Nutrien Ltd.

Greetings and welcome to the Nutrients 2023 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jeff Holtzman, VP of Investor Relations.

Thank you, Operator. Good morning and welcome to Nutrients First Quarter 2023 Conference 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, the President and CEO, and Pedro Farrar, our CFO, for opening comments before we take your questions.

Good morning. Thank you for joining us today. Nutrien's first quarter results reflect the impact of structural supply issues and shifting buying patterns that have contributed to an unprecedented period of market volatility. We delivered adjusted EBITDA of $1.4 billion, the second highest for any first quarter on record, continuing to demonstrate the advantages of our flexible, low-cost production assets and global distribution network. We invested $700 million to sustain and grow our assets and returned over $1.1 billion to shareholders in the first quarter. While our full year outlook is lower than previously expected, we are encouraged by the continued stabilization of crop nutrient markets and anticipate increased fertilizer demand in the second half of the year. We expect to generate strong cash flows in 2023 and maintain a balanced and disciplined approach to capital allocation. Shifting to the highlights from the first quarter. Nutrient Ag Solutions results were impacted by delayed grower purchases and lower margins compared to the exceptionally strong period in 2022. Retail fertilizer prices declined in the quarter, albeit at a slower pace than wholesale benchmark prices, and margins were below normalized levels as we worked through higher cost inventory. We ended the quarter with U.S. fertilizer inventory down 10% year over year, leaving a significant amount of our spring fertilizer volume to procure in the second quarter. Crop protection product margins were impacted by lower prices for certain herbicide products and later grower engagement compared to the previous year. This resulted in a temporary build of crop protection inventory, but this product is moving through the channel in the second quarter as field work has accelerated. Seed sales and margins improved. due to higher prices, increased crop acreage, and the strong performance of our proprietary seed lines. We completed eight retail acquisitions during the quarter in the US, Brazil, and Australia. In Brazil, our primary focus in 2023 is on the integration of acquisitions completed last year. The results for our potash, nitrogen, and phosphate business were impacted by lower benchmark prices compared to the exceptionally strong period in 2022. We had good initial uptake for our potash winter fill program in North America. However, volumes were down from the prior year as customers purchased on a just-in-time basis. Campotex sold record volumes to Brazil, driven by strong demand for the Safrania planting season, and to lower imports from Eastern European producers compared to Q1 2022. Potash shipments to spot markets in Asia declined as our customers worked down inventory and contract settlements with India and China were delayed as buying patterns continued to evolve. Global potash prices were relatively stable to begin the year, but declined later in the quarter due to the lack of consistent market engagement. We adjusted potash production across our low-cost network and pulled forward maintenance activities, preserving the flexibility to quickly ramp up production when stronger demand re-emerges. Nitrogen benchmark prices were highly volatile due to a sharp drop in European gas prices, lower Indian urea imports, and weaker industrial demand. Our North American nitrogen plants operated very well in the quarter and benefited from low natural gas costs in comparison to other global producers. Trinidad was impacted by gas curtailments of approximately 20%, which was in line with our previous expectations. We are progressing well on engineering work for our Geismar Clean Ammonia project and remain on track to make a final investment decision in the second half of 2023. In recent months, we have received significant external interest regarding co-investment or potential equity partnerships in the project. We plan to explore these options as we continue our evaluation of the project with a view of maximizing value for shareholders. Our phosphate business benefited from the stability of our feed and industrial product lines, partially offsetting the impact of lower sales volumes and fertilizer prices. We completed maintenance and reliability initiatives during the quarter and are targeting utilization rates above 90% in the second half of the year. Turning to the outlook. Geopolitical and weather related challenges continue to impact global agriculture commodity markets. The global grain stocks to use ratio is at its lowest point in more than 25 years and we expect it will take multiple cropping cycles to restore stocks to more adequate levels. Agriculture is a seasonal business, and there has been some near-term pressure on crop prices, resulting from a record Brazilian soybean harvest and favorable planting progress in the U.S. Even with this recent softening, new crop futures for corn, soybeans, and wheat are around 15% above the 10-year average. Growers are increasing acreage and have the incentive to invest in their crop, leading to strong demand for crop inputs as the planting season progresses in the northern hemisphere. To give you some context from a fertilizer demand standpoint, our second quarter U.S. retail fertilizer sales volumes are currently up 40% compared to the previous year. With product moving rapidly through the supply chain, we have seen some spot shortages in the U.S., in particular for potash and urea. This is highlighting the challenges that can emerge from just-in-time purchasing. Retail fertilizer inventories are projected to end the second quarter down significantly compared to last year, which supports the need for a strong summer refill. We expect second half global potash demand will be up significantly compared to the same period in 2022, with the majority of the increase in Brazil and North America, which are the two largest markets for our potash. The timing of a new China contract remains uncertain, but we do not view this as a significant impediment to our recovery in global demand. Global trade flows have evolved over the past year, and China's seaborne imports now represent only 5% of global shipments. For Nutrien, it also represents a relatively small percentage of our total sales, as we have shifted more volume to higher netback markets. On the supply side, Belarus has gradually increased potash exports through ports in Russia, partially offset by lower Russian production producer exports. We expect Eastern European potash shipments will be up approximately 15% in 2023 compared to last year, but still down 30% from 2021. We maintained our global potash shipment forecast at 63 to 67 million tons, which is well below the estimated trend demand of above 70 million tons. We expect increased demand as markets stabilize, driven by growth in global crop production, lower channel inventories, and the need to replenish potassium levels in the soil. I will now turn it over to Pedro to review our guidance assumptions and capital allocation plans for 2023.

