorable economics for palm oil and rice.

China's potash consumption was estimated at a record of approximately 17 million tons in 2023, supported by strong affordability and is a part of a long-term strategy to increase domestic food production. In 2024, we expect lower potash imports in China compared to the record in 2023, but for consumption to remain historically strong. Global nitrogen markets continue to be impacted by regional supply constraints, changes in natural gas prices, and seasonal buying patterns. These impacts have been evident to the first quarter, as ammonia prices have seasonally weakened, while global urea values have strengthened in response to increased demand ahead of the spring season. The U.S. nitrogen market is currently tight, and net import volumes were down significantly through the first half of the fertilizer year.

North American natural gas prices remain very competitive compared to Europe and Asia, and we are well positioned to supply our customers this spring. 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 disclosed in our earnings release, we have revised our guidance practice in 2024 to focus on providing forward-looking estimates that we believe are of value to our shareholders and are less impacted by changes in fertilizer commodity prices. We continue to provide guidance for retail Adjusted EBITDA, fertilizer sales volumes, key financial modeling variables, and pricing sensitivities. We have also provided Adjusted EBITDA scenarios for our fertilizer business in our earnings presentation posted on our website. For retail, our full-year Adjusted EBITDA guidance is $1.65 billion-$1.85 billion. The midpoint of this range represents an increase of approximately $300 million compared to last year, driven by increased gross margins in all major product lines.

We expect crop nutrient gross margins will be supported by higher sales volumes and per ton margins, in particular, compared to the compressed levels in the first half of the prior year. Further underpinning this growth is the continued expansion of our proprietary nutritional and biostimulant product lines. In Brazil, we expect increased crop input sales volumes in 2024, and an improvement in crop protection margins in the second half of the year. Our annual potash sales volumes guidance of 13-13.8 tons assumes demand growth in offshore markets and a return to more normal operations at Canpotex ports in 2024. In North America, based on strong participation in our winter fill program, we expect higher first quarter sales volumes compared to the prior year and a typical pricing reset compared to the fourth quarter of 2023.

Mine automation and other efficiency-related initiatives are expected to keep our potash controllable cash costs of production similar to last year. Nitrogen sales volumes are projected to increase by approximately 500,000 tons at the midpoint of our guidance range, supported by higher operating rates at our U.S. and Trinidad plants. We assume Henry Hub natural gas prices will average around 2.5 per MMBtu, and our Alberta nitrogen plants will benefit from the typical discount to Henry Hub. Total planned capital expenditures of $2.2 billion-$2.3 billion is down approximately $400 million compared to 2023. This includes approximately $500 million of investing capital on 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 be opportunistic on tuck-in acquisitions in our core markets. The majority of the planned investment capital in our operations is focused on mine automation projects in potash and low-cost brownfield expansions in nitrogen. We continue to target a stable and growing dividend. With the increase approved by our board of directors yesterday, Nutrien's dividend per share has increased by 35% since the beginning of 2018. Similar to the past, we will evaluate the potential for additional shareholder distributions as the year progresses. I'll now turn it back to Ken.

Ken Seitz (President and CEO)

Thanks, Pedro. As we look ahead to 2024, we expect increased crop input market stability and demand, providing the opportunity for Nutrien to deliver higher fertilizer sales volumes and growth in retail earnings. We will continue to prioritize 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 12, where we will provide more details on the strategic priorities across our integrated business. So watch for more details on this event over the next few weeks. We would now be happy to take your questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. Your first question comes from the line of Steve Hansen from Raymond James. Your line is now open.

Steve Hansen (Managing Director and Equity Research Analyst)

Yes, good morning, guys. Thanks for the time. Was hoping you could dig into your outlook on the Southeast Asian demand profile for potash in particular. It's been one of the weaker price points in the market for the past year or so, but you've described some good economics supporting demand. I'm just trying to get a sense of whether you've got good visibility into that, whether you've seen order flow, or, or what kind of sort of outlook you have there that gives you that confidence.

Ken Seitz (President and CEO)

Yeah, good morning, Steve. Indeed, when we say 68-71 million tons for 2024, Southeast Asia is certainly a part of that story. And, you know, it's owing to a few things. One, inventory levels are low in Southeast Asia entering the year, and two, you know, looking at about MYR 3,800 per ton price for palm oil, that makes the economics of palm oil, given where crop input prices have gone, that looks favorable. So, you know, low inventories and and improved economics in Southeast Asia makes that 68-71 million tons. We think that, as I say, Southeast Asia is gonna play a meaningful role in that. I'll hand it over to Mark, and maybe Mark can just talk to, you know, some specifics around numbers.

