Mosaic Company (MOS) — Q2 2022 Earnings Call Transcript

Thank you and welcome to our second quarter 2022 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat as well as open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer; and Jenny Wang, Senior Vice President of Global Strategic Marketing, will also be available to answer your questions. We will be making forward-looking statements during this conference call. 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 furnished yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our press release and performance data also contain important information on these non-GAAP measures. Now, I'd like to turn the call over to Joc.

Good morning. Thank you for joining our second quarter 2022 earnings discussion. I hope you've had a chance to review our posted slides as well as our news release and performance data, which were made available on our website yesterday. I will provide more context before we respond to questions we received last night, and then we'll conclude with a live Q&A session. Mosaic delivered second quarter net income of $1 billion and earnings per share of $2.85. Adjusted earnings per share were $3.64 and adjusted EBITDA was $2 billion. Free cash flow totaled $794 million, allowing us to return $667 million to shareholders during the second quarter, including $612 million of share repurchases, bringing the year-to-date buyback total through June 30th to over $1 billion. We've continued to buy back shares aggressively through July because we believe our portfolio positions us to continue driving strong results and generating significant cash flow through the rest of the year and into 2023. As such, Mosaic's Board of Directors has approved a new $2 billion share repurchase authorization to begin once the current one is exhausted later this year. Before digging deeper into our business, let's discuss the broader agricultural markets. There are several issues threatening global food security. The war in Ukraine continues to create uncertainty around food supply from one of the world's most important crop producers. In addition, Europe and the United States have experienced very high temperatures, while Southern Brazil is showing signs of drought conditions. And all of this is happening at a time of lower overall nutrient applications because of constrained supply. Each of these issues alone can have a material effect on global crop production. But together, the risk to food security is significant. This suggests global stock-to-use ratios, which are already near 20-year lows, will remain under pressure. Because of this, we see a tight supply and demand scenario for global grains and oilseeds continuing through 2022 and into 2023. As we focus on the potash and phosphate fertilizer markets, the fundamentals remain quite strong. In potash, we continue to expect Belarusian exports to be down 8 million tonnes this year. Some of that will be mitigated by incremental supply from producers like Mosaic over the next 18 months. But that will not be enough to erase the deficit that we see lasting well into 2023 at least. In phosphates, China has continued to restrict exports as it prioritizes domestic industrial and agricultural demand. We now believe full year phosphate exports from China could be down as much as 5 million tonnes from the prior year total of 11.5 million tonnes. Shifting focus, we believe global fertilizer demand in the first half of 2022 was down about 10% from the same period last year, which aligns with the shortfall we've seen in supply. Grower sentiment has grown more cautious. But supply constraints are supporting global prices and margins well above historical levels, a situation we believe will continue at least through the rest of the year. North America and Brazil have been well supplied thus far in '22, but much of the rest of the world is continuing to see unfilled demand of both phosphates and potash as a result of limited supply. In North America, a compressed planting season, macroeconomic headwinds, and volatile crop prices impact spring season consumption. First half applications were down from the record year in 2021, but remained in line with historic levels. Looking forward, we expect normal demand leading up to fall application. In Brazil, we saw first half demand in line with historic levels. Channel inventories were built in the country by importers driven by concerns over supply availability stemming from geopolitical events. Significant customer prepays, though, indicate farmer demand will ramp up as the softer season gets underway. In India, we've begun to see importers enter the market and take advantage of the recent price pullback in phosphate. India's phosphate inventories are low and concerns over availability persist. Farmer demand for nutrients remains very strong and the government continues to indicate it will ensure adequate supply for domestic consumption. In China, port inventories of potash sit below 2 million tonnes and in Southeast Asia, shipments of potash appear below historic levels. We see these dynamics impacting demand beyond 2022 as reduced application this year will require a catch-up in future years when supply availability improves. As we look at our business in the context of today's global markets, we remain optimistic. The investments we've made over the last decade have positioned us well for today's environment. In Brazil, our 2018 acquisition of the Fertilizantes business has driven significant shareholder value. We've seen EBITDA grow from less than $70 million in proforma 2017 to $1.2 billion over the last 12 months. And we've completely recapitalized the business, having now bought back all of the shares issued and repaid all of the borrowing to fund that deal. Looking forward, Mosaic, Fertilizantes will continue to benefit from its market position as the country's largest producer and second-largest distributor. We are seeing inflation in our cost structure, but believe ongoing optimization should offset much of the impact. In potash, we are realizing the benefits of K3, one of the world's most efficient potash mines and we're actively working to optimize that asset. We've reached our initial operating run rate target of 5.5 million tonnes per year at the end of the first quarter and plan to continue our optimization of the complex with the addition of three new underground miners over the next year, resulting in an incremental 1 million tonnes of production capacity. At Colonsay, we've begun the process of restarting the second mill, which should expand output to 2 million tonnes per year by the second half of 2023. In phosphates, we continue to benefit from our advantaged position in ammonia and we're now seeing an improvement in sulfur costs that should begin to flow through to our production costs later this year. We've seen prices moderate down to levels we believe are sustainable for the rest of the year. As a result, we expect our stripping margins will remain well above historic levels. Given the outlook for our business and the free cash flow we expect to generate, capital allocation remains a key focus for us. First, we continue to invest in our business. For 2022, total capital expenditures remain unchanged at $1.3 billion. We remain open to modest, high-returning projects, and small bolt-on acquisitions, especially in Brazil, but we are not interested in large-scale greenfield projects. Second, we're committed to ensuring a strong balance sheet and plan to retire $550 million of long-term debt in the second half of 2022, after which, we see no need to further deleverage. The third pillar of our strategy is returning capital to shareholders. Year-to-date, we returned $1.1 billion to shareholders through buybacks and dividends and we expect that pace to continue, if not accelerate, as the year progresses. In total, we expect to return essentially 100% of our free cash flow after the commitments to the business and the balance sheet we've discussed. Because we're approaching the end of our current authorization, our Board of Directors approved a new authorization of $2 billion that begins once we've exhausted the current authorization. At today's valuation, buying back our own shares provides better economics than any other use of cash. So, we expect to take advantage of this as long as the opportunity remains. We may also consider supplementing share repurchases with special dividends over time depending on market conditions. As we've said in the past, we will not build cash on the balance sheet just for the sake of it. Before going into Q&A, allow me to summarize. Mosaic delivered very strong results in the second quarter and we expect favorable dynamics as we continue through the year and into 2023. We're continuing to help the world grow the food it needs by ensuring customer demands are met, and we're returning significant capital to shareholders, while still investing in the business and strengthening our balance sheet. Now, with that, I would like to move on to the Q&A portion of the call.

