Mosaic Company (MOS) — Q2 2020 Earnings Call Transcript

Thank you and welcome to our second quarter and 2020 earnings call. Presenting today will be Joc O’Rourke, President and Chief Executive Officer; Clint Freeland, Senior Vice President and Chief Financial Officer; and Rick McLellan, Senior Vice President, Commercial. We will host a prepared question-and-answer session addressing the questions received last night, followed by a short live Q&A session, time permitting. All of our earnings materials released yesterday after market close are available on our website at mosaicco.com. We will be making forward-looking statements during this conference call. The statements include, but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our second quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing, as well as our commentary on the quarter posted to our website also contain information important on these non-GAAP measures. Now, I'd like to turn the call over to Joc.

Good morning. Thank you for joining us today. I'll start with very brief comments, then we'll get straight on to your questions. This was a very good quarter for Mosaic and our momentum is increasing. The key points about our performance are, our cash flow generation this quarter is the result of the past five years of work by our team to transform our cost structure and strengthen our franchise; we're succeeding even earlier than we expected; we've already achieved five of our seven 2021 cost targets. Even with realized potash prices down $20 per tonne from the first quarter and realized phosphate prices up just $13 per tonne in the quarter, we generated over $800 million in cash from operations. We delivered adjusted EBITDA 25% higher than consensus expectations, even before our adjusted EBITDA definition change. We paid down $500 million in short-term debt and structured payables in the quarter, while retaining cash on the balance sheet above $1 billion. In potash, we continue to invest in the accelerated K3 project, hitting a major milestone of connecting the K3 shafts to the K1 mill. We continue to reduce our brine management costs and we achieved the lowest cash cost per tonne of production in over a decade. Mosaic Fertilizantes had an excellent quarter, hitting both real-based cost targets and achieving further cost benefits from the weakening real, as well as realizing over 80% of our targeted full year transformation benefits. Phosphates drove the cash cost of rock below the target and lower than last year, despite increasing distances from mining to beneficiation. And with all of these efforts, we've reaffirmed our commitment to you, to our shareholders, our employees, our customers and our communities to act responsibly. We announced new aggressive broad-based environmental, social and governance targets and we will use these targets to drive performance across the business. We are continuing to transform. The quarter's accelerating earnings and cash flow clearly reflect our efforts to date and we are driving additional future savings. We expect to deliver another $700 million in savings above the 2019 base, as we continue to execute our strategy. Mosaic is more competitive than ever before and with fertilizer markets improving, we have significant earnings leverage to the future. Now, we'll take your questions.

Joc, I'm going to start with some questions we received on cost. Adam Samuelson from Goldman Sachs asked.

In the second quarter, Mosaic was ahead of its 2021 target on a number of its key cost KPIs. How much incremental opportunities do you see on each key metric to further reduce costs? And if so, what level of incremental capital spend would be necessary to achieve those outcomes?

Thanks for your question, Adam. As we've mentioned before, we have new targets that include an additional $700 million in improvements across the company, with $200 million coming from our Brazil operations and $500 million from our North American and administrative sectors. We believe we can make significant gains moving forward, especially in Brazil, where we continue to enhance that business; in North America, where automation is helping us drive efficiencies in both phosphates and potash. Additionally, our K3 operation, as we ramp it up, is expected to reduce costs and improve our brine management expenses. Looking ahead, we see numerous opportunities. Importantly, in September, when we present all of this at our Analyst Day, we anticipate being able to provide more details on what that will entail.

Joc, Chris Parkinson from Credit Suisse asked.

You're clearly comfortably ahead on numerous cost initiatives including your K3 shaft brine inflow, phosphate rock costs in the U.S. and Brazil and Fertilizantes platform. But would you take a step back, how are you thinking about your structural cost base in a normalized environment? And how much more could actually be done especially in phosphate?

Yes. Thank you, Chris. It's important to keep in mind that these cost improvements certainly are somewhat driven by high utilization. We've had a good quarter where we're able to use our assets fully and we've had some benefits from exchange rate, particularly in Brazil, but also in Canada. Over the long term though, the real differences have been structural and those are going to stay with us and those are going to continue and we're going to continue to improve those. So, if we look at our major projects which include Esterhazy K3, next-gen mining and the Brazil transformation, those are not temporary differences. Those are true structural changes that we'll be delivering value for the long term.

Joc, Michael Piken from Cleveland Research asked.

You mentioned that you are on track to exceed your $225 million in non-market growth in 2020. Which segments are exceeding your expectations and how higher can this number go for 2020?