Thanks, Ken. Good morning. Our revised four-year guidance reflects changes in fertilizer benchmark prices since mid-February and our expectation of a more stable market going forward. In retail, our initial guidance assumed a reset in crop nutrient and crop protection margins compared to the extraordinary levels achieved in 2022. In North America, Demand is accelerating as expected, but we have seen fertilizer margins temporarily drop below normalized levels as we work down higher cost inventory. We expect to end the spring season with very low inventories and for North America crop nutrient margins to recover in the second half. We could still see below normal margins in Brazil in the third quarter, as grower purchases are not likely to accelerate until closer to the spring planting season in September. Turning to potash, we assume North American prices remain firm through spring and then follow a typical seasonal pricing pattern. Offshore prices have moved lower in the second quarter due to the lack of consistent buying. However, we forecast prices to stabilize in the second half as demand increases. We lower our 2023 potash sales volume guidance to 13.5 to 14.3 million tons due to the delayed contract settlements and slightly higher export volumes from Eastern Europe. We have adjusted our production plans accordingly and will maintain a flexible approach to our potash ramp-up, basing the timing of capital expenditures with the expected recovery in demand. The investments completed to date have provided for greater production flexibility and increased our autonomous mining capabilities. These are important initiatives that enhance safety and reliability while supporting the low-cost position of our potash mines. In nitrogen, we forecast a normal season reset for urea and EUAN prices following spring. We expect an increase in global ammonia prices during the second half as prices are currently trading well below the estimated margin of cost, which we do not believe is sustainable over an extended period. We are assuming US natural gas prices will average around $3 per mm BTU in 2023 and Western Canadian gas below that level, continuing to position our nitrogen assets at the low end of the global cost curve. Cash from operating activities is projected at $5 to $5.8 billion in 2023, a relatively small decline compared to our previous forecast. As we have stated before, one of the benefits of our integrated business is the counter-cyclical impacts on cash flow. We project large increase of the release of working capital with a reset in fertilizer prices, and our cash conversion ratio would have been even higher this year if not for the timing impact of cash tax payments. We continue to deploy a disciplined approach to capital allocation that balances our priorities of maintaining a strong balance sheet, investing sustainability and growth of the business, and providing meaningful return to shareholders. While our cash flow allows to fund all of our strategic projects and we have a strong balance sheet to cushion the volatility, we will continue to review our investments to ensure they provide the best return on investment through the cycle. We allocated $900 million to share repurchases in the first quarter and intend to remain opportunistic, taking advantage of our existing NCIB. We announced a 10% increase in our dividend per share in February that aligned to the significant reduction in share count over the previous 12 months. Since 2018, we have reduced our outstanding share count by 23% and increased the dividend per share by 33%, demonstrating our commitment to capital returns through the cycle. I'll now pass it back to Ken.

Thanks, Pedro. I would just make a few final comments. The fundamentals for our business remain strong. We anticipate increased fertilizer demand in the second half of 2023, and supply issues that emerged in 2022 have yet to be resolved. Following a period of unprecedented volatility, we expect fertilizer prices to stabilize near mid-cycle values, reflecting the strength of underlying market fundamentals. We are generating strong cash flow from our integrated business and will remain disciplined in our capital allocation approach as we position the company to serve the needs of our customers and deliver long-term value for our shareholders. We would now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now conduct 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 one-tone prompt acknowledging your request. Your first question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.

Thank you very much and good morning, Ken and everyone. Just on potash, you talk about just-in-time buying. Southeast Asia is destocking. Can you or Jason or Chris remind us of when are the key buying times in each of the main regions and how are channel inventories in those regions affected? And if I can just sneak in a really quick one, on the Q4 call, when you talked about your 5% buyback, the stock was about 80 bucks and now it's about 60 bucks. Has that changed your philosophy in terms of how aggressive you'll be when it comes to buybacks? Thank you.

Yeah. Good morning, Ben. And thank you for the question. And yes, absolutely. We sort of walk market by market on potash as we've done in the past. And so maybe I'll hand that over to Mark and probably augmented by Jason. And then On the share buyback question, I'll hand it over to Pedro. So thanks, Ben.