Mark Thompson (EVP and Chief Commercial Officer)

Yep. Hey, Steve, good morning. Just to reiterate a few of the things that Ken mentioned, I think in Southeast Asia, actually, we've had two years in a row of consumption and shipments that would be less than normal. You know, we've got inventories that need to be restocked, and I think throughout the process of 2023, we saw high-cost inventories get worked down and are coming into 2024 in a much better position. As Ken mentioned, there are attractive economics in Southeast Asia for palm oil. Rice is a part of that picture as well that's playing a role that we think will lead to a positive rebound in demand there.

And if you look at our global picture in terms of where we expect demand growth to come from in 2024, Southeast Asia is actually the biggest single contributor to that. At the midpoint, we've got Southeast Asia by about two million tons from a shipment standpoint, and, and are optimistic based on what we've seen, moving through the fourth quarter of 2023. And so far in Q1, we understand there's been, solid movement and good shipments into Southeast Asia. So overall, as Ken said, we're positive and constructive on what we expect to see from, Southeast Asia this year for potash.

Operator (participant)

Your next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.

Joel Jackson (Senior Equity Research Analyst)

Good morning. Let's talk about free cash flow and the buyback and capital allocation. Can you talk about, you know, do you see free cash flow being similar in 2024 as 2023? You re-upped your authorization in the month, although you didn't really do a lot of the buyback under the prior authorization. You had a lot of buybacks in Q1 under the prior, prior authorization. So I'm trying to get a sense of, you know, do you think that your buyback, you know, on 2024 will be similar to 2023 in terms of total numbers, even understanding that this heavy Q1, early Q1 2023 under the prior authorization, and where that, you know, plays out authorization, really maxing out as much as you can do for buyback versus other things like maybe doing some more, you know, opportunistic M&A in the U.S. or Brazil for retail, for example?

Ken Seitz (President and CEO)

Good morning, Joel. Yeah, thank you for the question. So, you know, with respect to 2024 free cash flow, obviously, as we've talked about, we've made some changes to our capital program, and we've brought down some of those investing dollars, and getting highly focused on the things that we talk about, like proprietary products in retail, like network optimization, like our digital investments. And yes, we'll absolutely continue to look at opportunistic tuck-ins in North America and Australia. We have a history of those things, and you know, the economics for those things continue to prove out. So we'll always look at those, focusing on mine automation and reliability projects and finishing off some of the debottlenecking and brownfield investments in nitrogen. That's our focus from a capital point of view.

As it relates to, you know, the year, there's a number of moving parts on. You know, we saw the working capital give back in the fourth quarter of last year. We're expecting from a cash conversion point of view, to go back to more sort of normalized levels of about 70%. So you put that all together and it says, well, let's see now how the year unfolds. We've just come out of a period of unprecedented volatility and markets are stabilizing. We're returning potash, returning to sort of trend level demand. These are all good signposts, but you know, as it relates to the opportunity for continued distribution through share buybacks, we're always gonna look at that. That's why we renewed the NCIB. But it's a matter of watching how the year unfolds now.

Operator (participant)

Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.

Adam Samuelson (VP of Equity Research)

Yes, thank you. Good morning, everyone. I was hoping to maybe ask about the nitrogen business and your own outlook for improved production and reliability in 2024. One of your North American peers has alluded to weather issues impacting production in January because of weather. Did you face any similar issues? And help us think about, given the capital invested in recent years to increase the capacity, that hasn't really come through in terms of production and sales volumes, why we should have confidence that this year you're gonna start to see the benefits of those actions, especially where you just took an impairment on the Trinidad business.

Ken Seitz (President and CEO)

No, that's great. Thank you, Adam. And yes, you know, we, we have made a number of investments across the network to improve reliability, and certainly for the absolute majority of our plants, we're really happy with the way they're running. You know, we, we continue to assume that we're going to be curtailed on gas in Trinidad. That's part of the story for 2024. But for the things that we can control, we do have a number of in-flight projects that give us confidence on improving reliability. And I'll hand it over to Trevor Williams, our head of Nitrogen and Phosphate, to talk about that.