As we've done in past quarters, we'd like to address some of the most common questions we received after we published our earnings materials last night. Joc, just to start, I think it might be helpful to provide an update on potash and phosphate supply constraints. What are we seeing in the market today?

Thank you, Paul. Let's start with potash. The Belarusian and Russian exports together we expect to be down by about 12 million tonnes this year due to the effect of sanctions. Now, we do expect recovery from both Russian and Belarusian exports as we move into 2023, but the world is going to need those tonnes if demand snaps back in any way over the next year. So, where do we see Russia? Probably easier to come back. They're finding ways into the market. We're seeing their tonnes, particularly in countries like Brazil, India, and Central America. Belarus has had very little comeback. They are probably moving 100,000 tonnes a month through to China by rail. But other than that, we're seeing very little of Belarusian product in the market. So we expect between the two of them, like I said at the start, 12 million tonnes. In phosphates, the biggest player, of course, is China in terms of export restrictions, and those have been extended into the second half of the year. Our projection for Chinese exports this year is down to about 7 million tonnes from 11.5 million tonnes. So we're seeing a good five million tonne reduction of exports. And again, because of the structural changes in China, we really don't expect them to come back in a big way even after the restrictions end. So in 2023, we expect domestic ag and industrial demand to continue to restrict Chinese exports.

Given the dynamics we saw in the second quarter, we received several questions on the resiliency of potash and phosphate demand. Can you discuss how you see the second half playing out?