Hello Michael. Let me clarify. Our $225 million were actual items that we spent in 2019, but we did not expect to repeat in 2020. And so on those some of the key items, the Plant City idling that's happened and now is outside of our cost structure. Our Brazilian dams, we've completed the work now and that $80 million of cost is now behind us. Equally, the ramp-up of Esterhazy, which has gotten better than we expected, we now are delivering one million tonnes a year from the K3 project. So, that benefit has already flowed through to us. And then of our $50 million of transformation in Brazil that were part of that $225 million, we're already at over $40 million. So, we see that as pretty much complete and ongoing savings will be above and beyond that original $225 million we talked about.

Joc, a large number of questions seek a better understanding of our countervailing duty petition. Seth Goldstein from Morningstar, Chris Parkinson from Credit Suisse asked for an update on potential regulation changes of the U.S. import duties on Morocco and Russian supply. And if the outcome is successful in our favor, what should they expect in changes to their landed U.S. costs? In other words, what are the potential outcomes in terms of leveling the playing field?

Thank you, gentlemen. Let me start by saying, we believe in free and fair trade. However, the reason we filed this petition in the first place was to address imbalances associated with unfair government subsidies on imports and to highlight unequal requirements on environmental standards. We believe our competitors benefit from access to artificially low rock costs and energy while not having to meet adequate and proper environmental standards. We also will say that what we have done is put this forward to the Department of Commerce and the International Trade Commission. They will judge on the merits and as such, determine what level of duties if any, need to be put in place to create a fair trade situation. And Clint, do you have anything to add to that?

Yes. No, Joc. I think you're right. We certainly are ahead of schedule on the realization of the $225 million in non-market benefit this year. Keep in mind that the $80 million that we spent on dam remediation last year was spread really through the second to fourth quarter. So we realized about $36 million in benefit in the second quarter and should realize the balance throughout the rest of the year.

Joc, John Roberts from UBS would like to know.

Can you review the basis for your phosphates countervailing duty position? And have you had any response from customers or competitors?

Thank you, John. Our basis for the petition is clearly laid out in the public documents. And I would ask that you go to those. Also the comments from any of our competitors or customers or the other concerned groups are clearly laid out in those public documents. So I would suggest you go there. Our position is clearly that the Department of Commerce and the International Trade Commission really are the ones that will decide what are the merits of this case. Now clearly, as we talk to our customers, some are concerned mostly about how they're going to get their supply. We believe that this has opened up new opportunities for outside competitors to come in and make up some of that supply. But in the end, I think all people understand why we'd put it forward. And we'll have to wait to see what the ITC says in terms of its merit.

Joc, we received several questions asking about trade flows and implications to other markets. Specifically, Adam Samuelson and seven others asked: over the next six to twelve months, how do we think about the net impact of potential trade flow impacts of potential U.S. countervailing duties on Morocco and Russian phosphate? Do you see risk of market share competition rising in other major import markets, notably Brazil?

Thanks, Mike and Joel. Let's answer the last question first. No, we don't think this will impact global supply and demand. All we will do is probably change trade flow. The current market and resulting pricing is reflective of a tight market. And if anything, the countervailing duties only highlighted to people that this market was tight. So what's causing the tight market? Favorable farm economics and lower supply, which began to take shape well before we filed the petition. However, it is reasonable to assume that the trade flows will be altered and some products will be shifted to other jurisdictions including new suppliers coming into the U.S., and the Moroccan and Russian suppliers focusing on other markets which could be Brazil or wherever.

Joc, Jonas Oxgaard from Bernstein asked two more technical questions with respect to the petition namely.

If the Mosaic trade complaint is upheld, will there be a retroactive benefit to Mosaic? And what is the timeline for final decision on the complaint?

So look, thank you, Jonas. Let me first clarify. Whether duties are applied retroactively will depend upon the level of imports from these two countries from the filing of the case until the DOC preliminary ruling. We expect the case to be finalized in Q1 2021. And at that point, if there have been excessive imports, they will look at assessing a retroactive duty.

Joc, I'm now going to move on to questions about phosphate operations. Ben Isaacson from Scotia asked.

On the cash cost of mine rock in Florida falling to $36 per tonne from $40 year-over-year how much of that was due to transformational efforts versus favorable geology? And how much more wiggle room is there to bring that down? And how sustainable are these cost improvements?

