Nutrien Ltd

TSX:NTR

Earnings Call Analysis

Nutrien Anticipates Higher Sales, Dividend Growth

Nutrien is poised for an uptick in sales volumes in Q1, harnessing efficiency measures like mine automation to maintain steady Potash production costs. Anticipated nitrogen volume growth is around 500,000 tonnes, supported by robust operations in U.S. and Trinidad facilities. Planned capital expenditures have reduced by roughly $400 million to between $2.2 billion and $2.3 billion, continuing investments in areas such as organic retail growth and operational enhancements. The company's focus includes digital advancements, proprietary product expansion, and strategic tuck-in acquisitions. For 2024, a promising market stability suggests potential for increased fertilizer sales and retail earnings growth. Additionally, dividend payouts have grown by 35% since 2018, reflecting a committed shareholder return strategy.

Overall Financial Performance and Market Conditions

Nutrien demonstrated robust financial performance in 2023 with an adjusted EBITDA of $6.1 billion, propelled by strong demand in key markets and strategic initiatives. The company generated $5.1 billion in cash from operations, focusing on efficient capital management and delivering substantial value back to shareholders through $2.1 billion in dividends and share buybacks. Fertilizer demand in North America showed particular strength, bolstered by improved grower affordability and an extended fall application season.

Diversified Earnings Across Business Segments

Nutrien's diverse segments, including retail, Potash, nitrogen, and phosphate, each played a vital role in its financial outcome. The retail sector, Nutrien Ag Solutions, faced a decline from the previous year's record to $1.5 billion in adjusted EBITDA, yet strategic inventory management and high-value product sales signal growth potential for the future. Meanwhile, the Potash sector, despite lower prices, attained $2.4 billion in adjusted EBITDA, cementing its place in global markets with notable volume growth in North America and China.

Operational Efficiency and Sustainability Initiatives

Nutrien is honing its operational efficiency and augmenting its sustainability initiatives. Notably, the nitrogen sector generated $1.9 billion in adjusted EBITDA, navigating through lower benchmark prices but offset by reduced natural gas costs and operational improvements. Phosphate results also improved, demonstrating commitment to operational efficiency and margin enhancement with a full-year adjusted EBITDA of $470 million.

Global Market Dynamics

On a global scale, low grain stocks-to-use ratios suggest continued robust demand, while crop price declines and lower input costs are bolstering demand ahead of the 2024 planting season. For Potash, the company forecasts a strong demand rebound, with China's consumption at a record high, despite expectations of lower imports in 2024. Nutrien predicts nitrogen markets to remain influenced by regional supply variations and fluctuating natural gas prices, with the U.S. market currently tight and favorable for the company due to competitive North American natural gas prices.

Strategic Guidance and Capital Allocation

Looking forward, Nutrien's guidance for 2024 emphasizes shareholder value, with projected retail adjusted EBITDA ranging from $1.65 billion to $1.85 billion. Capital expenditure plans are set to be reduced by approximately $400 million to the range of $2.2 to $2.3 billion, reflecting prudent financial stewardship. With an upward trajectory in first-quarter sales and strategic capital investments facilitating organic growth, Nutrien appears well-positioned for efficiency improvements and operational advancements.

Future Outlook and Investor Engagement

Nutrien anticipates increased market stability and demand, which will underpin growth in fertilizer sales volumes and retail earnings. The company remains committed to strategic initiatives such as serving growers effectively, maintaining competitive cost structures, and ensuring asset reliability. Investors are invited to gain deeper insights into the company's strategic priorities during Nutrien's Investor Day on June 12.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings and welcome to Nutrien's 2023 Fourth Quarter Earnings Call. At this time, all participants are in 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, executive]

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.