Yeah, good morning, Ben. This is Mark. So maybe I'll just do a bit of a flyover on some of the key markets, and then I'll pass it to Jason to talk about specific timing of application season. You know, I think generally, as Ken said in his comments, there's really three key themes here we see in potash globally. I think first, it remains a supply-constrained market, and really what we see relative to our expectations in February is is about a million more tons coming out of the former Soviet Union as a whole. I think second, as Ken mentioned, we are seeing trade flows shift structurally. And really the biggest themes there that we see is that North American production is becoming more important and a bigger proportion of buying in markets like North America, Brazil, and Southeast Asia. Former Soviet Union production is disproportionately moving into China. And then third production out of Laos is increasingly finding markets in China and Southeast Asia. And so I think those are the three biggest factors as it relates to the structural shifts. And third, as Ken mentioned, we do see demand recovering in the second half and certainly do see long term trend demand intact. So, maybe just to drill down into some of the markets more specifically, Brazil was certainly a bright spot in Q1. Capitex had record shipments into Brazil in Q1. We did see a recovery there and we do expect a rebound for the remainder of the year and buying to accelerate to meet their seasonal needs as we move through the second quarter and into the second half. From an India standpoint, obviously there was contracts signed with major producers and suppliers recently. One of the big items that we're waiting for there, while we have seen some products start to move, is a subsidy announcement from India. Right now, we would probably be historically late for that announcement, so we expect that at any time. And we would anticipate that when that's announced, we'll see further movement in product into India. From a Southeast Asia standpoint, we have seen some volume moving to Southeast Asia. We've seen inventories that were higher cost for 2022 continue to be worked down. We did see some reengagement in buying following the Indian contract. Inventories are normalizing and we are starting to see fresh purchases. And again, we would expect those to accelerate through the second quarter and into the second half. And then I think finally on China, from an inventory standpoint today, we would see port inventories of China between 2.3 and 2.5 million tons, probably about five to 600,000 tons of that is sitting in bonded warehouses today. And certainly we have seen that inventory be a little bit stickier because of the trade flow shifts that we've seen. But as Ken said, I think what we've seen over the past 12 months Certainly from a China perspective is that while the contract markets have historically been benchmarks or events that the global markets look to in a year like 2023 with these trade flow shifts, we think China's seaborne imports are only going to represent about 5% of global shipments. And so we expect that this is going to be a trend that these contracts will be of less significance to the global market over time and really a smaller part of the picture. so finally in north america as we've talked about because of the lack of field activity in q1 we had a seasonally slow q1 but really in april things have picked up substantially i was just in the field last week with our team and as ken said products moving extremely well we saw one of the biggest drawdowns in the last five years month over month between march and april in our customer owned inventories and uh certainly saw inland production of potash moving very well at our distribution terminals. So I think from a timing perspective, I'll just let Jason talk about some of the specifics on that.

Sure. Thanks, Mark. Just to start with Southeast Asia and the timing of shipments and applications in that market, it is a region, particularly as we look at Indonesia and Malaysia, where there's a long lead time between purchases and applications. And that's part of the reason why the high priced inventories are holding up there. So there's large volumes purchased early in the second half of last year that flowed in through the end of 2022 and carried over into early 2023 and start to see applications in late Q1. And those inventories move lower through the second quarter of the year in Southeast Asia. And then In Brazil, in terms of the timing, we did see unusually strong imports of potash in Brazil in the second quarter of last year, which really led to a buildup in inventories in that market in front of Q3. And we'd expect more normal levels of imports into Q2 and a seasonally normal volume of imports coming in late Q2, early Q3 in front of the applications for their spring season in September.

Maybe, Ben, just to address your last question about the buyback. So we intend to remain opportunistic in the market. As we mentioned before, we already, since MOE bought, 23% of our share count. We do have a very strong balance sheet that allows us to take a long-term view in terms of value. And that continues to pay off. And in terms of our free cash flow per share, So just to kind of give you a quick compare, in 2021, when our EBITDA was $7.7 billion, our free cash flow per share was $3.4 per share. And if we jump now to kind of a similar year, I'm excluding 2022 because, of course, it's like an anomalous year. In 2023, we have A kind of a midpoint of our guidance of about 7.3. And our free cash flow per share is 4.7. So that's a almost 40% increase in our free cash flow per share. So we think that strategy is paying off. We intend to use the balance sheet. And if we see value, we'll be opportunistic about it.

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

My question is on normalized EBITDA and how are you thinking about that? You know, if we go back to your investor day last year, you know, you kind of walked through the case of mid-cycle EBITDA of around 9 billion. You know, do you still think this is realistic? I know you're making some commentary about mid-cycle prices for the remainder of the year, but the midpoint of 23 guidance is well below that 9 billion. Just any commentary there would be helpful.