Thank you, Ben. Clearly our cost improvements are a combination of several factors. We've certainly been running our assets at elevated utilization rates and that's helped. But our efforts to centralize mining operations, streamline processes and automate have also helped reduce our cost. As previously mentioned, the establishment of a central control center for our mining and collapsing all of our mining operations basically into one large operation, which should begin operation by the end of the year will really further enhance cost savings. And as we introduce new management structures, incorporate automation for certain mining functions and accelerate savings from adjustments to transportation, we start to see real long-term improvements in our cost structure.

Joc, PJ Juvekar from Citi also asked.

With the recent rise of over $50 per tonne in DAP pricing, have you ramped up your production at the mine? And what could be the benefit of better cost absorption from higher tonnes in the third quarter?

Thank you for your question, PJ. While high utilization rates are certainly advantageous, they are just one aspect of the overall picture. Looking ahead to the third quarter, we anticipate that high tonnage and increased utilization rates will persist. Consequently, we expect to see improvements in costs for the remainder of the year, both from structural changes and the benefits of high utilization.

Joc, we also have a question from Adam Samuelson from Goldman Sachs.

With specialty percentage rose to 48% of shipments and marked a new quarterly high in phosphate coincident with MicroEssentials shipments to Fertilizantes being substantially above recent quarters, is this sustainable? Why or why not?

Thank you, Adam. The sales of MicroEssentials and Aspire hit record highs and K-Mag came in close to the record in quarter two 2020. Among these growth MicroEssentials' shipments to Brazil has been a major driver. Now we believe the growth of MicroEssentials will continue over the next quarter driven by Mosaic Fertilizantes and also North America. I have to reemphasize the value that MicroEssentials brings to the growers is showing positive returns for them on their investments. So these are bringing real value to the growers and to our customers, the distributors so we do believe that as more people start using MicroEssentials this is very sustainable and they're going to see the benefit and they're going to keep using that product.

Joc, three analysts submitted multipart questions related to our potash operations. So first Chris Parkinson asked.

The demand environment in potash appears to be modestly improving while spot prices are well off their first half lows. Can you talk about your thought process for the second half of 2021 operating rate assumptions and how that may drive changes in your mine mix?

Thanks, Chris. As you know we've accelerated the development of K3 and this has an obvious impact on costs both now with declining brine management spending and in the future as the mine ramps up. Beyond K3, we continue to see strong results from Belle Plaine, which recorded its lowest cost position in more than a decade. As we move forward, we're going to take advantage of owning two of only seven mines in the world with annual production capacity of over 3 million tonnes and with some of the lowest costs in the industry. So as we look to the future, we intend to optimize the production coming from K3 and from our Belle Plaine operation and only see running higher cost mines like Colonsay if the market really requires it in the future.

Joc, another question comes to you from Jonas Oxgaard of Bernstein.

In potash you lowered your cost per tonne a fair bit but how much of that was simply spreading fixed costs over a 20% larger volume? On a fixed volume basis what would your cost reduction be?

Good question, Jonas. There is no question that the larger volume helps spread out our costs. However, we believe there are structural changes that are fundamentally changing our costs over the long-term. We think one area of clear savings is the accelerated reduction of brine management costs as we shift to K3. K1 underground mining will be completed this year. Brine management accounted for $8 a tonne in Q2 and that will continue to decline as we move into 2021 and will be eliminated completely by 2022. So as you can see, a lot of our cost reduction is actually structural and should be with us for the long-term.

Joc, PJ Juvekar from Citi asked.

What kind of savings do you expect from sending K3 potash ore to the K1 mill? And what is the updated timeline now to shut down K1 and K2?

Thank you, PJ. We expect to be sending potash to K1 and actually be shutting down our K1 shafts from a production perspective early in 2021. That will start meaning we're only going to be operating two shafts and then by the end of 2022 only operating the one big K3 shaft. At that point, the project will be complete, we'll eliminate brine inflow and that really will be the end of our K1 and K2 plant mines from a production perspective.

Joc, Vincent Andrews is interested in how he should think about our potash shipments in the second half of this year given how strong shipments were in the second quarter? Also, can we remind him of the accounting for the Chinese contract shipments that were already in a bonded warehouse prior to contract agreements?

Yes, we did have strong shipments in quarter one. And if I referred to our discussions with Canpotex, I think they have a fairly full order book for Q3 and even going well into Q4. So I believe the shipments internationally will be strong in the second half. And domestically, we're expecting a good fall in North America. So we're expecting strong shipments there as well. So from our perspective, our second half is looking pretty strong from a potash perspective. In terms of the shipments in the first half, I'd just like to throw it over to Clint to explain a little bit about our China shipments to bonded warehouse that we recognized in the first half of the year. Clint, can you discuss that?