[Kenneth Seitz, executive]

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. From Nutrien sales volumes for our global retail business increased by 10% in 2023 as growers work 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 continue 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 5 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's 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 the mine automation products that enhance productivity and safety, increasing our annual Potash ore tonnes 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 the 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 GHB 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 tonnes. 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, maintain the low-cost position and reliability of our assets and position 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 is 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 the global demand will continue to recover towards trend levels in 2024 with shipments projected between 68 million to 71 million tonnes. 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 tonnes in 2023, supported by strong affordability and as 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 continued 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 remained 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, executive]

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 to $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 volume guidance of 13 to 13.8 tonnes 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 field 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 contributable cash cost of production similar to last year. Nitrogen sales volumes are projected to increase by approximately 500,000 tonnes 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 to $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 capture 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.

[Kenneth Seitz, executive]

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 to watch for more details on this event over the next few weeks. We would now be happy to take your questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Steve Hansen from Raymond James.

[Steven Hansen, analyst]

I 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 whether you've got good visibility into that, whether you've seen order flow or what outlook you have there that gives you that confidence?

[Kenneth Seitz, executive]

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

[Mark Thompson, executive]

Yes Steve. So just to reiterate a few of the things that Ken mentioned. I think in Southeast Asia actually had 2 years in a row of consumption and shipments that would be less than normal. So 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 up by about 2 million tonnes from a shipment standpoint 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]

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

[Joel Jackson, analyst]

Let's talk about free cash flow and the buyback and capital allocation. Do you see free cash flow being similar in '24 of '23, 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 authorization. So I'm trying to get a sense of do you think that your buyback on 24 will be similar to 23% in terms of total numbers, even understanding that it was heavy Q1 early 2023 under the prior authorization? And where that plays out authorization, really maxing as much as you can do for buyback versus other things like maybe doing some more opportunistic M&A in the U.S. or Brazil for retail, for example?

[Kenneth Seitz, executive]

Yes, thank you for the question. So with respect to 2024 free cash flow, obviously, as we've talked about, we've made some changes to our capital program, and we brought down some of those investing dollars and getting highly focused on the things that we talk about like proprietary products and 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 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 up some of the debottlenecking and brownfield investments in nitrogen, that's our focus from a capital point of view. As it relates to the year, there's a number of moving parts on 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 a period of unprecedented volatility and markets are stabilizing. We're returning Potash, returning to trend level demand. These are all good signposts. But as it relates to the opportunity for continued distribution through share buybacks, we're always going to look at that. That's why we renewed the NCIB. But it's a matter of watching how the year unfolds now.

[Operator]

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

[Adam Samuelson, analyst]

Yes. I was hoping to maybe ask about the nitrogen business and your own outlook for improved production and reliability in 2024. One of your [ Mark ] 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 going to start to see the benefits of those actions, especially where you just took an impairment on the trend.

[Kenneth Seitz, executive]

No, that's great. Thank you, Adam. And yes, 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. 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 Phosphate to talk about that.

[Trevor Williams, executive]

All right. Thanks, Ken, and thanks for the question, Adam. And I'll take you back to our Q3 earnings call, and we communicated that we've taken several proactive steps to address some of the reliability challenges that we had a couple of our facilities. Just to bring you back, these actions included pulling forward a couple of major turnarounds at our facilities as well as returning to operation in one of our previously idled facilities or sites in Trinidad, which really allows for a greater overall operational flexibility as well as 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 in the Trinidad area is also provide 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 to the plants to back to operation, they've been running extremely well. Finally, I just wanted to comment or highlight a couple of other things 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. And it is really the result of the investments 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 to boltleneck rates. And then finally, 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 tonnes into our production forecast as we move into 2024.

[Operator]

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

[Ben Isaacson, analyst]

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.

[Kenneth Seitz, executive]

Yes, 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, executive]

Yes, Ben, thanks 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 continue to liquidate their inventory there. We feel like we're in a really good position on our inventory going into '24. 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 proper protection margins and the same for Australia. So you asked the question, how do we see it going into '24? 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 a really nice leverage with our suppliers. We were very opportunistic in the fourth quarter on our purchases on product protection, which sets us up really well going into '24.