Good morning, Jacob, and thank you for the question. What we would say is yes, we do, and there's a few reasons for that. If we look at the assumptions when we talk about mid-cycle EBITDA of $9 billion, it's really predicated on the structural shift that we've seen in energy, agriculture, and crop nutrient markets, and really lending to what we see is a strip going forward that's about $50 more across crop nutrients than we had assumed prior to this conflict in Eastern Europe. It also assumes additional volumes, and so there's a timing effect here, obviously, as we look at wrapping up potash volumes over time, and as we talk about our brownfield investments and our nitrogen fleet, and also our clean ammonia project, which is also going to bring volume. And then finally, when we talk about normalized EBIT ranges within our retail business, and it is true. that we've had a reset in our retail business. We talked about that at the end of last year. We expected that to happen this year. Of course, as it relates to the softness that we saw in crop nutrient markets in the first quarter, that reset is bigger than we had anticipated. That's reflected in our results. But when we think about normalized EBITDA ranges of our retail business, it too contributes to that $9 billion mint cycle. If we walk across those assumptions, there is a timing effect here, but we believe that those assumptions remain intact.

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

Hi, good morning. Maybe a two-parter for me. So if we take your potash volume guide, it's going to be the best nine months, like the best Q2 to Q4 in aggregate that Nutrients ever had at 11 million tonnes. can you do that in a year without meaningful seaborne Chinese volumes? And what do you assume in the midpoint of that for Chinese seaborne volumes? And then just back on the buyback, if you look at, you know, on slide, I've got the slide now, that's where you show your operating cashflow. Like it looks like you're suggesting there's really no more room for any additional repurchases this year at the midpoint. Thanks.

Right, so as it relates to our plan for potash this year and the shifting trade patterns that Mark described earlier and how we're navigating that, you know, I will pass that back to Mark. And then as it relates to what we might do this year with share buybacks, we'll ask Pedro.

Yeah, good morning, Joel. So just to reiterate a couple of the comments I made earlier and that Ken's made, We do see the shifting trade flows playing a role here, but nonetheless, even at 5% of global shipments, China is likely going to need 3.5 million tons or give or take a half a million tons on either side of that in seaborne imports that are going to have to be met. And we ultimately believe that in the second half, China is going to need that volume. So we do see Capitex playing a role in meeting those needs. But one of the other points that I'll call out again is the record volumes that we've seen in Q1 from Capitex into Brazil. And the fact that we are seeing Canadian production become far more important in some of these other key markets, including Brazil and Southeast Asia. So when we consider the fact that we do believe China is going to have to come back to the market to meet its second half needs for hot ash, we expect Camputex to play a role in that. And again, when we look at our projections across markets, we look at economics for growers in these markets and the healthy demand recovery that we expect. We would also see shipments growing in places like Southeast Asia and Brazil overall this year. So you put all of that together and we do believe that we can get to a place that meets the shipment numbers that we've talked about. And certainly in working with Campitex, we also believe that we've got a supply chain that can deliver it and a production plan and Chris's business unit that can also get us there as well.

Okay, so just, Joe, on the buybacks, I think we are not circumscribing ourselves to the fiscal year here. I kind of said before, we do have a strong balance sheet. We are obviously going to be monitoring the business, but if we do see value and we see the direction of travel being as we expect, we are intending to be opportunistic in the market and use the flexibility we have to to capture that value.

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

Thank you. Good morning, everyone. Maybe continuing on potash, I mean, if I look at your own shipment guidance for 2023, kind of volumes up about a million to 1.8 million tons, Can you break out kind of the increment of that that's domestic versus offshore? I presume that at least a million of that was implied domestic over the balance of the year. And if that's the case, that would get your North American business back pretty close to historical kind of norms versus history, which... would mean that you would need to see a disproportionate kind of offshore growth in 24 and beyond to really be the outlet for your incremental production tons. And I'm just trying to get a sense of your confidence in that view and kind of where you think the market share gains from Campotex can be durable, especially with China getting more tons out of the former Soviet Union and Laos.

Yeah, good morning, Adam, and thank you for the question. Yeah, so I would just a few comments and maybe pass it over to Mark. I mean, 2021, we saw potash demand shipments on the planet of about 70 million tons. And we saw that drop to 61 million tons last year. And now seeing a rebound, we expect to 63 to 67 million tons. We're maintaining that range. albeit a supply-constrained environment. And importantly, this is a market that's growing. We've seen 2.8% compound annual growth rates in the potash market for the last 20 years, and we expect that to continue to grow for all the reasons that we talked about, growing population and the need for more food. So we're in a market that's growing, and as we look at where that growth is going to take place, Yes, last year the North American market, and when we talked about 61 million tons, the North American market was down significantly, and that was going to the late spring weather last year, and here we are this year. And while we have seen some incredible volatility and movements of inventory, we are now in the heart of the planting season and seeing very strong movement of volumes in North America. Application rates are up, inventories are being drawn down, and as I said earlier, in the opening remarks, we've seen a 40% increase in Q2 volumes quarter to date over last year. So, yes, as we look at where the volumes are going, it is tilted to North America. Maybe, Mark, you want to provide some detail around those numbers.