Trevor Williams (EVP and President of Nitrogen & Phosphate)

All right, thanks, Ken, and thanks for the question, Adam. I'll take you back to our Q3 earnings call when we communicated that we're taking several kind of proactive steps to address some of the reliability challenges that we had at a couple of our facilities. Just to bring it back, these actions included pulling forward a couple of major turnarounds at our facilities, as well as returning to operation one of our previously idle facilities or sites in Trinidad, which really allows for greater overall operational flexibility, as well as you know, having the ability to more effectively manage through the impact of some of the gas curtailments and things that we've seen in Trinidad.

And finally, with respect to you know, in the Trinidad area, it also provides a little bit more flexibility in terms of being able to provide some increased capacity utilization as we execute turnarounds on the island. Now, while these outages did take a little bit longer than expected to complete, I'm really happy to be able to share that since returning the plants back to operation, they've been running extremely well. Finally, I just wanted to comment on or kind of highlight a couple of other things that you know, across our North American fleet, obviously excluding where we did the pull-forward turnaround in Borger. The remainder of our assets in North America ran at 100% capacity utilization across the quarter.

It is really the result of the investment that we've put in terms of reliability in those sites, as well as completing some debottlenecks. We did some brownfield debottlenecks, specifically at our Geismar facility. That facility is now running at full capacity at those debottleneck rates. And then finally, really, the work that the team has done really to focus in on how do we continue to run our assets efficiently and effectively. Now, as a result of that, and Ken alluded to it, that really is giving us the confidence as we move into 2024. And as you'll see from our guidance range, we've added almost 500,000 tons into our production forecast, as we move into 2024.

Operator (participant)

Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.

Ben Isaacson (Managing Director and Equity Research Analyst)

Thank you very much, and good morning, everyone. When we look at the retail, how should we think about crop protection? Is that a threat or an opportunity? Can you run through how the challenges have evolved? Is it region specific, as you mentioned, in South America, is it structural or cyclical that can be cured with, inventory destocking? Should we think about it being more volatile going forward? Just trying to understand how you see the CP business. Thanks.

Ken Seitz (President and CEO)

Yeah, good morning, Ben, and thank you for the question. So we certainly see crop protection as an opportunity, and, I would say the challenges at the moment are really quite regional as it relates to Brazil, but I'll hand it over to Jeff Tarsi to provide some color.

Jeff Tarsi (President of Global Retail)

Yeah, Ben, hey, thank you for the question, and when I look at the crop protection business, if I look, and Ken mentioned in his commentary, we saw a lot of pressure in the fourth quarter as retailers in Brazil continued to liquidate their inventory there. We feel like we're in a really good position on our inventory going into 2024, and I think we've talked about it quite a bit, that we expect to see significant improvement in the back half of the year in the crop protection market in Brazil. If I look at North America, I'm actually quite pleased with where we ended the year from a crop protection margin standpoint. We were just under 25%, and that's historically in line with where we are generally on crop protection margins, and the same for Australia.

So I see, you know, you asked the question, how do we see it going into 2024? I see it as an opportunity, particularly from a Brazilian standpoint, that we should see a lot of recovery there from a margin standpoint. And in North America, look, we're in really good position from an inventory standpoint. If I look at it year-over-year, our inventories were down about $400 million on the crop protection segment. So this gives us really nice leverage with our suppliers. We were very opportunistic in the fourth quarter on our purchases on crop protection, which sets us up really well going into 2024.

Operator (participant)

Your next question comes from the line of Jacob Bout from CIBC. Your line is now open.

Jacob Bout (Managing Director and Senior Equity Analyst)

Good morning. In the past, you talked about mid-cycle EBITDA, kind of $7 billion-$7.5 billion. I think you were, you were referring to, you know, you'd be able to achieve that by 2027. A couple of questions here. Maybe just talk through, you know, what pricing looks like today versus what your mid-cycle expectations are. And do you think that this is still attainable by 2027? Just talk through, you know, what your expectation on potash volumes would have to be for that to happen.

Ken Seitz (President and CEO)

Yes. Thank you, Jacob, for the question. So yeah, we do think it's achievable. It's really owing to a few things. We talk about returning or advancing this year toward more normalized or normal margins within retail this year. We have our guidance range, but, you know, we would call that in the mid-cycle, more close to $1.9 billion-$2.1 billion coming out of our retail business. And, you know, that's also owing to the organic growth that we cite, and proprietary, our network optimization, work digital, and it gives us confidence in that range.