Sure, Joc. Good morning, Vincent. So to start with on a consolidated basis, we don't recognize revenue until that product is sold to a third party. However, we do – on a segment level basis, we do recognize revenue when Canpotex sells product to our distribution business in China. And when they sent that product to our distribution business in China, the segment recognized revenue but that was based on an estimate of pricing since the contract had not been completed. Once the contract was completed and the price for that transaction was set, that gave rise to the adjustment. But again, that's an adjustment on the Potash segment only, because we won't recognize revenue on that product on a consolidated basis until it's finally sold to a third party.

Thanks for that clarification, Clint.

Joc, I'm now going to move on to questions about Mosaic Fertilizantes. We have four analysts including John Roberts from UBS and Mark Connelly from Stephens asked similar questions about the timing of volumes in Brazil.

Brazilian farmers are having an outstanding year so far, and have been widely reported to be buying inputs well ahead of last year's schedule. How much do you think has been borrowed from the third quarter? And are we likely to see an offsetting reduction in third quarter margin to reflect those lower volumes next quarter? And specifically, within the quarter, April and May were significantly higher than the prior year month, while June appeared to be much closer to a year ago. Is that just timing? Or are the trends decelerating into July?

Great question. The strong volumes in the first half of the year did reflect some forward input purchases, as a result of generally favorable farm economics. But year-over-year demand is expected to be up slightly to 37 million tonnes. And in that figure, we believe we are beginning to take market share as farmers gravitate towards higher analysis products and high-value products such as our MicroEssentials.

Joc, Mark Connelly at Stephens asked.

How did the dramatic improvement in costs in Brazil break out between volume-driven cost improvement and operational structural cost change that should repeat with normal volumes?

Thank you, Mark. Let me start by saying last year our operations were negatively impacted by the change in regulations that required us to shut down a couple of operations for down improvements. That reduced volume and impacted our raw materials access. This year, we're benefiting from running at full operations rate. And this also has allowed us to have more access to our own rock supply. So overall that has helped a little bit. So about a third of what those costs are probably volume-related. The others are improvements to our freight, our inventory management, our overall planning and of course structural changes to our cost structures. I think overall though we're seeing long-term changes to how the Brazil business is running and we're starting to see full benefit of the $330 million or so of integration benefit that we announced at the end of last year.

Joc, PJ Juvekar has a question about currency.

The Brazilian real versus the U.S. dollar was down significantly year-over-year in the second quarter of 2020. How did that volatility impact you? And what specifically was the impact in the quarter on Mosaic Fertilizantes?

Thanks PJ. I want to discuss two significant changes regarding the Brazilian real. The first is its effect on farmer economics, which I believe is the most substantial improvement. Farmers' ability to purchase fertilizers and the ongoing growth of the Brazilian agriculture sector are largely influenced by strong economic conditions for them. This is the first area where the Brazilian real has been beneficial for us. Regarding our cost performance, we set our targets based on the real, which helps us gauge the genuine underlying progress. There has certainly been a positive impact, and we have seen noticeable improvements in our overall costs due to the real. However, we prioritize understanding the real-based costs, as they indicate whether we are genuinely enhancing the business or simply benefiting from currency fluctuations. Additionally, if you review our materials, you'll find our sensitivities outlined. A $0.10 change in the real translates to approximately $20 million a year when unhedged. Considering we are about 50% hedged, it's relatively straightforward to reconcile with last year's real costs.

Joc, we have another question from Ben Isaacson with respect to Mosaic Fertilizantes.

Mosaic Fertilizantes sales volumes have been notably higher year-over-year. Can you walk through the strategic strength of this business and how it relates to your mix between commodity and MicroEssentials tonnes?

Thanks Ben. Again I've said this before, but I'll repeat. The volume growth really was a result of improvement in farm economics in Brazil. The strengthening of the U.S. dollar versus the real excellent barter ratios and anticipation of a strong summer crop demand. So, both commodity and performance products have shown robust increases in quarter two of 2020 versus a year ago.

Joc, Chris Parkinson's asked for a COVID-19 update. His question is.

Brazil is in the midst of a fairly complex COVID-19 outbreak which has periodically been affecting the ports and logistics system. Can you give us an update on the demand environment as well as any logistical headwinds you foresee during the peak fertilizer application season?

Thanks Chris. Look let's start from our own operations in Brazil. And although we've had a number of cases because of the high level of community transmission we have not been impacted on our operations to this point and we've instituted a number of procedures to make sure we mitigate the spread. Sorry and then from an overall country logistics perspective we believe that in general we have been unaffected by COVID. Now, obviously, there's going to be local places where that impacts us. But in general we've been able to work around that and kept the product moving to the end customer. And from a demand perspective despite COVID, we've continued to see strong demand again driven by favorable foreign economics and we have got our product to our customers with relatively little impact.