Yeah, thanks Ken. Good morning Adam. So yeah, maybe just to start with North America and again, the assumptions are laid out in our investor package for the call, but we do expect North America to be back to a relatively historical level of shipments this year. So we're estimating nine and a half to ten and a half million tons of shipments into North America. So 2022 is certainly an anomalous year with what we saw in terms of inventory stocking and drawdown, and the return to normal will see us back at more normal levels in North America with, you know, shipment somewhere between four and a half and five million tons. So the split we would see between domestic and international is much more typical for us than sort of the one-third roughly domestic and two-thirds internationally moving through Campotex. And then just on your second question about where that growth is going to come from, I mean, as Ken talked about, The last few years have been certainly a major shock to the market supply coming out and what we've seen from a pricing and inventories perspective. But we certainly believe that the long term demand trend is intact in these markets. And certainly, we expect to see a rebound as I've talked about already in markets like Brazil and Southeast Asia, where capital tax and Canadian production has become increasingly important from a share perspective. So the growth in those markets over time certainly can sustain the volume growth in our business from our perspective. And there's other markets that have become opportunities for Campitex in this environment. I think a great example of that is a destination like Bangladesh, where we're expecting to ship over half a million tons through Campitex this year, which really provides incremental opportunity. So notwithstanding the incremental production from the Soviet Union that's finding its way into China, we do see growth in a number of our important markets.

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

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. You mentioned Belarus being more active and Russia being less active in the export market than what you had previously expected. Can you talk about whether this changes how quickly you think Belarus can get back to those pre-war shipment volumes and what would need to happen for them to get there. And then if you could give us a little bit more color on why Russia isn't exporting as much, that would be helpful as well.

Right. So, yes, we had started the year with a set of assumptions or beliefs about shipments out of that region. And it was really following last year where we saw, you know, substantive volumes out of Belarus and Russia shut in. With the effect of sanctions and to your question, well, Belarus and really difficulty getting access to tidewater for seaborne exports and some of the logistical challenges with rail, albeit, as Mark mentioned earlier, we are seeing those rail movements increase or have seen them increase out of Belarus to China. So there is a bit of an outlet there. So when we started the year, we thought that we said that Russian volumes we thought would be down 15 to 30 percent and that Belarusian volumes would be down 40 to 60 percent compared to 2021 levels. If we look at exports out of the region, we've adjusted those numbers so that we say we think Belarusian volumes would be more like 25 to 40 percent and Russian volumes more like 25 to 35 percent. But importantly, If we look at just supply out of the region, while it is closer, you know, and maybe even a little bit above the top end of what we had assumed for exports out of the region, still 30% down from 2021 levels. So that equates to about 9 million tons. So, yeah, I mean, while there is movement among those numbers, Will, the reality is there's still a lot of volume that's not getting out of the country. What would it take? I mean, I think what we're seeing – with Belarus for seaborne imports is that some of those volumes are going through Russian ports, but at the same time, that seems to be displacing Russian volumes out of those ports. And then finally, one of the other outlets is, of course, rail to China. We've talked about that. I think for Belarus to probably continue to increase volumes, I assume they'll be maximizing those rail volumes, but at the same time, what we believe need to see is new port capacity. Now we're talking about volumes from the region, new port capacity on the Russian coast. And of course, we've talked about that's going to take a bit of time so that we believe exports out of the region will continue to be challenged.

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

Yes, thank you. A couple years ago, Ken, if you had thought that there'd be a 9 million ton shortage out of the former Soviet Union of potash, maybe net 5 million ton with some increases elsewhere, would you have predicted a $370 realized price for your offshore business? Does that seem fair to you on a going forward basis? Maybe the math has got a few... Strange items in there, but it seems lower than what we were expecting for the quarter. And then maybe another potash question on your domestic side. This surge of sales through customer-owned warehouses, that's your product in your customer's warehouse. How is the price set there when that customer decides to pay you? And do you have negotiating or pricing power given what seems like a tightening market in the U.S. when your product is in their warehouse?

