Mosaic Company (MOS) — Q4 2022 Earnings Call Transcript

Thank you and welcome to our fourth quarter and full year 2022 earnings call. Opening comments will be provided by Joc O’Rourke, President and Chief Executive Officer; followed by a fireside chat and then open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer; and Jenny Wang, Senior Vice President, Global Strategic Marketing will also be available to answer your questions. 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 published 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 full year 2022 earnings call. Mosaic had a record year in 2022, delivering revenues of $19 billion, adjusted EBITDA of $6.2 billion and adjusted earnings per share of $11.01. In 2022, we reached several operational milestones that allowed us to benefit from strong prices. K3 reached its initial capacity of 5.5 million tons. In Brazil, we grew our distribution market share from 16% to 18%. In North America in phosphates, performance products represented 43% of total sales volumes and now we have begun to look at expanding our MicroEssentials capacity further, which we will discuss later. These efforts are driving strong free cash flow generation, which allowed us to return significant capital to shareholders in 2022, while also strengthening our balance sheet. Over the last 12 months, we have repurchased $1.7 billion worth of shares outstanding, if we include the fourth quarter of 2021, we have bought back more than 10% of the shares outstanding or roughly 40 million shares. In addition to share repurchases, we have also paid investors nearly $200 million in dividends. Our regular dividend now stands at $0.80 per share, up from $0.60 per share the prior year. And on the balance sheet, we met our long-term debt reduction target of $1 billion with the retirement of $550 million of long-term debt in November. Before diving into our business further, I’d like to briefly discuss broader agriculture and fertilizer markets. Ag market fundamentals remain very constructive, with December corn near $6 per bushel and November beans near $14 a bushel. This reflects ongoing global food security concerns at a time of disappointing production. Global stocks-to-use ratios are at 25-year lows and remain under pressure because of elevated risks that threaten output in 2023. The world continues to watch the war in Ukraine. We have consulted with top military and foreign policy leaders who share our concern that the conflict seems unlikely to be resolved in the near-term and will have long-lasting impacts, particularly in the production of key crops like wheat and sunflowers, which is a source of a significant amount of the world’s edible oils. Outside of Europe, we believe the USDA’s latest estimate for Argentinian production appears optimistic, as drought conditions during the growing season suggest yields will disappoint. In Brazil, weather has delayed the planting of safrinha corn, which could pressure the record crop that many are forecasting. Around the world, we still see fertilizer shortages in many key agricultural markets, despite some major markets being well supplied. However, the overall shortage still threatens total production and this will underpin global crop prices for some time. Now let’s focus on the fertilizer markets. The sharp spike in nutrient prices in the first half of last year resulted in growers aggressively mining their soils. As we enter 2023, phosphate and potash prices are now half of what they were at the peak. With crop prices still very strong, farmer affordability for nutrients has improved significantly and is now back to the levels seen in 2020 and 2021. This suggests a strong rebound in demand as growers seek to maximize yields with sufficient fertilization. The world is still short of potash. Certain markets are seeing more readily available supply, but this means other markets are not able to get what they need. Belarusian supply remains constrained because of the ongoing sanctions. We believe Belarus, Calais exports were down about 8 million tons in 2022, and we expect only modest recovery in 2023 with total exports of around 6 million tons to 7 million tons or half of their pre-sanctioned export volumes. The limited product Belarus has been able to get out of the country has been aggressively marketed over the seasonally slow winter and we have seen similar actions from some Russian producers. This is driving recent weakness in prices, but we believe the phenomena is temporary and will reverse as spring demand ramps up. In phosphates, China remains committed to the structural shift impacting where it sends its phosphoric acid. In addition to shutting down production for environmental reasons, a significant portion of phosphoric acid is now being directed to industrial uses, including the battery market. Roughly 1 million tons of finished fertilizer equivalent was diverted to the battery market in 2022 and we think that will continue to grow rapidly over the next few years as additional battery capacity is added. This suggests China’s exports of phosphate fertilizers will continue to be down significantly as restrictions extend into 2023. Inventory levels in our key markets for both phosphates and potash have declined considerably from the elevated levels observed in the second half of last year. Grower demand across the Americas has been very strong because of favorable affordability, but retailers have been hesitant to replenish inventories, because of the volatility in global prices, especially in potash with the aggressive off-season marketing from the Russians and the Belarusians. U.S. spring demand is ramping up over the next coming weeks and we believe we have reached a bottom in potash prices. In Brazil, sentiment has improved. Inventories have worked their way down to much more normalized levels for both potash and phosphates, as growers take advantage of much more attractive barter ratios. We estimate fertilizer shipments will total 46 million tons in 2023, up more than 10% from last year and roughly 35% of those expected shipments have already been contracted. In India, phosphate inventories remain very low even after a year of elevated imports as most of the product went straight to the ground. Government subsidies for the coming fertilizer year will determine whether India will be able to attract the nutrients it needs to meet its food security concerns. In Southeast Asia, potash has