The last question we received on Mosaic Fertilizantes comes from Joel Jackson.

Fertilizantes' second quarter gross margin was more than double the results from the prior two years. How much of that gain was market conditions versus foreign exchange tailwinds versus share gain in the market versus a pull-forward of Q3 because of COVID-related logistics concerns?

Thanks, Joel. I would summarize our results in the second quarter in Brazil, as a couple of factors. First of all, if we looked at the exchange rate, it's probably offset almost perfectly the change in pricing. So what we see in actual results is, almost solely the result of our own actions, and the reversal of some of the down costs that we saw last year.

Joc, we received a handful of questions on the balance sheet, primarily focused on uses of free cash flow. John Roberts asked, 'what are the capital allocation priorities moving forward? And can you please discuss your gross debt level, dividend and potential share repurchases?' And PJ Juvekar asked, 'Beyond paying down some debt what could be uses of cash, especially with improved free cash flow in the second half of 2020? Would buyback be approved use of cash over the countervailing duty decision prevents you from buying back stock? Joc, can you talk about capital priorities, to address both of these questions?

Yeah, thank you, gentlemen. Our capital priorities are unchanged. And they continue to be what we've said in the past. Our first priority is to maintain the business. Next priority maintains investment-grade metrics. And to do that, we have to continue our normal capital plan, as we've had. We expect to lower debt by about $1 billion over the next few years, doing so, when our bonds come due, in the next couple of years. And then continue some of the key projects like the Esterhazy acceleration, K3 acceleration. And then, what we have after that, returning capital to shareholders. All three of these are depending on future cash flow generation. And capital allocation will not be impacted in any way by the countervailing duties.

We've also had a couple of questions from a buy-side analyst and they include, can you describe what's included in the $610 million of short-term debt, that you indicated will be paid in 2020? And does Mosaic still plan to keep about $1 billion cash balance and pay down its 2021 maturity?

Thanks for the question. At the start of this year we did increase our cash balance to $1 billion, by first of all taking out some money from our revolver and executing on some of our inventory financing debt. Since that time we paid down the revolver. And we will continue to pay down the rest of the $600 million in short-term debt throughout the rest of this year.

Before we move on to market-related questions, Ben Isaacson asked about our tax rate outlook.

Why is your effective tax rate expected to be in the mid-to-high 50s? And how should we think about this rate under a Trump or Biden presidency?

Thank you, Ben. Let me begin by explaining that the reason for the higher tax rate is due to our income mix across our three jurisdictions: Canada, Brazil, and the U.S. I will now hand it over to Clint to clarify how the negative earnings in the U.S. will impact the overall tax rate.

Yeah. Thanks, Joc. And Ben that's right, it really comes down to an earnings mix phenomenon for us. If you recall, the tax rate is based on GAAP results by jurisdiction. And when you look at the United States not only is, our Phosphates business incorporated into that, but also our corporate G&A our interest expense and so forth. So, there are times when that pre-tax income in the U.S. turns negative. And that can begin to skew the rate. When you then start to factor in things like, some of the foreign currency moves that we've seen, and how it affects our mark-to-market, and some of the notable items that we have on our schedule, that begins to skew it. And then, as you've seen Brazil improve this year, that's our highest rate tax jurisdiction. So that begins to influence that rate as well, so really the combination of all of those things that's resulting in an unusually high tax rate for this year. And then, I'd add two things. One, on a longer-term basis, we would expect that effective tax rate to be somewhere in mid to high 20s. But then I would also call your attention that our cash tax rates and payments are much different than that. As a matter of fact this year, we expect to end up with a small cash tax refund so very different than the effective tax rate in our financial statements.

Now let's move on to market-related questions. Mike Piken asked.

If you could comment on our summer fill programs in the U.S. and where we see downstream inventories in the U.S. at this point?

Thank you, Michael. I think we've had fairly successful fill programs in both phosphates and potash here in the U.S. In recent discussions that we've had with our customers suggest that they're probably in the range of 60% full for the fall season. So there will be increased buying towards the fall season. But for the most part, our customers are in reasonably healthy shape going into that fall.

Steve Byrne is looking for insight into future volumes.

How are you trending in each of the segments through the month of July on a year-over-year basis? Do you see volumes higher in the third quarter? And any expectation for volumes for the rest of the year?