Let me start by saying, because of the lack of supply in both phosphates and potash, demand had to be rationed. And what we saw was that rationing of demand meant lower use in different areas, but specifically lack of supply in some areas. So it's very regional how this played out. In North America particularly, a compressed season because of weather in the spring led to very late and very limited ability to add fertilizer to the ground. So this, combined with growers being willing to mine their soil because of the higher prices, probably led to lower use in the United States and Canada. But remember, any of this missed or curtailed application will have to be made up in the next couple of seasons. So we do expect a very robust normal fall application. Now again, the caveat there being, it will be late because the planting was late, so the harvest will be late. So it could cross quarters from the third quarter into the fourth quarter. But if I look at the overall second half of the year, we expect it to be very much in line with a normal year here in the United States and in Canada.

Joc, we received a few questions on elevated inventory levels in Brazil, specifically around potash. How do you think this will affect new sales? And how might this also impact pricing?

Thank you. As we discuss Brazil, we have to start by understanding that 85% of fertilizer into Brazil is imported. And at the start of the year, there was a huge concern with the constrained supply over whether or not the country could get the fertilizer it needed for its planting. To put it to a point, the Minister of Agriculture and the President of the country both traveled the world to ensure that imports would be available for Brazil. As such, Brazil led pricing in the first half of the year for around the world. Now because of that, imports were up about 30% year-over-year in the first half. So as we move into the second half of the year, inventories are high. And because inventories are high, farmers believe they can defer. But ultimately, solid economics for both soybeans and second crop corn are going to drive the farmers to apply fertilizer. And when they start applying, we believe the ramp-up of buying activity will consume the inventory, and we will end the year at a normal place. The best evidence from our perspective of this is the high prepay that we have seen in the last quarter, which indicates that the farmers are getting ready to buy, the farmers are getting ready to apply. They are just waiting for the right time.

We received a few questions from analysts about our third quarter sales volume guidance, especially for phosphates. Can you provide some context around our expectations for both potash and phosphates over the next three months?

Yes. Thank you. Let me start by saying this is mostly a timing issue. In North America, the late spring and late planting is going to lead to a late harvest. Now that means that the second half demand, while it should be in line with expectation, could come in the fourth quarter rather than the third quarter due to this delayed harvest. So while we expect a very normal second half, where exactly it plays out in terms of the timing is yet to be seen. In Brazil, planting for the second crop corn or the soybeans won't happen until November, December. As such, there is time for them to delay their purchases until the last minute. Now again, in Brazil, just like North America, we expect normal application in the second half of the year. But as always, with higher prices, people are deferring the purchase as late as they can. However, good economics will mean that in both cases, we believe normal application will occur. If you do note the high range for the phosphate guidance does align with more typical sales historically, but again, we could see those slipping into the fourth quarter.

Clint, this question is for you. We received a question on our working capital needs in the last few quarters. How do you see that playing out going forward?

Thanks, Paul, and good morning, everyone. As we look at working capital, there are a number of dynamics to keep in mind. First, the overall market pricing levels and seasonality that impact our income statement also impact our balance sheet, particularly around working capital. As we've seen the pricing levels and the overall market increase over the last couple of years, that has caused an increase in our core working capital accounts of receivables, inventories and payables. So those tend to follow directionally what's happening with the overall pricing environment. And again, over the last couple of years as a result of that, we've seen the overall working capital needs of the business increase. Now in addition to the impact of the pricing environment that we're operating in, we also have the seasonality of our business that plays out. And so you see some meaningful changes from quarter to quarter based on which season we're either in or entering into. First quarter, we tend to see preparation for the spring season. So we typically see inventory builds. We typically see our accruals and payables from the previous year get paid out. And then as we move into the second quarter, we tend to see receivables build. We tend to see other impacts on working capital. So we can see as we move through the seasons it certainly will play out in our working capital accounts, particularly the seasons in North America and Brazil. Two things, I think, are good to focus on or to recall, particularly as it relates to Brazil. One is our growing distribution business in Brazil does tend to hold quite a bit of inventory, particularly as it moves into the season, and then it tends to liquidate throughout the season. So that can be a driver of some of our overall working capital. The other element of the Brazil business is around prepayments. Prepayments tend to build in the first half of the year and then reverse out in the second half of the year. And just to give you a sense of order of magnitude, first half of this year, we saw prepayments in Brazil increase by about $830 million. Again, that's another factor that's influenced by the overall pricing environment. But again, we would expect to see the vast majority of that, if not all of it, reverse out in the back half of the year. And specifically, in the third quarter, I would expect somewhere between 50% to 75% of that number to reverse out of working capital. So again, just keep in mind, as you look at our working capital, overall pricing environment impacts it, but also the seasonality of our underlying business.