We also talk about the investments that we've made in potash, so that we have the ability to add one or two million tons compared to 2023 levels that are going to, that gives us the confidence in this growing market to deploy those tons. And then we also talk about the things that Trevor Williams just cited in ongoing investments in debottlenecks and brownfields, that allow us to add one million to 1.5 million tons of, of nitrogen. So from a volume perspective, yes, you know, prices. I'll hand it over to Mark to talk about pricing, but, you know, what we would see in the mid-cycle is certainly pricing a bit above where, where we see prices today. But Mark, over to you.

Mark Thompson (EVP and Chief Commercial Officer)

Yeah. Thanks, Ken. Good morning, Jacob. So yeah, I think Ken covered, you know, the retail portion of that and, and the path to mid-cycle EBITDA and retail's role, not in the volumes really well. So just on price, in that scenario, you know, on an approximate basis, to feed that $7 billion-$7.5 billion of EBITDA, we would call potash in that scenario about $400 per ton, both globally and within North America. Within North America, we're quite close to that number today, but internationally, obviously, we're, we're well below that. And so, you know, we do have a gap there, but with the fundamentals improving that Ken talked about, and, and the time horizon in front of us, as demand improves, we certainly see a path there.

From a urea standpoint, our assumption is also about $400 a short ton. So, again, we're not that far away from that today. And as we look at in-season pricing and the strength that we expect in urea this year, you know, we do see positive fundamentals. And from an ammonia standpoint, looking at the Tampa benchmark, it's about $500 a ton. And again, you know, this year, we expect to see a constructive outlook for ammonia, some in-year volatility, but all of those prices, we continue to believe, are quite reasonable. When you go back to our assumptions for why that's the case, it's the factors that we've seen change fundamentally the last few years in terms of inflationary impacts, changes in trade flows, changes in energy prices, all of those things feeding into a structurally higher fertilizer price deck over time.

Operator (participant)

Your next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is now open.

Andrew Wong (Equity Research Analyst)

Hey, good morning. Thanks for taking my questions. So, you know, just first on the potash markets, they seem to have had what seems like a bit of a slow start, but affordability looks good, and, you know, both your guidance and Mosaic calls for higher year-over-year demand growth. So I guess my question is, like, what, what catalyst are we looking for to kind of get the market moving a little bit more here? And what's your outlook on prices? And then just secondly, on potash production, like Mosaic, they announced a curtailment at Colonsay. Would that be something that Nutrien considers as well, just given your outlook versus your operating capacity? Thanks.

Ken Seitz (President and CEO)

Good. Thanks, Andrew. And, you know, I'll hand it over to Mark here to maybe go market by market. And what we're seeing sort of on the ground, certainly as we head into the planting season in the Northern Hemisphere and the balance of the world. But, you know, in the U.S., we've talked about the very strong fall application season and strong prepays heading into the spring planting season. And actually, Jeff and I are talking about, you know, strong seed sales as well. And so things are pointing to a strong, a strong year in North America once again. Brazil, while it's been some weather challenges there, we think we're probably experiencing some seasonal softness in pricing.

Q2, Q3, we expect that prices, you know, there could be some firming in that part of the world. You know, for Australia, the farmer is in good shape at the moment. We would say that yields and price over the last few years have been strong, albeit now some risk associated with El Niño. So for the markets where our retail business, as we see, we see, you know, pretty strong on the ground fundamentals, and we are anticipating normal application rates. Maybe for the rest of our distribution, in market to market, I'll hand it over to Mark.

Mark Thompson (EVP and Chief Commercial Officer)

Sure. Thanks, Ken. Good morning, Andrew. So yeah, I think as, as Ken said, we're entering 2024 with potash showing greater price stability, attractive pricing levels for growers, and really the need to rebuild inventories and soil potassium levels after the last two years in a number of key markets. And I think an important factor here is that in 2023, we would estimate that consumption in aggregate for potash across the world was actually higher than shipments. So that resulted in an aggregate drawdown in inventories, in our view. So these factors are supportive of our expectation for shipment growth to that range of 68-71 million tons in 2024 that we've talked about.

So when we actually look across most global markets today, we do see a general trend of potash inventories being in a balanced to tight position. The exceptions to that would be Brazil and China, which both are estimated to have built some inventory on a year-over-year basis, but that was on the back of extremely strong consumption and record imports in both of those markets in 2023. So those are the dynamics that are shaping our view of 2024 demand, and we see the strongest growth potential in 2024 in those markets where inventories are historically tight or where below-needs applications have left soils more depleted.