Right. Good morning, Steve, and thank you for the question. So I'll start with, you know, just obviously as you've described it, there's challenges on the supply side of the equation for potash. As you put it, some anomalous effects that are leading to what we are experiencing is as softening crop nutrient pricing, potash pricing in the first quarter of the year, which frankly, domestically is a rarity, something that we've really never seen. But that's just one of the anomalous observations. If you look at, if we look at 2022 and obviously this terrible event, which we all want to come to an end and stability back in the markets, And the challenges that that created for some of the big potash importers and users. And the inventory, the rush to get hands-on inventory and the inventory build that took place, and obviously the price spike that followed that. I mean, we saw that inventory build, and there were some weather-related effects there, so that when we headed into the fall period, The world started on a large inventory drawdown, watching prices soften. And that inventory drawdown, one of the most dramatic, again, that we've ever seen carried through the first quarter of this year as farmers, as growers, and we saw that certainly in our North American markets, exercise really cautious buying behavior. We talked about it, just-in-time buying, and really only stepping into the market now when they absolutely have to as all of these big volumes go to ground. And so, wanting to shore up inventory with supply concerns in 2022, movements in price, and then inventory drawdown coming into 2023, and the associated movement in price. And here we are. The backdrop for ag fundamentals remains strong. Grower affordability is good, given the reduction in crop nutrient prices. And so here we are with inventories clearing and prices stabilizing and volumes moving. So, Steve, you know, how this all translates into price and market volatility, what we would say is that we've now approached sort of a form of stability and what we would call sort of mid-cycle pricing for potash. And that's what we've assumed for the balance of the year. As it relates to these supply shortages, we're watching that incredibly closely. It's going to and has impacted how we think about increasing our own volumes It will continue to do that as we seek to meet the needs of our own customers. But, yeah, some of the supply challenges remain, and we'll see how that plays out over the balance of the year. Maybe, Mark, if you want to provide some thoughts on pricing with our customers in the domestic market.

Sure. Good morning, Steve. So, yeah, I think this is a relatively simple answer overall. I think first and foremost, You know, we continue to contend that we've got, I think, the best built, the most ideally positioned and the most robust distribution network in North America for potash. And the majority of those assets are owned assets. As I've mentioned, I was just out at our Hammond, Indiana terminal last week, which has about 80,000 tons of storage. And so our primary mechanism for moving product into the North American market is through our own warehouse and distribution system. From an efficiency perspective, we do have agreements with some customers. Nutrient Egg Solutions is one of those customers, as well as our other major customers. And that's really efficiency from a logistics standpoint, so that we're not spending unnecessary dollars where they're not needed on distribution infrastructure and taking advantage of the assets that exist in market. And from a pricing standpoint, actually things have been relatively straightforward, as we've talked about in the commentary today. We saw product move very quickly and a lot of hand amount buying. So what was being sold was largely going directly to ground and moving through the channel quite quickly. And what we've found from a commercial perspective generally is that as we've seen these supply demand shortages emerge at inland distribution points, we've been tracking those prices higher as they've emerged throughout the spring season.

Your next question comes from the line of Christopher Parkinson from Mizuho. Your line is now open.

Great. Thank you so much for taking my question. Just from a strategic perspective, is there any remaining apprehension to walking away from the contract structure of the Indian and Chinese markets? It seems your exposures in other markets, Southeast Asia, Brazil, from a spot perspective, are continuously growing, and it seems like it affects the fluidity of the marketplace. So just what's in terms of, you know, how you've been thinking about the last several decades versus the future, you know, can you just walk us through the kind of what you see as the merit of the current market dynamics? Thank you.

Yeah, thanks, Chris.

You know, and I would say that as we look at our portfolio of sales over 40 countries around the world, and importantly, agriculture markets that we see growing, and what are they? I mean, we've talked about Brazil. But it's certainly India, it's certainly Southeast Asia, and it's certainly China. And right now, the Canadian potash is an important supplier into all these regions. We have worked hard in these regions to establish a really, really enviable customer base, and we've worked hard over the last 40 years to do that. So we have had success in these growing markets of China, India, Southeast Asia. Of course, Brazil, when we talk about offshore markets, and that we continue to believe that customer base will be important to us as we grow our volumes.

Your next question comes from the line of Joshua Spector from UBS. Your line is now open.

Good morning. This is Lucas Bowman on for Josh. I just wanted to follow up on the mid-cycle expectations that you're saying pricing is basically now baked into the updated guidance. So could you just clarify for us exactly what your expectations are either, you know, directly or as a range in terms of pricing for potash, ammonia, urea, phosphates, and your energy cost assumptions? Thanks.

Yeah, we can provide those, you know, some ranges, Lucas. And, yeah, I'll hand it over to Mark to talk about those specifics.

Yeah, Lucas. You know, I think with respect to mid-cycle prices, as Ken said, when we came out at last year's Invest Today and talked about the structural shift that we expected from all the factors that have been mentioned today, our expectation was that generally on average across the fertilizer price complex, that we would see prices shift by about $50 across all the nutrients. Probably specifics in every product line is beyond the scope of today's discussion. But I think what we're seeing generally is that as prices are stabilizing, as Ken's talked about, and that process continues for both nitrogen and potash domestically and internationally. Currently prices are sitting, give or take, probably within $20 or $30 of those assumptions that we made in terms of what new mid-cycle prices would look like. So when we look across the fertilizer complex and we see things stabilizing today, that is what's inherent in our guidance, as Pedro and Ken have described. And we also think that's a good way to think about the business on a run rate going forward in terms of where we'll see mid-cycle prices in the future.