That concludes the fireside chat portion of the call. Operator, let's open up the follow-up questions.

I'd like to get your view on where do you take Fertilizantes from here. Joc, you mentioned you were looking at potentially some small bolt-ons down there. What businesses are you largely looking at? And can you also comment on how the gross margins in that business differ between product you produce versus product that you buy and then redistribute? Do you see that split changing going forward as perhaps you expand your capacities?

Okay. Thanks, Steve. Look, let me start by saying, as we look at Brazil, the Northwest or Northeast kind of section of Brazil, as you go towards, but not into the Amazon, obviously. It seems to be the area that’s growing the fastest. It's growing probably at 10% plus per year. We have plans to build a hub that would allow us to be more participative in that region. So as that market grows, that's one area where we would expect to expand our distribution business. And then in the areas of production, we've got plans for optimizing our existing operations. We're looking at plans to expand and extend the life of our potash facility down there because we think it's a niche area where it can supply. So there are a number of opportunities we're looking at down there that we think are going to have very quick paybacks and relatively limited capital requirements. In terms of the margins, clearly producer margins are better at this type of market than distribution margins. But on the other hand, the benefit of our distribution business is that the margins stay very constant year-on-year. Where we – what I'll say, though, not to be too explicit about our actual margin split is that our best margins are seen for things like MicroEssentials, where we pick up the production margin in the US and then both the distribution and retail margin down in Brazil. So those margins are pretty fantastic and then the other place where the margins are really good is our production B2B business, where we sell it through our own distribution and we capture both of those margins. So, overall, I think our two-thirds of our earnings are probably being driven by the production business.

Just following up on the Brazil margin question or Fertilizantes margin question. Obviously, margins have been all over the place the last bunch of quarters in a rising fertilizer price environment. I mean, how should we see margins there? I'm assuming some of the peak margins we're seeing right now have to go down. You guys see inventory gains. Commodity prices can't stay here forever. So how do you see the next couple of quarters? And then, what would be kind of a mid-cycle margin guidance to think about?

That's a detailed question, Joel, and it involves making some significant forward-looking statements. The primary area of our expansion has been in our distribution business, where margins have remained relatively stable for a long time. Although I won't go into specifics about those margins, I don't anticipate significant changes during the mid-cycle. We've experienced some positioning gains that have fluctuated, but our overall strategy for purchasing raw materials, including ammonia and UAN, is carefully managed, which leaves us well-positioned in that market. Regarding mid-cycle projections, when we initially proposed purchasing the business, we estimated earnings of $350 million per year. Considering our integration benefits and the improvements we've made since then, I would argue we've potentially added at least $400 million to that figure. Therefore, we are likely looking at a mid-cycle range of $700 million to $800 million per year.

Just maybe just give us your latest thoughts on capital allocation. Obviously, the $2 billion buyback, but you did also mention potentially doing special dividends. So maybe you could just layer on how you're thinking about the common dividend from here and what might cause you to do a special dividend and how large it could potentially be.

I appreciate the question, Vincent. Regarding capital allocation, our strategy has remained quite steady. We committed to paying down $550 million out of the $1 billion and once that is completed, we believe we'll be in a good position. Our balance sheet is strong, and we are comfortable moving forward. We aim to return the remaining funds to shareholders. Currently, we find our own business more attractive than other investment opportunities, especially considering our current share prices and EBITDA-to-enterprise value ratios. This makes our shares appealing, and we plan to continue buying them. However, if share prices fluctuate or our business circumstances change, we might consider initiating special dividends. This would cater to long-term shareholders who prefer not to sell. We want to accommodate all our shareholders in our approach. As for regular dividends, we have decided to review them annually, with plans to reassess at the year's end. Notably, we have a lower share count and reduced debt levels compared to last year, which means we have less to pay out in dividends now than before, and we're also facing lower interest payments. All these factors will influence our decisions on increasing the regular dividend while ensuring we provide reasonable returns to long-term shareholders.