become much more affordable for palm oil producers as well, which should drive demand recovery. Globally, we are seeing very good farmer economics and depleted inventories that suggest strong demand for phosphates and potash in 2023. Given this landscape, we believe our business is well positioned to benefit from the market’s recovery. In phosphates, lingering issues from Hurricane Ian impacted our operations during the fourth quarter for longer than originally expected, but Florida operations returned to normal operating levels earlier this month. We now believe we have moved past the operational issues that impacted output and are dedicating resources to fixing key components in our production. At Bartow, we are upgrading our sulfuric acid production facilities following the recent production stops we saw after Hurricane Ian. And at Faustina, we have improved operations at our ammonia plant and saw a significant increase in the amount of ammonia produced from our plant during the fourth quarter. Florida production has returned to normal operating rates. During the first quarter, we expect total shipments of 1.7 million tons to 1.9 million tons with realized pricing of $625 per ton to $675 per ton. We expect stripping margins will remain relatively stable quarter-over-quarter as lower raw material prices offset lower finished product prices. In our potash business, slower demand led us to temporarily stop production at our Colonsay mine, but we think the current market situation is temporary and expect to restart operations at Colonsay within the first half of 2023. At Esterhazy, the 12th miner is being commissioned and the 13th miner is expected to be in service before the end of the year. When that’s done, it will add at least 1 million tons of additional annual capacity at one of the most efficient mines in the world. In the first quarter, we expect sales of 1.8 million tons to 2 million tons with realized MOP prices at the mine of $425 per ton to $475 per ton. Mosaic Fertilizantes had its best year since we purchased the business in 2018, with adjusted EBITDA of $1 billion in 2022, despite volatility in the second half of the year. Fourth quarter results reflect the sharp reversal of commodity prices from the highs of the first half of the year, which negatively impacted both the production and the distribution margins. But for the full year, our distribution margins averaged $36 per ton, which is right in the range of $30 per ton to $40 per ton that we would expect. First quarter distribution margins will be similar to fourth quarter as higher inventory is worked through. But for the full year, we do expect distribution margins to be back within our normal range. As we think about the evolution of our business, we continue to execute our high returning investments while returning capital to shareholders. In phosphates, we have begun expansion of our MicroEssentials offering by adding capacity at our Riverview facility. The project is expected to be completed by the end of the year. Upon completion, about 50% of our North American phosphate business will be sales of value-added performance products. This is not an expensive project. The total budget is less than $40 million with a payback period of less than two years. We are also building a test plant for purified phosphoric acid production in North America to verify final design plans for commercial operation. This is the next step in our shift away from commodity fertilizers and opens up new markets like food production and batteries. We are also exploring using the plant’s byproducts to produce NPKs. In Brazil, we continue to grow our distribution business. While our footprint is already large, there are still areas where we see opportunities to expand. We have begun construction of a 1 million ton blending and distribution facility at Palmeirante in the fast-growing North with access to very attractive rail infrastructure. Returns of about 20% on an expected $80 million budget, make this another example of highly attractive modest investments. We are also monetizing past investments. In January, we sold our Streamsong Resort for $160 million, because we could realize appealing value for a noncore asset. Our joint venture in Saudi Arabia is also performing well. In 2022, Mosaic’s equity earnings from the joint venture totaled $195 million, which is about a quarter of our initial investment. This year, they plan to reduce debt by $800 million. They have also distributed $100 million in dividends to investors. Our proportional share of $25 million was received this month. Finally, I want to reiterate that we remain committed to our approach to balance sheet management and shareholder capital returns. In November, we retired $550 million in long-term debt and this allowed us to meet our commitment of reducing long-term debt by $1 billion. As we look at our balance sheet today, we believe we are well positioned for the long-term. Similar to last year, we plan to return substantially all of our free cash flow to shareholders in 2023 through a combination of share repurchases and dividends. Since September of 2021, we bought back $2.2 billion in shares and we continue to see great value in our shares. To emphasize that point, we plan to proceed with a $300 million accelerated share repurchase program in the first quarter. We have also grown our regular dividend to $0.80 per share and we are well positioned to consider further growth, especially with our reduced share count. In addition to the regular common dividend, our Board of Directors has approved a special dividend of $0.25 per share to be paid out on March 30th to shareholders of record on March 15th. Given our strong cash flow, combined with the proceeds of asset sales, our Board approved this payout as a supplement to our ongoing share repurchases. Before we go on to Q&A, allow me to summarize. Mosaic delivered record results in 2022 and we expect favorable dynamics to continue in 2023. The world is short global grains and oilseeds. So farmers are incentivized to maximize yields. We expect this to drive strong fertilizer demand and our business is well positioned to meet that demand through our existing assets and exciting new growth opportunities. With the strong cash flows that these provide, we are returning significant capital to shareholders through dividends and share repurchases. With that, I’d like to now move on to the Q&A portion of the call.