Thanks, Steve. I would characterize Q3 as largely having our order books full for both phosphate and potash. And so it will be a matter of delivery and revenue recognition that will determine where we are for quarter three. But we expect a reasonably good fall in the U.S. and global markets are running well. So for both phosphates and potash, we expect relatively normal Q3 volumes in both. And then for the rest of the year, we should also see a good stable volume.

Joc, Mark Connelly would like insight into grain and oilseed price implications.

How important to Mosaic's earnings outlook are higher grain and oilseed prices? If the current price of corn is sustained through 2020 and soybeans stay at/or near their current prices, do you think there is any material room for higher P&K prices in the market?

Thank you, Mark. Clearly oilseed and grain prices do have implications for us. But in general, the farmers tend to work a lot more on their needs to plant. So what's a lot more important to us is planting intentions, number of acres planted. And remember also the grain and oilseeds are just a few of the products that we fertilize. So it really depends on what does the whole global market look like and what is the demand for P&K and what supply balance there as opposed to something on the grain and oilseed. It has an indirect impact, but I would say no direct impact on our pricing.

Vincent Andrews from Morgan Stanley wants to know about our market forecast.

Given that the last 10 years of P&K shipments show some pattern lumpiness, potash more than phosphate, why not forecast lumpiness going forward rather than just CAGRs?

Thanks, Vincent. We tend to forecast on annual growth simply because some of the other factors that go into the lumpiness of our business are impossible to forecast. And those are really inventory movements globally and of course weather. You saw in 2019, the weather impacts in the U.S. made a fundamental difference to the growth rate of both phosphates and potash on a global scale. So we really have to look at it on averages, but recognize that there will be lumpiness as we go forward.

I'm going to move on to some questions on phosphates. This one is from Ben Isaacson.

The benchmark MAP selling price decreased by $16 to $314 per tonne, while Mosaic's average finished product selling price dropped by nearly three times that amount, reducing $44 to $308 from $352. Why is this the case? How should we consider this relationship in the future?

Thanks, Ben. The answer here is simply that the average selling price in Fertilizantes is based on all the components we sell, including urea and potash in the blends, both of which are down significantly. So when you look at that relationship going forward, you have to take into account all three products that could be in our blends that we sell.

Ben also asked.

DAP stripping margins have started to improve in July after remaining largely flat throughout the second quarter. Are you seeing this flow through to the Phosphates segment margin?

Thank you, Ben. We monitor the DAP stripping margin closely, as it reflects the revenue we generate after accounting for raw material and transportation costs. This directly impacts our margins, so an improvement in the stripping margin is closely linked to our overall profitability.

Adam Samuelson would like to know.

What does Mosaic see as the equilibrium prices of U.S. NOLA, DAP and MAP versus key offshore benchmarks?

Thank you, Adam. All I can really say there is, if you look at it historically other than the last say three years where there's been a real increase in imports, we have seen NOLA prices being similar to other global prices. And I would expect that under a more fair trade market that's what you would see is, you would see the NOLA price being equal to what the prices in other markets adjusted for the transport cost. And that's exactly what we expect will happen after a countervailing duty case if they readjust that market.

Joc, Steve Byrne would like more insight into our global phosphate demand outlook and its relationship to inventory swings.

Specifically, what is your estimate of underlying global consumption of phosphate in 2019? And was it below the shipments of 71 million tonnes? Did it reflect channel inventory builds?

Thank you, Steve. If we look at 2019, there was no question that there was a buildup of global inventory, particularly in the U.S. I mean in the U.S., there was a poor season and the imports in particular kept coming in. We shut down our Louisiana operation for a number of months last year. And still the inventory build in the U.S. was very high. Likewise, the Brazilian inventory was probably slightly above normal coming into this year, for maybe some of the same reasons. But what I will say is, in the first and second quarter of this year, we have largely cleared out all of that inventory and probably have moved from an area of high inventory to a very low inventory in phosphates as we move into the third quarter of this year.

Joc, in a related question he also asked.

Are normalized inventory levels the reason for the increased phosphate shipment forecast in 2021?

Thanks, Steve. Yeah, in terms of 2021, what we really see is the inventory levels should be pretty much leveled off, and we expect normal growth in the market as per any other year, so that 2% type annual growth in 2021.

Vincent Andrews would like our opinion on farmer economics.

He asked, given the recent run-up in DAP prices are you all concerned about U.S. farmers deferring fall applications?