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

Hi, good morning. So with pricing now near what you would consider as mid-cycle levels, has there been any change in your view on capital allocation and investing in more capacity? Would you consider slowing down the potash ramp a little bit more, maybe until demand re-engages? you know, maybe would it make sense to use some of that capital if you do delay some of those plans for buybacks, given where your shares are today? Thanks.

Yeah, good morning, Andrew, and thank you. The short answer to your question is yes, we would. Yes, we would consider slowing down. We're really, as we talked about earlier this year watching the market, we did delay our ramp up. We talked about that earlier this year, 25 to 26, 18 million tons, and Importantly, just continuing to watch the market and the supply and demand dynamics. The reality is, again, that we are in a market that's growing, and we believe that that's going to carry on for the absolute foreseeable future at sort of 2.5% to 3% annual growth rates, and that new supply is going to be required to meet that growing demand. If we look at then the supply-side challenge that challenges that continue to persist. And while, yes, we have seen some additional volume get out of Russia and Belarus, the reality is, again, 30% down from 2021 levels. I mean, these are big numbers, 9 million tons. And we're watching how those tons find their way back into the market and the pace at which they'll do that, talking to our customers on a daily basis about what their needs are in this environment. and then planning our capital accordingly as it relates to wrapping up potash. These investments are really quite granular. Dozens of projects across four mines. We have made some investments that are going to take our capacity up to around 15.5 million tons by the start of next year. We've demonstrated the value of that flexible approach. We demonstrated that in 2021 and 2022, and the value associated with preserving some additional capacity But when we're doing that math, yes, Andrew, the short answer to your question is, you know, if we see that the market's not there, then we'll pace our capital accordingly. And, yeah, we'll certainly, as Pedro mentioned, always look opportunistically at buying back our own shares.

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

Great, thanks. I just wanted to ask a question on cash costs. So we saw an uptick in the first quarter across potash and nitrogen. I think Pedro talked about bringing some maintenance forward in the course. Maybe we can talk about how much of that increase in costs in the first quarter was attributed to that. And then just on the nitrogen side, ammonia costs went up in the quarter. but we are seeing ammonia coming down, and natural gas should be coming down in the second half. So you could talk about sort of maybe trends on the cash cost and nitrogen side as well. Thank you.

Yeah, absolutely, Richard, and thank you for the question. Yeah, there's a number of moving parts there as it relates to natural gas costs in nitrogen. We're obviously automating our mines and starting to enjoy some of the benefits of those investments in potash. The biggest one probably we can talk about is volume and the volume impacts on cash costs in the quarter. But I'll hand it over to Chris Reynolds to talk about our president of our potash business to talk about cash costs in potash. And then over to Trevor Williams, our president of nitrogen phosphate, to talk about nitrogen.

Yeah, good morning, Richard. Thanks for the question. So as we look at full year, you know, our controllable cost of product manufactured in Pardash, we expect that to be fairly similar, in fact, to what we saw in 2022. Now, yeah, in Q1, as Pedro had mentioned, we did have some increased maintenance. We pulled some of that maintenance forward to be ready for the surge in demand we're expecting in the second half. But, you know, as we look at that, controllable costs still amongst the lowest cost in North America and certainly one of the lowest costs across the industry. So we're still feeling good about that position today.

Yeah, and thank you, Richard. And very similar on the nitrogen side. Our volumes are down a little bit, primarily driven from the Trinidad side. We did have some increased maintenance costs there. As we had a few reliability issues, but really because we've had some reduced volumes because of the curtailments. But really, as we look towards the remainder of the fleet, the majority of the fleet, we look to get back towards what we would expect in terms of our cash cost for 2023.

Your next question comes from the line of Ben Tyler from Barclays. Your line is now open.

Thank you very much. Good morning. I just wanted to go back a little bit on the supply-demand. Obviously, you've shown us in the graph and you've highlighted the growth potential over the last couple of years and how you expect this to come back. As it seems, in the first quarter, demand was clearly softer than what you anticipated. And I think you've talked about it, that there is a year-or-year improvement of like 40%. But maybe help us understand, put that in a first-half context versus first-half last year, and maybe also versus 2021, just to kind of get a little bit of a better feel if the need for potash is really what you think it should be and what the mismatch is. That would be like my first question. I'll have a quick follow-up after that.

Right. Thank you for the question, Ben. And I think what we would say for the first quarter was not necessarily demand was down, but that inventories were being drawn down and this just-in-time buying behavior so that when we look on an annual basis for potash, we continue to say 63 to 67 million tons. We haven't changed those numbers. Continues to be a supply-constrained market. Continues to be the backdrop of growing demand you know, over time. But Jason Newton, our chief economist, handed over to you maybe to talk about some of those details. Sure. Good morning, Ben.