So, I just wanted to talk about the purchased nutrient volumes there. So, it was up kind of modestly in the second quarter but down a bit over 10% in the first half from last year. So, just given how strong demand has been in Brazil, just wondering if you could sort of tell me why the purchased nutrient volumes there weren't higher and if you could give us your thoughts on how the second half is likely to shape up from a volume perspective?

Well, now we've lost you completely. Lucas, are you still there?

Yes, I can hear you. Can you guys hear me?

Okay. We can hear you again. Yes. We lost you completely there. You were breaking up, and then we lost you completely. I apologize profusely, but if you could ask again, I'm sorry, we're struggling with the line, I think.

So, just the purchased nutrient volumes in the second half in Fertilizantes please?

Yes, Lucas, I believe there is a straightforward explanation for that. As we have integrated our B2B and B2C businesses, we have concentrated on selling our B2B product through our own distribution sales system. Consequently, this results in an intercompany transfer and does not get counted towards our overall volumes to avoid double counting. Therefore, what you are observing is that, although purchased nutrient volumes were down, this decline was offset by internal volumes from our own B2B or production business.

Nutrients are supposed to be applied in optimal ratio, something called the Liebig's Law of the Minimum. So with potash and nitrogen more constrained than phosphate, does that reduce demand for phosphate even though phosphate is less constrained people aren't going to apply as much because they can't get the nitrogen and potash?

Yeah. Thanks. Sorry, I didn't pick up the name. Can you repeat your name?

John Roberts from Credit Suisse, sorry.

Hi John, I believe I understand your question. There will definitely be significant deficits in some markets, especially in potash, which will be underutilized in various regions like Asia, West Africa, and Europe. The same goes for nitrogen. However, I don't know if this will lead people to use less phosphate. I suspect that farmers will still aim to apply the appropriate amounts of fertilizers. While the ideal ratio is preferred, it's somewhat like vitamins; lacking enough vitamin D doesn't mean you would neglect to take enough vitamin C. My knowledge of agronomy is limited, so I'm not certain how this would affect things. We are not anticipating any sales restrictions because of this. However, I do recognize that if nitrogen prices rise significantly, it could consume a large portion of budgets, which has historically posed a challenge for other nutrients in countries like India, where nitrogen is often overapplied. If nitrogen takes up a larger share of the budget, it may lead to restrictions on other uses.

I would like to revisit the phosphate business. You mentioned earlier that volumes are expected to improve in the latter half of the year. However, I'm curious about what it would take for your US phosphate business to achieve operating rates above 85%, as they haven't reached that level in quite a while. Is it purely a demand issue, or are there logistical challenges in Florida? I’m trying to understand if there are significant costs related to under-absorbed overhead and idled turnaround processes that are impacting your cost structure and margins.

Thank you, Adam. I noticed your question in the preliminary materials, and I've been reflecting on it. Over the past couple of years, we've faced challenges such as a freeze in Texas that limited our sulfur usage, which affected our operations. Hurricane Ida also caused power outages in Louisiana for about three or four weeks. At the start of this year, we entered the first quarter with low phosphate inventory and encountered significant rail restrictions. Although we've managed to increase our inventory, moving the product has been challenging, and we've had sulfur shortages. Currently, we have a surplus of sulfur, but we just completed a turnaround quarter. As we move forward, I'm optimistic that there won't be any external challenges affecting our operations in the southern US, which should help us return to normalcy. The main issues have been the external impacts from the hurricane, restrictions due to ice storms, and logistical challenges, rather than significant internal issues. In the earlier part of the last 18 to 24 months, constraints in inventory forced us to shut down plants. However, we are looking ahead to a more normal situation.

Just wanted to talk a little bit about Ma'aden and your investment there and when we might see the trajectory of profitability increase. Are there any issues with getting ammonia there? And just overall, your outlook for ammonia costs across the business in light of some of the European and Asian curtailments? Thanks.