[Operator]

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

[Jacob Bout, analyst]

In the past, you talked about mid-cycle EBITDA $7 billion to $7.5 billion. I think you're referring to you'd be able to achieve that by 2027. A couple of questions there. Maybe just talk through 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 what your expectation on Potash volumes would have to be for that to happen.

[Kenneth Seitz, executive]

Yes. Thank you, Jacob, for the question. So yes, we do think it's achievable. It's really going 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 we would call that in the mid-cycle more more close to $1.9 billion to $2.1 billion coming out of our retail business. And that's also leading to the organic growth that we cite a 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 products so that we have the ability to add 1 million or 2 million tonnes compared to 2023 levels that gives us the confidence in this growing market to deploy those tonnes. And then we also talk about the things that Trevor Williams just cited and ongoing investments in debottlenecking and brownfields that allow us to add 1 million to 1.5 million tonnes of nitrogen. So from a volume perspective, yes. So I'll hand it over to Mark to talk about pricing, but what we would see in the mid-cycle is certainly pricing a bit above where we see prices today. But Mark, over to you.

[Mark Thompson, executive]

Yes. Thanks, Ken. So yes, I think Ken covered the retail portion of that and the path to mid-cycle EBITDA and retailers are all not in the volumes really well. So just on price in that scenario on an approximate basis to feed that $7 billion to $7.5 billion of EBITDA, we would call Potash in that scenario about $400 per tonne, both globally and within North America. Within North America, we're quite close to that number today. But internationally, obviously, we're well below that. And so we do have a gap there. But with the fundamentals improving that Ken talked about and the time horizon in front of us is demand improves, we certainly see a path there. From a urea standpoint, our assumption is also about $400 a short ton. And 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, we do see positive fundamentals. And from an ammonia standpoint, looking at the Tampa benchmark, it's about $500 a tonne. And again, 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. And when you go back to our assumptions for why that's the case, it's the factors that we've seen change fundamentally in 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]

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

[Andrew Wong, analyst]

So just first on Potash markets. They seem to have had what seems like a bit of a slow start, but affordability looks good and both your patents and Mosaic calls for higher year-over-year demand growth. So I guess my question is what catalysts are we looking for to 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 announce curtailment at Colonsay would that be something that Nutrien considers as well, just given your outlook versus your operating capacity?

[Kenneth Seitz, executive]

Good. Thanks, Andrew. And I'll hand it over to Mark here to maybe go market by market. And what we're seeing on the ground certainly as we head into the planting season in the Northern Hemisphere and the balance of the world. But in the U.S., we've talked about the very strong qual application season and strong prepays heading into the spring planting season. Actually, Jeff and I are talking about strong seed sales as well. And so things are pointing to 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 and Q2, Q3, we expect that there could be some firming in that part of the world. 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 risks associated with El Nino. So for the markets where our retail business, as we see pretty strong on-the-ground fundamentals and we are anticipating normal application rates maybe for the rest of our distribution and market-to-market I'll hand it over to Mark.

[Mark Thompson, executive]

Sure. Thanks, Ken. So yes, I think 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 2 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 million to 71 million tonnes 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 and 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 is a meaningful contributor to that as well. So I think just to reiterate, touch on a few key markets. Southeast Asia, we see about 2 million tonnes of demand growth at the midpoint. That actually wouldn't get us back to historical trend levels. And after the last 2 years of under applications, we see that being reasonable. And again, for the reasons we talked about supportive in-country economics on palm oil in Southeast Asian countries in rice, the impact of El Nino being less severe than originally feared and 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 tonnes 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 2 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 2 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 tonnes 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. And 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 going to 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 tonnes to start the year. But to put that in context, we would look at imports being up by 3.7 million tonnes. So again, consumption was very strong, and we believe there continues to be a strong policy incentive and economic 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 to 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 2 million tonnes in 2024, but we do expect consumption to be strong in that region. And then lastly, just around 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. And this set us up for what was a very positive response to our [ PIL ] program in the first quarter of 2024 here. And we've been very, very pleased with what we saw. And 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.