Thanks, Vincent. Our experience, even during the spring with the uncertainty from COVID, shows that farmers apply fertilizer based on their needs. With precision agriculture today, they are more likely to use the correct amount of fertilizers each year. Phosphate prices are only a small part of the overall farming cost, so I don't think most farmers will alter their application based on phosphate pricing. It's also worth noting that phosphate prices remain quite reasonable compared to grain and oilseed prices. As is typical for fall seasons, we anticipate that weather will be the primary factor influencing demand. With an expected early crop maturity this year, we believe it should be a favorable fall.

Joc, we have three questions related to China and phosphate. First Vincent Andrews asked.

What do you anticipate will be the Chinese DAP exports in the second half of 2020? And what second half 2020 DAP price does that assume? If DAP prices are higher or lower than your assumption what would happen to Chinese exports?

Thanks, Vincent. Chinese exports over the first half of the year were lower by about 800,000 tonnes from last year. Now, the base forecast calls for Chinese exports to end the year about 600,000 tonnes lower. In other words, we expect that international pricing is a little higher. We'll incent a few extra tonnes coming out of China in the second half. And if prices are higher than our expectations, there might be a little bit more upside but we don't see significant upside. And part of the reason for this is domestic demand is coming in fairly strong as we move into fall. And I think the big issue there will be export availability limitations. Now, obviously, if our prices are lower than expectations, the volumes could be even lower than what they are now.

Joc, Seth Goldstein and Steve Byrne both asked about production. Specifically, what is the status and outlook for reduced phosphate production at specific facilities in China and Tunisia? And do you expect the lower exports over the next several years?

Well, let me hit China first. There's been a well-known shift towards shutting down some of the higher polluting plants, particularly along the Yangtze River and we've seen some, that have resulted in production declines in the first half of the year. In terms of Chinese export volume over the next years, we maintain that Chinese exports will trend lower and we'll establish a new normal. I mean we've now seen what we think is the bottoming of Chinese domestic demand and we're seeing a lowering of production. So with that will have to come a lowering of exports as they meet domestic demand. For Tunisia, it would appear that expectations for a plant resurgence of production in 2020 were somewhat overstated. But it's also important to put Tunisia in context. They have produced an average of about 750,000 tonnes of DAP and TSP over the last five years. Current protests will certainly lead to shuttering of the rock production. This has plagued them for over a decade, so which means we would expect them to stay about the same run rate as we go forward as well.

Joc the last section of questions relates to potash global markets. Steve Byrne and Seth Goldstein asked about the impact of palm oil demand on potash. What is the typical lag between movements in palm oil prices and changes in potash demand in Southeast Asia? And has the rebound in palm oil pricing resulted in increased potash demand in Southeast Asia?

Thank you, gentlemen. The palm oil demand is important for potash. And what we have seen recently is, an improvement in palm oil prices. And we know that for production reasons they will be adding potash to their palm oil plantations. So we see that as a fairly direct relationship. I wouldn't say we see increased demand, but we see demand that is getting back to its normal levels. In terms of a longer term export demand and domestic demand for biofuels is helping in terms of optimism for recovery. So all of these things mean that we should see a better demand for potash in the Southeast Asia region, particularly Malaysia and Indonesia.

Joel Jackson and Ben Isaacson would both like to understand where global potash inventories stand in the various regions particularly in China.

Thank you, gentlemen. If we look at China there's sort of a bifurcation of inventory. We know there's about 3.5 million tonnes at the port. But we believe there's relatively low inventories as we move inland. And so as we're now seeing a strong demand for NPKs in the domestic market, we do expect that the movements out of the port to those NPK plants will start bringing down inventory levels assuming that the arrivals are about normal levels compared to last year.

Mark Connelly and Steve Byrne are both interested in potash demand growth. What is driving the acceleration in potash demand in your forecast and other specific geographies?

Thanks. I wouldn't say we're actually forecasting an acceleration of potash demand. Our potash demand growth from a long-term trend is staying fairly steady at what we believe to be around 3%. And if you take 2019 out of it, I think we still stay just on that trend.

In a related question if demand ends up toward the high end of your range, do you see increased supply balance in the market? Or would you expect the market to tighten?

Well I guess this requires two things. One the success of production ramp-ups on the new projects particularly I guess EuroChem's, Volgakaliy, and Usolskiy. But given the delays we've seen in recent years on these ramp-ups it would seem that the market should tighten actually if demand comes in at the high end of our expectation.

And the last related question also what is the bull case for potash pricing over a three to five year period?