Yes. Thank you, Michael. In the second quarter, our equity earnings from Ma'aden were approximately $34 million, with sales linked to the business totaling 413,000 tonnes. While this isn't quite as high as we ultimately expect, it is still making a positive contribution, which is great, especially as we serve our Indian customers and aim to reach clients globally. Overall, Ma'aden has a ramp-up plan in place. Although progress has been slower than we would have preferred, it is what it is. However, given the current market, Ma'aden benefits significantly from low natural gas prices in Saudi Arabia, providing them with a substantial structural advantage. Additionally, they have very low sulfur costs, which means Ma'aden likely has a lower cost per tonne compared to other producers globally, probably establishing itself as a low-cost producer. Regarding ammonia availability, we have had unrestricted access. We produce around two-thirds to 75% of our ammonia needs through our own operations and our contract with CF, with the remainder sourced from the open market under long-term agreements that work well for us. Looking back, our ammonia price was in the high-$500 range compared to over $1,200 in the market. Therefore, we not only have the ammonia we require but also at a significantly favorable price.

I recall that business was impacted by some extended turnarounds last year, but it looks like in Q2, production was down versus Q1. And are there still any constraints in that part of the business? And are we setting up for a Q3 seasonal strength which is typically what happens in Brazil? And then, just one follow-up on some of the corporate line items. There was a negative charge there in Q2. Can you talk about that? Was it mostly intersegment sales? And does that reverse in subsequent quarters? Thanks.

I'll leave that to Clint, but I might need you to specify a bit more about which aspect you're referring to. Let's discuss phosphate production in Brazil. I believe that Brazil, more than any other location, has seen us get out of sync with our turnarounds and maintenance schedules due to COVID. These situations require time to resolve. We had to postpone and reduce several turnarounds, with our Shaw plant being one of the most affected due to equipment failures. Although we had the necessary parts available, the restrictions imposed by local communities led us to delay the shutdown that was originally scheduled for the third quarter of this year. We've also experienced equipment breakdowns there. In Tapira, we've encountered some problems with the conveying systems, and fixing these issues has proven to be more difficult and time-consuming, particularly in Brazil. As a result, there's been a lingering impact from these challenges in Brazil. However, we are looking forward to a strong third quarter, which is crucial for meeting the market demands in that region.

And Andrew, this is Clint. Regarding the corporate segment, the main factor influencing it is intercompany sales. This involves profit and inventory, typically occurring when one business unit sells to another, but the final tonnes have not yet been sold to a third party. In June, we shifted about 300,000 tonnes from phosphates to Fertilizantes. This is reflected in the corporate segment. We handle these transactions to ensure that when we consolidate the individual segment results, everything aligns correctly. Therefore, what you're observing is an internal shipment that took place in June, which will be resolved as Fertilizantes completes that sale.

Two questions. I didn't fully understand your phosphate price guidance for the third quarter. You gave an explicit number for potash. And secondly, in your cash flows from financing activities, if you exclude what you did in terms of debt paydown and share repurchase and dividends, you had a negative $672 million outflow. And the number isn't as negative for the year. But I was wondering, when you net out all of those numbers for 2022, what should they be? And why aren't those numbers in cash flow from operations? So, I guess those are the two questions.

Okay. Thanks, Vincent. Sorry, Jeff, I mixed up the names. Jeff, I'm going to let Clint start as he's still figuring something out, but he's ready now. After that, I'll come back to discuss the price forecast for phosphates.