Those markets, maybe just to dive into it in a little more detail, that we would expect to grow, which we've provided in our outlook presentation, would be Southeast Asia, Europe, India, and Latin America, outside of Brazil. And really, as we've talked about earlier in the call today, Southeast Asia is the largest of those, and Europe's a meaningful contributor to that as well. So I think just to reiterate, and kind of touch on a few key markets, Southeast Asia, we see about two million tons of demand growth at the midpoint. That actually wouldn't get us back to historical trend levels.

And after the last two years of underapplications, we see that being reasonable, and again, for the reasons we talked about, supportive in-country economics on palm oil in Southeast Asian countries and rice, the impact of El Niño being less severe than originally feared and, you know, depleted inventories in that market. So we think there's a good setup there. Europe, I mentioned, is another market where we see growth. At our midpoint, we would have about 1 million tons of growth in potash shipments into Europe in 2024, which again would represent a strong year-over-year improvement, but not a full recovery back to trend levels.

And for many of the reasons that we just talked about in Southeast Asia, application rates there have been low for the past two years due to the volatility in prices and actually challenges for supply into the region. So it does appear that we're poised for a rebound in Europe, and supportive weather looks like it could set up to an earlier start to spring application in that market. Maybe just to turn to Brazil and China, and these are the two markets that really surprised to the upside.

In the second half of 2023, we saw record imports into both of those markets last year, and it's important to note that in both cases, consumption was estimated to be extremely strong, which was the primary driver behind the large growth in shipments in those markets in 2023. If we look at Brazil, we estimate that inventories entered the year about 700,000 tons higher than they entered 2023. As Ken touched on, some poor growing conditions and adverse weather impacted demand and sentiment to start the year. But in recent weeks, we understand that inquiries and buying interest in the country have increased, and the expectation is that buyers will be positioning as we move into Q2 and prepare for the next major planting activity in Q3.

that market is supported by attractive prices for distributors and growers. We would expect shipments to be roughly similar to 2023 in 2024, but we do expect that consumption is gonna increase, assuming supportive weather. In China, imports are anticipated to have reached a record in 2023. We saw extremely strong demand emerge in the second half of 2023. And I think, again, important is that we would estimate the majority of that increase on a year-over-year basis went to the ground. Domestic consumption was estimated to be at record levels, and we do believe that Chinese inventories were up by about 750,000 tons to start the year. But to put that in context, we would look at imports being up by 3.7 million tons.

So again consumption was very strong, and we believe there continues to be a strong policy incentive and economics incentive supporting potash demand in China. Given the comfortable inventory levels that we see in that market, and the trade flow shifts we've observed over the past 12-18 months, we would expect limited engagement in the near term on a new contract. And the midpoint of our shipment and volume guidance doesn't assume an imminent settlement in China. So overall, we would say that Chinese shipments, we expect at our midpoint, would decline by about two million tons in 2024, but we do expect consumption to be strong in that region. And then lastly, just to round things out in North America.

North America, like some of the other markets we've talked about, entered 2024 with historically low inventories, following very strong demand in both the spring and the fall of 2023, where that product went primarily to the ground. This set us up for what was a very positive response to our fill program in the first quarter of 2024 here. We've been very, very pleased with what we saw. As a result, we would expect, as Ken mentioned in his opening remarks, to see stronger domestic shipments in Q1 of 2024 versus Q1 of 2023.

So with the values of potash relative to nitrogen and phosphate at attractive levels, combined with solid expectations for U.S. acreage, we see North America as a constructive backdrop and shipments relatively similar to 2023 and 2024. So we step back from each of these markets, and overall, we see a setup for demand to grow again in 2024, and a backdrop of more normalized and balanced supply, which should incentivize further recovery and growth in global consumption.

Ken Seitz (President and CEO)

Great. Thanks, Mark. And with respect to your second question then, Andrew, on curtailments, you know, we have sized our network for 2024 to meet our, you know, range, our guidance range. In other words, our expectation of the needs of our customers. And we'll always meet the needs of our customers, so, you know, we'll always look at where we plan to land within that range, depending on how the year unfolds and everything that Mark just described. And, you know, we have obviously well-established channels all over the world. We're in touch with those customers every day. And so, yes, we'll set up our network, our, our six mines in a flexible way to meet the needs of our customers.

That's based on a reliance on the needs of the grade splits as well, whether it's standard grade markets, as Mark just described, and what's going on in China, or whether it's granular markets in places like Brazil and North America. We've got the flexibility to shift back and forth between those two as our customers call for volume, but again, we'll always seek to meet the needs of our customers.