[Kenneth Seitz, executive]

Great. And with respect to your second question, then Andrew, on curtailments, we have sized our network for 2024 to meet 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 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 we have obviously well-established channels all over the world. We're in touch with those customers every day. And so yes, we will set up our network 6 mines in a flexible way to meet the needs of our customers. And that's based on 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. So we've got the flexibility to shift back and forth between those 2 as our customers call for volume. But again, we'll always seek to meet the needs of our customers.

[Operator]

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

[Vincent Andrews, analyst]

Wondering if we can just speak a little bit more on the Potash supply as well as the Potash price outlook. Obviously, all your points are well taken on the demand and shipment side of the equation, but 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?

[Kenneth Seitz, executive]

Yes. Thanks, Vincent. And yes, we do see potential for affirming of Potash prices. And a lot of it has to do with -- 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 of course, you know what they are, whether it's rail and through Russia and the North of China, where now with some of the challenges shipping through the Red Sea, that's all adding cost. And so again, we look at the cost curve, and we said that last ton to produce that last ton could be up by about $50. We're also in some markets experiencing 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 around it. Yes, we do think that there's potential opportunity for some strengthening here in 2024. Obviously, demand returning this year to trend levels are on trend levels, 68 million to 71 million tonnes. And as we look at how that's going to get supplied, it's really owing to 3 parts of the world, its FSU production, those volumes are for the most part back in the market, and we expect some incremental volumes from FSU coming back in 2024. We expect some additional [ comp ] tonnes coming out of Laos, we've assumed it's going to 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 3 producing regions are going to play the role in increasing demand here in 2024. Overall, for all those reasons, we call it a relatively balanced and stable market.

[Operator]

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

[Richard Garchitorena, analyst]

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

[Kenneth Seitz, executive]

Great. Thanks, Richard. So 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 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 [ side ] 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, executive]

Yes. I think what we are 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 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 we mentioned before, but also gives us the opportunity to invest in the critical areas, particularly in the proprietary products in the future.

[Operator]

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

[Steve Byrne, 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 of a 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 active ingredients and really have a nice margin on it. Just curious on your outlook for that gross margin in the coming years.

[Kenneth Seitz, executive]

Yes. No, thank you, Steve. I'll hand it over to Jeff Tarsi, but yes. 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, yes, Jeff Tarsi can certainly provide more color on that.

[Jeff Tarsi, executive]

Yes, Steve, as you know, our proprietary business has always been a very strong part of our retail business environment. And from a crop protection standpoint, we run somewhere between 30% to 35% from a proprietary line of products versus our branded product line. And we haven't seen that. I mean, we kept that pretty much in line. If you look back in '23 and of course, a lot of those products, as you would note, a lot of those products in our proprietary level of products line would be products that are all patented or post patent. And so if you look in '23, we would have seen a lot of pressure actually on that side of the business, especially around products like glyphosate, glufosinate, [ paraquat ] and [ clevedon ]. We expect to see a really nice recovery in that area coming back in '24. And 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 product business for us.And as a matter of fact, in our 24 budgets, we've got about 17% increase in gross margin projected for '24. And some of that have come into crop protection side of the business, probably more importantly is what we plan to do in our prop Nutrition and our biostimulant sector of that business as well, where as Ken said, we've had double-digit growth. I think crop nutrition were up 10% last year, and our biostimulant business was up over 20% last year. So yes, crop protections is very important for us. It's also very important from a standpoint that it's secure for our adjuvants and surfaces, 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 out at and how then we've got an opportunity to bring those products into our proprietary portfolio.

[Operator]

Your next question comes from the line of Jeff Zekauskas from JPMorgan.