Yeah, if we look globally, I guess just as Ken mentioned off the start, we've maintained our 63 to 67 million ton shipment range for the year. And as we look around at various markets, there's a bit of a split between standard grade and granular markets. markets and that we have seen really strong demand in brazil and strong shipments in north america as well from a granular perspective but we know the contracts were delayed and particularly china's delayed in terms of contracts which has an impact uh on on our sales but We have seen strong shipments going into those markets, part by rail from Russia and Belarus. And so as we look through the various markets, there's a few minor shifts market to market. But overall, demand's been pretty much as expected. And I'd say even probably closer to the higher end in some of the granular grade markets.

Your next question comes from the line of Martin Pradier from Veritas Investment Research. Your line is now open.

Thank you. Yes, I hear all about this shortage that is in the supply chain in North America, and I was wondering what is the effect in price. Are you seeing the prices increase now because there are no inventory and people have to

buy right away yeah maybe yes the short answer martin is yes where we are seeing uh some of those uh impacts on price maybe i'll just hand it over to jeff tarcy talk about some of those observations that we're seeing certainly in our retail business through the channel and then over to to mark to talk about the impact on on crop nutrient pricing yeah ken thanks and good morning mark

I think we have seen, as Ken spoke to, you know, if I look at the first quarter, we were basically 6% off on volume for the quarter. And so very steady from that standpoint. We have seen a surge in the second quarter on volume across our fertilizer portfolio. And Look, this again, I think it speaks from a nutrient ag solutions perspective. It speaks to our supply chain and investments we've made across our supply chain in order to get product moved in a lot of cases on a just-in-time basis from that standpoint. We have seen prices stabilize as we've gotten into the spring. Probably more importantly, we've seen margins stabilize and normalize as we've gotten into the quarter as well. Look, we spoke to earlier in the year, you know, what our soil testing was alluding to and that there were some deficiencies in about 40% of our tests around P and K. And we certainly see our growers responding today to that. Rates are good. And so the demand's been exceptionally strong into the second quarter. We expect that to continue. We're right in the middle right now of our planting season. And so... we continue to see a pull on demand and we're working hand to mouth in some of those situations today from an inventory perspective. Mark, I might pass it over to you as well.

Sure. Thanks, Jeff. Good morning. So, yeah, as Jeff said, we're seeing things move very quickly right now. And after a first quarter where, as we've mentioned, there was relatively low field activity in North America due to weather and the just-in-time buying, we really have seen things kick off at a frantic pace as planting activities started in April. And so, again, just to look at benchmark prices that are published as an example, if we look back to some of the lower values we saw in Q1, sort of in the $370 per ton range at NOLA for potash, we've seen firming of approximately $40 and seen really good uptake at those values. And if we look at inland terminals or inland distribution points, that really have been challenged logistically by the just-in-time purchasing behavior. We've seen values increase in excess of that and in some cases substantially. And I think when we go back to talking about the North American agricultural supply chain, one of the things that we talked about in February was that if we were to see this just-in-time purchasing behavior persist, that because of the significant needs for crop nutrients and how fast a crop can get planted, we would expect to see some logistical premiums emerge because of the supply chain crunch. And so I think we have seen that and certainly have seen potash prices firm in season and have sought to sell into that strength to the extent possible and support our customers. And I think, again, this is something that whether it's in the nutrient egg solutions business that Jeff talked about or in the NPK distribution assets that we have, does set us apart, and really we've been responding quickly to meet those needs and capture those higher price premia in our markets.

Your next question comes from the line of Edlin Rodriguez from Credit Suisse. Your line is now open.

Thank you. Good morning, everyone. A quick question on crop prices. They have come down a little bit, and as a result, farmers' income is likely going to be down. I understand crop prices are still higher than historical averages, but do you think the lower prices could have an impact on farmers' psychology and willingness to pay higher fertilizer prices?

Thanks for the question, Edline. Maybe I'll pass it over to Jeff Tarcy just to talk about psychology among farmers. I think the reality is that given the way crop nutrient prices have softened relative to what we're seeing, with ag commodities, and again, the likes of corn, soybean, wheat, still 15% above the 10-year average, that we are seeing strong application rates domestically in the planting season here. But Jeff, over to you.

Yeah, Ken, thanks. And no, we certainly don't see any indication of that. You have to remember as well that a lot of growers have forward contracted prices when they enjoyed a really strong back half of the year last year. So you saw probably more forward contracting going in across the commodity pricing. But as we sit here today, again, we see growers using The best hybrids, the best trade packages. Again, we talked about our fertility rates in the second quarter up 40% right now year over year, and we anticipate that there again going to want to try to maximize their yields from that standpoint. I've said this many times before. These are science based decisions today, and so these growers are making their decisions based off of what these crops need to maximize yields. going forward, and that's their best chance to optimize ROI. I think we'll see continued strong input demand as we go through the rest of the spring and into the summer.

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