Operator (participant)

Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is now open.

Vincent Andrews (Managing Director)

Thank you, and good morning, everyone. Wondering if we can just speak a little bit more on the potash supply as well as the potash price outlook. You know, obviously, all your points are well taken on the demand and shipping side of the equation, but, you know, we continue to see potash prices drifting lower in most markets. So what do you think causes the price to start flattening out? And is there an opportunity for prices to actually increase in 2024? Or should we be anticipating this just to be a year of strong volumes, but prices continuing to leak lower?

Ken Seitz (President and CEO)

Yeah, thanks, Vincent. And yes, we do see potential for firming of potash prices, and a lot of it has to do with, you know, we estimate that the marginal cost of production for potash is up about $50. And there's inflationary pressures for potash producers, but there's also just increased challenges with logistics. And, you know, of course, you know what they are, whether it's, you know, rail in through Russia into the north of China. We're now with some of the challenges shipping through the Red Sea. That's all adding cost. And so, you know, again, we look at the cost curve, and we say that last ton, to produce that last ton could be up by about $50. We're also in some markets experiencing some just some seasonal weakness.

So you combine the seasonal weakness with the notion that it's just more expensive these days to move potash around, to produce and move potash around, and yes, we do think that there's potential opportunity for some strengthening here in 2024. You know, obviously, demand returning this year to trend levels or on trend levels, 68-71 million tons. And as we look at how that's going to get supplied, it's really owing to, you know, three parts of the world. It's FSU production, which, you know, those volumes are, for the most part, back in the market, and we expect some incremental volumes from FSU coming back in in 2024. We expect some additional tons coming out of Laos, which, you know, we've assumed is gonna be in the market in 2024 as well.

And then there's Canadian production, our own production, which we think is going to make up some of the difference as well. So it's really those three producing regions are gonna play the role in meeting demand, increasing demand here in 2024. Overall, for all those reasons, we call it a relatively balanced and stable market.

Operator (participant)

Your next question comes from the line of Richard Garchitorena from Wells Fargo. Your line is now open.

Richard Garchitorena (Equity Research Analyst)

Thanks, and good morning. My question is on the CapEx reduction. So this year, you're gonna be spending roughly $400 million-$500 million less than 2023. It looks like the bulk of that is gonna be cut from the investment for growth CapEx. So just wondering, yeah, what, what was the, you know, change this year versus last year? Is it a function of your, your budget scheduling for the expansion plans for the mid-cycle scenarios, or are you tweaking the budget down just to conserve cash? And, and also just going forward, is, is $2.2 billion-$2.3 billion a good level to think about going forward, in a normalized environment? Thank you.

Ken Seitz (President and CEO)

Yeah, great. Thanks, Richard. So, you know, a lot of it has to do with just ongoing and increasing focus on our high conviction opportunities. We've made investments in our wholesale business that provide us with, you know, flexibility and capacity now to meet the needs of customers and to continue to grow, and we feel good about that. And we continue to target those high conviction opportunities in retail, proprietary, network optimization, digital, and of course, again, always looking at tuck-in opportunities. I'll maybe hand it over to Pedro just to provide some more color on how we think about CapEx levels going forward.

Pedro Farah (CFO)

Yeah, I think, and good morning, Richard. I think what we're looking, of course, we kind of mentioned before, there were a few investments in sustaining capital that were related to end of life, and we are continuing those for a couple of years. But we think those are already kind of are baked in into this year. And we continue with the strategies that Ken just mentioned in terms of primarily in retail. One of the uses of our CapEx in the past as well has been the expansion of network in Brazil. We decided to put that on pause as we integrate the past acquisitions that we have made, as well as the further maturing of all the acquisitions we have made in the U.S. here.

So we think that this level of CapEx not only provides us the opportunity to sustain all of our assets and deal with some of the end of life situations I mentioned before, but also gives us the opportunity to invest in the critical areas, particularly in the proprietary products in the future.

Operator (participant)

Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.

Steve Byrne (Managing Director and Equity Research Analyst)

Yes, thanks. I'd like to get back to Jeff Tarsi's comment about gross margins in crop chems on nearly 25%. Your revenues of crop chems are almost $7 billion. I mean, that's nearly a Corteva business. And I'm just curious, with respect to those margins, what fraction of your crop chemical sales are your proprietary brand? And within that, is there a portion of it that you're starting to get your own registrations, where you can import the, you know, the active ingredients and really have a nice margin on it? Just curious on your outlook for that gross margin in the coming years.