Thanks. There's a number of factors that could create a bull run in potash prices. And the first, I've already mentioned which is slower ramp-up of the projects particularly the ones in Russia and Belorussia. But what we would really expect is probably a higher utilization rate of the North American assets over the next say three to five years and a more modest rise in prices. That would suggest prices appreciate slightly to where they were maybe in 2018 and utilization of assets goes up at the same time.

Another potash related question from Adam Samuelson and Ben Isaacson. They're both asking about the disconnect between pricing trends between Brazilian MLP that rallied off-loads in the second quarter versus U.S. and Southeast Asian MLP prices that have continued to be lower. Are strong Brazilian economics enough to offset this weakness in other regions?

Thanks. Brazilian farm economics are really outstanding at present which is certainly helping to underpin pricing in that market and we expect that to continue. For the U.S. and Southeast Asian markets, I think it's important to remember that this is a seasonally slow period for potash demand and that will impact prices. I'd also like to highlight that our summer fill program was extremely well received. And it is typical of commodity markets to necessarily see first a rebound in demand and then prices following after that. We have now completed our pre-submitted questions. And so now I would like to do is open it up to the audience for live Q&A. Operator?

Yes. Thanks. Good morning, everyone. So I guess I wanted to just follow up on the affordability question Joc on phosphates. And on your own kind of affordability metric that you published were now above long-term average. And just trying to think about where you would see an upper limit to that? And especially, if you think about next year and farmer income risks from government support programs in the U.S. or lack thereof given kind of the big farmer support payments that have been experienced both this year and last?

Thanks Adam and welcome. There is definitely a link between crop prices and perceptions of imports. However, government support payments have significantly helped maintain farmer incomes. While we are increasing phosphate prices, especially phosphates rather than potash, it’s important to consider the prices from December 2021. At that time, corn was around $3.60 and beans were about $9. This means farmers could see favorable prices if they sell forward into that market, encouraging them to produce good crops and use fertilizer. Concerning the direct connection between crop prices and demand, it's possible to exceed that ratio by a standard deviation without significantly impacting demand.

Yes. I just wanted to hear whether or not you saw any impact on phosphate imports during the month of July following the countervailing duty petitions. And just ask for an update on your gypsum sales out of your gypstacks in Brazil. Any update on that?

Thanks, Steve. In July, we noticed that imports were indeed lower. I need to confirm the exact numbers, but from our discussions with various customers, it seems that importers of both OCP and Russian products were cautious, likely due to concerns about potential countervailing duties. This cautious approach led to a decline in imports during that month. It's unclear if they will re-enter the market in the coming months. However, we have observed new products arriving from countries like Egypt, Australia, and Mexico, indicating some market shifts. I also missed the second part of your question, so I may need to ask someone for clarification.

Thank you very much. You already mentioned that you expect Chinese DAP exports to decrease by about 600,000 tonnes and that there won't be significant year-on-year availability from Tunisia, which is reasonable. However, there have been several mines in Morocco, Saudi Arabia, Turkey, and Egypt that have been ramping up in the last couple of years. Do you think the phosphate market has fully absorbed the impact of these ramp-ups? Can we focus our considerations for new supply solely on Morocco and Saudi Arabia? What is your overall assessment of the supply dynamics over the next two to three years? Thank you.

Yes. Thanks, Chris. It really comes down to the remaining ramp-up in Saudi Arabia. Assuming they achieve their target of 2.7 million tonnes for 2020 and considering the debottlenecking and other projects that OCP is planning, those developments are still on the horizon. Additionally, PhosAgro is beginning to produce slightly higher amounts, which could contribute some new supply. However, across the globe, I would say that production closures are more than counterbalancing any small increases we've observed. Overall, the situation hinges on minor increases from Saudi Arabia and whatever production levels Morocco introduces in the next couple of years, along with a slight boost possibly from PhosAgro.

Well if there are no other questions I'd like to first of all say thank you for the questions you brought in. We had a very good set of pre-submitted questions, which I thought was very healthy. But to conclude our call, I'd like to just reiterate our key themes here. Mosaic generated strong results despite low realized prices for our products. Our long-term transformation efforts are really starting to deliver substantial, structural cost savings and we expect to drive additional savings in the years ahead. Our balance sheet continues to strengthen as we paid down debt and generated strong cash flows. Fertilizer markets continue to improve and prices are rising. We are navigating the COVID-19 situation successfully with minimal impacts to our business. So in summary, Mosaic is more resilient and competitive than it has ever been and we have built significant earnings leverage for a rising price environment. So we are looking forward to continued improvement and continued success on our journey towards being a very competitive company. So thank you for joining the call. Have a great day, and we hope to talk to you in person soon.