Thanks, Joc. Before we move on to the live portion of this call, as we have done in past quarters, we would like to address some of the most common questions we received after we published our earnings materials last night. Joc, could you provide a little more color on the potash market and why we expect Colonsay will need to be restarted in the first half of 2023?

Thanks, Paul. Let me start by saying, we have had a year of low potash usage, which means soil levels are depleted and farmers will need to add potash to the soil to ensure reasonable yields this year. So growers are seeing very attractive economics and they are acting on it. We are seeing things like our largest channel customer in North America has already got 60% of their farmer’s demand is committed for spring, which is higher than most normal years. So as we move into spring, our expectation is farmer demand is going to be good, but everybody is waiting for the last moment. They don’t want to live with the price risk. So why we expect a very good season in North America and we are already seeing a good season in Brazil, we do expect people to wait as long as they feel they can, but once it moves, we expect it to move fairly well. Overall, we do see the potash market as being limited by production. So while demand will be normal, we expect Russia will be exporting less than what they have in the past, probably, 1.5 million to plus 1 million tons and Belarus will probably export 6 million tons to 7 million tons, which is half of what they did pre-sanction. So we think this situation today the standoff is temporary and it will start moving, and when it starts moving, we expect we will have to run hard to supply the market. Jenny, do you want to just give us a little bit of a highlight of where the overall supply and demand is for potash right now?

Sure, Joc. As you mentioned, the potash market last year declined by 16%. That was driven by the supply constraint, and this year, with a very constructive farm economics. In the markets like North America and South America, we believe farmers have all the incentive to go back to apply potash on the field to maximize their yield. For the markets like China and India, the governments are concerned about food security. Therefore, there are a lot of local policies to support the farmers to maximize their production. For that, we actually have seen potash demand increased last year in China. We believe this trend is going to continue. So, overall, in 2023, we expect the demand to rebound globally, but there’s no way to have the full recovery back to 2021, just because of the supply constraints. We are seeing a 5 million tons to 6 million tons of supply shortage in this market.