Yes, Jeff, I think what you're seeing are some of the entries associated with some of the short-term financings that we have – we have not only inventory financing facilities that we use seasonally to finance some of our working capital, but I think some of the other entries that you may be seeing are related to some of the account receivable securitization facilities. And those are some of our working capital funding mechanisms that we use, again, through the seasons. One of the things, in particular in the second quarter is, as we look at the increase in customer prepayments, particularly down in Brazil, year-to-date, as I mentioned a little bit earlier, year-to-date, that's up about $830 million. And when we look at that, that is a source of working capital financing to us. And so, as that cash comes in and that typically lands in your cash from operations line. We use that cash to actually replace other sources of working capital financing, like our inventory financing and our AR financing. And so, as we use that basically cost – the interest-free working capital financing from customer prepays to pay off some of those lines that were drawn earlier in the year, what you'll see is a disconnect because the free payments are intact from operations, pen down short-term lines are down in financing. And so, what you'll see also though in the back half of the year, as those prepayments reverse out, I think you'll probably start to drawn off of some of those lines and probably see a reversal of what you're seeing through the second quarter. So happy to spend some more time with you and go through that in more detail offline. But I think that's what you're seeing is some of the replacing external third-party financing with customer prepays as those dollars come in and that I would expect kind of those dynamics to reverse out in the back half of the year.

Okay. So Jeff, let me discuss the phosphate price forecast. We didn't mean to cause any confusion. The issue is that it depends on when sales occur. Currently, we have only about 25% sold and priced for the quarter, so it's still early to determine expectations. Prices have slightly decreased from where they were in the second quarter and have moderated. We are now in a stable range, so if you consider the cost of freight from today's published price, it will be close to what we will see for the quarter. That would be the simplest way to look at it. Pricing has come down a bit from the second quarter and has moderated, but we expect it to stabilize around the current levels and likely remain in line with spot prices for the quarter.

Just a quick question, just given the outlook for cash flow and certainly appreciate all of your comments about returning to shareholders. But just a quick question outside of some of the modest growth CapEx you're planning. Are there any other meaningful projects at Faustina, Uncle Sam, or anywhere that you're currently assessing to further improve reliability or things you've been kind of looking at for years that are now of interest, or should we just stick with the buyback and the potential for special dividends? Thank you.

Certainly, we're focusing on reliability projects at this stage. For example, we've recently installed a new reformer in Louisiana for the ammonia plant, which will significantly enhance the plant's reliability and capacity over time. In Colonsay, we're preparing to start up the second mill, which has been idle for a couple of years. These initiatives are part of $50 million projects. In potash, as part of our K3 developments, we will complete a compaction unit for the plant to better align production with the demand for compacted products. Overall, our needs have remained steady, even with the K3 budget reduction, as we are seizing opportunities for high-return projects given the current margins, which offer short payback periods. We're looking at the CTV project to extend the lifespan and boost production of our potash unit, as well as increasing production and improving reliability at Colonsay and Louisiana. We anticipate strong paybacks from these initiatives without affecting our commitment to return 100% of remaining resources to shareholders.

Maybe a bit of a tricky sensitive question, but I found interesting with the UAN duties investigation the other week, indicating that there was any damage to the US in UAN industry from subsidized Russian gas. But that wasn't what the determination was in your own DAP/MAP phosphate case. Could there be any future ramifications on your own phosphate duty situation in the States from that?

Thank you, Joel. We have definitely considered that. We had another hearing from the judge on this case, and we expect to know in about a month whether he will refer it back to the ITC. It's important to examine the differences in this situation. The appeal has gone to the US Court of International Trade, which will then go back to the International Trade Commission to evaluate any errors in the ruling. They might refer it back to the ITC, but our stance is that the ruling was substantial, and there is considerable evidence of damage to our industry. We don't believe there is much risk overall. We anticipate that it might be referred back to the ITC in the next two to four months, but we understand that the ITC takes quite a while to review matters. So we won't have more information for several months. We believe the facts of this case are quite different, especially since we faced significant challenges in 2019 that severely impacted the phosphate industry. Thus, we remain quite confident.

Okay. Thank you, folks. I know it's been a long couple of hours of listening to companies for you, analysts. So I appreciate your time and your attention. To conclude our call, I'd just like to reiterate just a couple of quick messages. First of all, we delivered excellent results in the second quarter, and we expect these strong business conditions to continue well into 2023. We remain committed to meeting our customers' needs and meeting our mission of helping the world grow the food it needs. And at the same time, we think we can do that and be a great provider for our shareholders and return significant capital to our shareholders even as we invest in our business and continue to strengthen our balance sheet. So with that, thank you for joining our call, and have a great safe day.