Ken Seitz (President and CEO)

Yeah. No, thank you, Steve, and... I'll hand it over to Jeff Tarsi. But, yeah, we are pretty pleased with the role that proprietary plays in those margins, and that's been growing for us. But overall, for 2024, as we think about that 25% and the split then between proprietary and our branded products, yeah, Jeff Tarsi can certainly provide more color on that.

Jeff Tarsi (President of Global Retail)

Yeah, Steve, good morning. As you know, our proprietary business has always been a very strong part of our, of our retail business environment. From a crop protection standpoint, we run somewhere between 30%-35% from a proprietary line of products versus our branded product line. We haven't seen that. I mean, we, we kind of kept that pretty much in line. If you look back in 2023, and of course, a lot of those products, as you would know, a lot of those products in our proprietary level of products line would be products that are off patent or post patent. So if you look in 2023, we would have seen a lot of pressure actually in that side of the business, especially around products like glyphosate, glufosinate, pyrethroid, and clethodim.

We expect to see a really nice recovery in that area coming back in 2024. You're right, we do have a very large crop protection, but we still think that we have room for growth in that crop protection line. You've heard Ken and you've heard Pedro mention the importance of our proprietary products business for us. As a matter of fact, in our 2024 budgets, we've got about 17% increase in gross margin projected for 2024. Some of that will come in the crop protection side of the business. Probably more importantly, is what we plan to do in our crop nutrition and our biostimulant sector of that business as well, where, as Ken said, we've had double-digit growth.

I think crop nutrients were up 10% last year, and our biostimulant business was up over 20% last year. So yes, crop protection is very important for us. It's also very important from a standpoint that it's a carrier for our adjuvants and surfactants, which are high margin products for us, and we saw just under a 10% increase in that segment of our business last year as well. From a registration standpoint, we've got some registrations in our portfolio. I don't know that we've got a strategy right now greatly increasing those registrations going forward. As you know, we work very closely with the multinationals, and from a life cycle standpoint, as some of those products start to come off patent, how then we've got an opportunity to bring those products into our proprietary portfolio.

Operator (participant)

Your next question comes from the line of Jeffrey Zekauskas from JPMorgan. Your line is now open.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Thanks very much. When logistics costs for shipping potash rise, who's penalized by that? That is net, do your profits decrease because you're responsible for their shipping costs? Or do you split it with your customers? Or if you had to quantify what the effects were, what would they be? And secondly, are you hedged in natural gas prices for the first quarter and for later in the year, or no?

Ken Seitz (President and CEO)

Yeah, thanks, Jeff. So as it relates to logistics costs, I'll hand it over to Jason Newton. But, you know, we really think about our business in terms of the cost curve, and we think about that on a delivered cost basis in a commodity space that we're in. So yes, as we would look at the supply and demand fundamentals, and we've talked a lot about that. But ultimately, you know, you look at the floor in our industry, in this commodity space, and again, that last ton that needs to get produced, that marginal ton, well, that ton includes. We think about that on a delivered basis, what's happening with logistics costs. But Jason, over to you to provide more color.

Jason Newton (Chief Economist and Head of Market Research)

Yeah, thanks. Good morning, Jeff. Yeah, when we're looking at logistics costs, I'd say there's short and medium-term implications of that, and both from a supply and demand and pricing perspective, to Ken's point, on the cost curve. So, in a market like we're in today, where we're pressing down, and certainly in the Asian markets and in Brazil, to prices that are near the cost base floor, any increase in the cost of freight from marginal regions is going to support the cost floor and ultimately provide support to floor prices. The other impact that can see, especially as freight rates increase and as we're seeing today with the issues in the Red Sea, you see differentials change, and so it impacts trade flows.

We know when fertilizer trade flows are disrupted, that tends to tighten supply-demand balances. So as we're looking at the flows east-west from the Baltic into Southeast Asia, for example, we know those costs have increased, and especially from Belarus, the cost reduction and inland logistics relative to pre-sanction levels are significantly higher, and we're pressing down toward those costs landed into Southeast Asia today.

Ken Seitz (President and CEO)

Thank you, Jason. Yeah, with respect to our hedge position on gas, you know, it continues to be the case that we enjoy our cost advantage when you look at the delta between European gas pricing, which albeit has come off significantly from previous highs, and, you know, today we put it sort of $8-$9. But, you know, back here in North America, $2-$2.50, we're paying for natural gas. So again, that advantage cost position given our geography. But in terms of our hedge, hedge position, we're laying the hedges at the moment, but I'll turn it over to Pedro.