Joc, Mosaic Fertilizantes gross margin dropped significantly in the fourth quarter. What drove that margin compression and how should investors think about margins for the business in 2023?

Thanks, Paul. Now if we look at the second half of 2022, it reflects a reversal in prices from the first half of the year. This impacted both our distribution and our production business. In our production business, we are now working our way through high-cost raw materials such as sulfur and ammonia. As those move through the system, we expect our margins to get more normalized after the first quarter. In distribution, high-cost inventory is now working its way through the system. Now, none of this should have come as much of a surprise because prices were moving up in the first half and coming back down in the second half of the year. So, in the first half of the year, we made higher distribution margins, and in the second half of the year, those reversed as we were selling higher-priced inventory into the market. If we look at it over a whole year, both our production business and our distribution business did very well, and overall, 2022 was a very successful year and a record year for the Fertilizantes business. Once we get past the first quarter, distribution margins should be in line with our historical expectations of $30 per ton to $40 per ton, and our production margins will revert to normal stripping margins well once we work through the high-cost raw materials.

Joc, how should investors think about our production volumes over the next year and what types of capital projects is Mosaic initiating to support reliability?

Thank you. First of all, let me say, the last couple of years, there have been some extraordinary circumstances that have impacted our production, particularly in our phosphate business and our Brazil businesses. First, sulfur shortages coming out of the Gulf of Mexico have hurt us at the start of last year, refinery shutdowns, COVID, transportation limitations at the start of last year, and then, of course, a couple of big hurricanes, one that hit Louisiana and the other one last year, which hit directly onto our operations here in Florida. Now, what we saw from those was damage that, probably, lingered longer than we would have liked, because of the condition of some of our plants. So what are we doing to improve that? We are looking at how do we fortify our plants to make them more resilient to this type of occurrence. And some of that means we have replaced a bunch of our converters in sulfuric acid, our boilers or economizers, etc. In Brazil, we are building a new sulfur tank, new phosphoric acid tanks are being overhauled. So we are doing a lot of work to really fortify and reinforce the resilience of these plants. So where do we expect these to go? What we have seen already is, for instance, where we have done the repair work at Faustina, in Louisiana, more than 40% of our ammonia last quarter was supplied from Faustina, which is the highest it’s been in over a couple of years. So we think we are getting ahead of all of that. Now if I look forward, what do I expect? I expect that we will be running in that 85% to 90% of our 10-K value. So that would probably indicate somewhere in the range of 7.5 million tons to 8 million tons in phosphates and 3.5 million tons in our Brazilian business.

This concludes the prerecorded portion of our call. Let’s now move on to the live Q&A. Operator?

Yeah. Thank you. Just kind of following up on that statistic that you provided, Jenny, where global consumption of potash down 16% in 2022 and your estimates for Russia and Belarus sound like down another 10% or down 10% from 2021 in this year. My question for you is, does the world really not need 70 million tons of potash or could there be an impact on global crop production this year as a result of this and/or do you think there could be maybe a bit of a panic to meet farmer demand this spring given the just-in-time purchasing mentality?

Thanks, Steve. This is Joc. I'll start here and then pass it over to Jenny as you requested. The world does require over 70 million tons of potash. We see a genuine necessity, and what we anticipate happening, and what we have already witnessed, is that regions like Africa are going without the products they critically need. We are experiencing shortages in areas such as Africa and parts of Asia because they cannot afford it, as well as in some regions of Central America. The fact is that if there were more potash available, it would certainly be utilized, and obviously, the pricing dynamics would differ from the current situation. We expect that the major markets that can afford it will drive the potash price up. Now, I'll turn it over to Jenny to discuss that balance further.