[Jeffrey Zekauskas, analyst]

When logistics costs for shipping Potash rise, who's penalized by that? That is net to your profits decrease because you're responsible for their shipping costs? Or do you split it with your customers? Or where 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?

[Kenneth Seitz, executive]

Yes. Thanks, Jeff. So as it relates to logistics costs, I'll hand it over to Jason Newton. But we really think about our business in terms of the cost curve, and we think about that on a delivered cost basis in the commodity space that we're in. So yes, as you would look at the supply and demand fundamentals, and we've talked a lot about that. But ultimately, if 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, all that ton includes -- we think about that on a delivered basis, what's happening with logistics. But Jason, over to you to provide more color.

[Jason Newton, executive]

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

[Kenneth Seitz, executive]

Thank you, Jason. Yes, with respect to our hedge position on gas, 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 today, we'd put it $8 to $9. But back here in North America, $250 million, we're paying for natural gas. So again, that advantage cost position given our geography. But in terms of our hedge position, we're laying the hedge at the moment, but I'll turn it over to Pedro.

[Pedro Farah, executive]

Yes. Thanks, Jeff. What we do with hedging, we tend to be very more contractually in the hedging. So we are looking into a base [Audio Gap]basically firm up some of our contracts with hedges for the remaining of the year, but we have some from commitments and taking advantage of the existing low prices in the market. But we're not adopting a multiyear hedge of a position from that point. So those are more contractual related for the balance of the year.

[Operator]

Your next question comes from the line of Edlain Rodriguez from (sic) [ Mizuho ].

[Edlain Rodriguez, analyst]

I mean just a quick one on corn prices. 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 corn price is higher than historical norms, but I also understand it's a psychological number for farmers. Like how do you think this plays out if corn prices stay at those levels?

[Kenneth Seitz, executive]

No. Thank you, Edlain, for the question. And 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, executive]

Yes, Dan, thanks for the question. And 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, 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. That's a corn followed by soybeans. And those growers don't break out of those rotations. Secondly is they're planning the best germplasm and this germplasm takes a lot of horsepower to produce the type yields that it's able to produce. And so when growers commit, if I look at our seed bookings today, as Ken mentioned earlier, they're very healthy. And growers still want to plant the best genetics, the best freight packages. They're not going to put that seed in the ground and not give it to 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 become team. 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 fertilizer application was up 15%. Very heavy fall. That's a very strong indication of grower sentiment and what they're thinking. And our prepaid was very strong as well, and a lot of that prepaid went toward purchasing fertilizer for '24. So I think once the seeds in the ground, growers is going to be committed to giving all the inputs it needs because, again, it's going to be really key to produce high yield in this type of environment.

[Kenneth Seitz, executive]

Operator, we have time for one more question.

[Operator]

Your last question comes from the line of Aron Ceccarelli from Berenberg.

[Aron Ceccarelli, analyst]

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 4 million tonnes compared to 2021 and Russia to be down approximately 2 million tonnes to 2021 for 2023. What do you expect for 2024? Do you expect discounting to be back now to the level of 2021 or actually even above 2021? And where do you see these countries directing volumes these days?

[Kenneth Seitz, executive]

Thank you, Aron. And yes, so a couple of questions there on times 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. But I'll hand it over to Jason Newton to walk through that.

[Jason Newton, executive]

Sure. I guess just to start from where we ended up in 2023, we think shipments in '23 estimated between 67 million and 68 million tonnes, 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 2 million tonnes in 2023 compared to 2021 levels and Belarus is still down in the range of 3 million tonnes versus 2021. For the region as a whole, we'd expect somewhere in the range of 1.5 million tonnes of additional production in 2024 versus 2023. So for both Russian dollars not back to 2021 levels. But again, we've seen relatively stable shipments from those regions since late 2023.

[Operator]

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

[Jeff Holzman, executive]

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

[Operator]

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