Pedro Farah (CFO)

Yes, thanks, Jeff. We, what we do with the hedging, we tend to be very, more contractually into hedging, so we are looking into kind of a, basically firm up some of our contracts with hedges for the remaining of the year, where we have some firm, firm commitments, and taking advantage of the existing low prices in the market. But, we're not adopting a multi-year hedge, kind of a position on that point. So those are more contractually related for the balance of the year.

Operator (participant)

Your next question comes from the line of Edlain Rodriguez from Mizuho. Your line is now open.

Edlain Rodriguez (Director and Equity Research Analyst)

Good morning. Thank you, everyone. I mean, just a quick one on corn prices. You know, again, below $5, is that a concern for the industry in terms of whether farmers will be willing to pay higher fertilizer prices? I mean, I understand that that corn price is higher than historical norms, but I also understand it's a, it's a psychological number for farmers. Like, how do you think this plays out if corn prices stay at those levels?

Ken Seitz (President and CEO)

No, thank you, Edlain, for the question, and, you know, we're obviously watching corn prices very closely, but I'll hand it over to Jeff Tarsi to provide some color on your question.

Jeff Tarsi (President of Global Retail)

Yeah, Edlain, thanks for the question. Look, while crop prices have declined, on the same side of the sheet, input prices have declined as well, especially as it relates to corn. When I look at it, you know, number one, if you look in the North American market, the U.S. market, most of our corn in the Midwest is on a rotational basis. It's a corn followed by soybeans, and those growers don't break out of those rotations. Secondly, they're planting the best germplasm, and this germplasm takes a lot of horsepower to produce the type yields that it's able to produce. So when growers commit, if I look at our seed bookings today, as Ken mentioned earlier, they're very healthy. Growers still wanna plant the best genetics, the best trait packages.

They're not gonna put that seed in the ground and not give it the horsepower and nutrient it needs, to produce a full yield. Because when you get in these situations like we're in right now with lower prices on it, then without a doubt, yield now becomes king. You have to, you have to produce yield in order to make it work. And, I think it's pretty reflective as well, as we went into our fall, our fall fertilizer application was up 15%. A very heavy fall, and that's a very strong indication of grower sentiment and, and what they're thinking. And, and our prepay was very strong as well, and a lot of that prepay went toward purchasing fertilizer for 2024.

I think once the seed's in the ground, growers are gonna be committed to giving it all the inputs it needs, 'cause again, it's gonna be really key to produce high yield in this type environment.

Ken Seitz (President and CEO)

Operator, we have time for one more question.

Operator (participant)

Thank you. Your last question comes from the line of Aron Ceccarelli from Berenberg. Your line is now open.

Aron Ceccarelli (Equity Research Analyst)

Hello. Hi, team. Thanks for taking my question. I would like to ask you if you can be a little bit more specific on supply on potash. I was looking at your Q3 press release, and you were mentioning that Belarus you were expecting to be down approximately four million tons compared to 2021, and Russia to be down approximately two million tons to 2021 for 2023. What do you expect for 2024? Do you expect this country to be back now to the level of 2021, or actually even above 2021? And do you see where do you see these countries directing volumes these days? Thank you.

Ken Seitz (President and CEO)

Well, thank you, Aron. Yeah, so a couple questions there on tons returning to the market and where they're going. We do not see in 2024 volumes out of the FSU returning to 2021 levels fully, but certainly for the most part. I'll hand it over to Jason Newton to walk through that.

Jason Newton (Chief Economist and Head of Market Research)

Sure. Good morning, Aron. Yeah, I guess just to start from where we ended up in 2023, we think shipments in 2023 estimated between 67 and 68 million tons, so above the high end of our previous range. And that was facilitated by higher than expected shipments from both Russia and Belarus, both still down. So Russia down close to two million tons in 2023 compared to 2021 levels, and Belarus still down in the range of three million tons versus 2021. For the region as a whole, we'd expect somewhere in the range of 1.5 million tons of additional production in 2024 versus 2023.

So for both Russia and Belarus, not back to 2021 levels, but again, we've seen relatively stable shipments from those regions since late 2023.

Operator (participant)

There are no further questions at this time. I will now turn the call back to Jeff Holzman for closing remarks.

Jeff Holzman (VP of Investor Relations)

Thank you for joining us today. The investor relations team is available if anyone has follow-up questions. Have a great day.

Operator (participant)

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