Yeah. Sure. Thanks, Joc. Steve, to your question, what is the impact with a significant demand of shipment reduction last year, we believe that was over 11 million tons versus the previous year. We believe the impact to the yield in some of the markets might be reflected on the yield for that year and in some markets like North America and Brazil, where the farmers probably have invested in the potash application. In the previous year, they probably they were able to afford for reducing rate for a year, but in two years in a row to cut application rate, it is not really a good decision for the farmers to maximize their yield and production. Therefore, we believe the demand recovery of the demand for potash in this market is there. It’s just the farmers have the incentive to maximize their production. There are certain markets, as I mentioned in the prerecorded answer, governments are really supporting the farmers to use potash in order to secure their food security and we believe that government support is going to continue as we are getting into 2023. Lastly on the spring demand, what we heard from our customers and also the growers on the ground, Steve, in North America, in particular, there’s a very clear desire based on the affordability and the farm economics for farmers to go back to apply potash, especially for those who skipped a season last year or cut the rate last year. We are at the stage that the farmers need to engage with their retailers and then the retailers to cover the last part of the buying from us and we see that is happening. In fact, this week, we are seeing increasing inquiries in the south part of the U.S. as the season started. So we feel confident that demand is going to recover for potash; we still believe with a significant constraint on supply and the price will stay at a healthy level, although, it is much more moderated from last year.

Yeah. Okay. Let me also add this, Steve, in response to your question about Colonsay. One reason we think Colonsay will likely be needed in the first half of the year as demand returns is that we see a strong case for its restart. It is currently on standby, and the labor is ready. If we don't need it, it won't be activated. However, if we do require it, it will be brought back, and we expect that to be the likely scenario as we see it.

Yes. Joc, I think you mentioned that, 1 million ton equivalent of fertilizer is going into the battery market. Is that DAP equivalent that you are talking about? Is that what you are seeing as the LFP battery grows in China and maybe in the future other parts of the world. What are your expectations there and do you have any product that goes into that market?

Thanks, P.J. I just want to confirm some figures. Yes, your equivalency is accurate. Last year, around 0.5 million tons of purified phosphoric acid were shifted from fertilizers to batteries, which is equivalent to approximately 1 million tons of DAP. We observed significant growth in that market, nearly doubling year over year. So, we've moved from 500,000 equivalents to 1 million equivalents, and potentially up to 1.5 million to 2 million equivalents. This means we will see a substantial amount of phosphates not exported from China. That's why we are confident that our export expectations are reasonable. Currently, we are not supplying to that market; however, we are conducting a pilot study. We've completed the initial tabletop work and are now moving on to a pilot plant to finalize the design criteria and cost for our purified phosphoric acid. I expect to share more information in the next six months, after which we will make an economic decision.

Great. Thank you so much. You have a helpful outline on slide 10, just given the sensitivities to DAP, MOP, so on and so forth. Can you speak to the potential year-on-year benefits from all three of your sources of ammonia, as well as the average sulfur price? The way you see that trending in the first half. Just any color on that as it pertains to DAP your margins? Thank you so much.

Thank you, Chris. What I understand you're asking is about the sensitivity of the stripping margins to input prices. This year, we are observing an increase in refinery activity, which is improving the supply of sulfur and likely making the sulfur market a bit looser. However, if DAP demand rises significantly, it could tighten again, but that will generally balance out with pricing. In terms of ammonia, we are witnessing a substantial drop in natural gas prices in Europe, which is also reducing natural gas prices here in the U.S. and consequently lowering our nitrogen input costs. We anticipate this trend will continue and eventually stabilize, with prices decreasing for a while before approaching a flat period. Currently, urea prices are around $300, and they cannot drop much lower without impacting production rates. Therefore, we expect stripping margins to remain fairly stable throughout the year, meaning any decrease in prices will be countered by a reduction in raw material costs and vice versa.

Yes. Thank you. Good morning, everyone. Joc, could you clarify the point about phosphate stripping margins? If you are able to ship between 7.5 million tons to 8 million tons of product in 2023, with flat stripping margins, do you believe your EBITDA is growing in phosphate? Additionally, regarding Fertilizantes, can you provide more insight into the factors affecting the fourth quarter and the first quarter? Are both distribution and upstream phosphate production expected to show similar margins in the first quarter before normalizing later? I want to confirm I understood that correctly.

Sure. I'll address the first question. Our volume expectations are reasonable. The inquiry was about our production capabilities, and I want to clarify that we are primarily driven by on-the-ground demand for our products rather than our production capacity. There may be a gap between our production capabilities and our sales, but this will vary. We anticipate strong demand for both potash and phosphate this year, so we expect to sell most of what we produce. Regarding pricing, as the season progresses, we expect both phosphate and potash prices to increase, possibly significantly for potash. We also anticipate that phosphate prices will stabilize with a relatively flat stripping margin. In Brazil, both our production and distribution businesses have been equally affected by rising raw material costs and the timing of sales relative to third-party material purchases. We expect to return to more normalized levels following the first quarter.

Thanks. Just wanted to touch on the plans to restart Colonsay. I guess when you look at the outlook and where we were a year ago when you were planning to expand further, when you start up, I guess, how long will it take you to get back to that, I guess, 1.3 million ton run rate initially when it was shut? And then how are you thinking about moving forward in terms of expanding that capacity, is it probably going to be more of a 2024 event, assuming we have demand recovery or is that on hold intentionally for the market to recover?

Yeah. Thanks, Richard. Look, the way I’d look at Colonsay is, so when we expected the volumes would continue at the rate they were, and let’s call it, the middle of the year to the first half of the year. That slowed down significantly in the third quarter and fourth quarter, which was less than what we would expect. So reasonably we shutdown Colonsay. Now like I said earlier, we shut it down. We still have the employees. We still have everything ready to go. So it doesn’t take much to restart. But what’s happened in the meantime that has to be considered is, we have added since that time and because of the slowdown, we have been able to add two new miners at Esterhazy. So very soon, Esterhazy will have an incremental capacity of 1 million tons. So if you add the 1.3-ish million ton run rate of Colonsay plus 1 million tons of Esterhazy, it doesn’t seem to me that we are going to need the second mill at Colonsay. So I would say that, generally, that would be on hold. And a matter of fact, I think, the longer the demand waits, the later that Colonsay would need could be down, because of Esterhazy taking up the slack.

Thank you, and good morning, everyone. Joc, could you just talk about how you sort of view the shape of the year volumetrically in terms of seasonality and whether as we get after the U.S. spring season, which presumably is going to be quite strong. Do you anticipate the supply chain sort of entering a restocking phase or do you think they are going to want to have empty bins and there’s going to have to be summer fill and all that. And I am just curious because it seems like everybody is running hand to mouth right now. I just can’t tell whether you are sort of assuming that this is the end of hand to mouth as we get into spring and then we go back to maybe sort of the supply chain having normal levels of inventory through the year, so what are your thoughts there?

Thank you, Vincent. Currently, there is a lot of volatility, leading people to be cautious about waiting too long. Everything is being done just in time, but dealers and customers need to ensure they have the necessary products in time for the season. This is always a balancing act. From what Jenny and I heard at the Fertilizer Institute meeting recently, nearly all customers expressed a desire to have their products ready at the beginning of the season. They plan to refill only when necessary and aim to finish the season with empty inventories. We expect this will be the case, indicating that the summer fill program should be robust in North America. In Brazil, however, due to longer lead times, the situation will be somewhat different. The Brazilian market is likely to remain stable throughout the year, and we anticipate the third quarter will be our strongest, with notable demand signals already emerging for the Safrinha season. We expect third quarter activity in the U.S. will proceed as normal. Additionally, we need to account for an eventual increase in demand from Central America, China, India, and for potash shipments to Indonesia and Malaysia, as these regions have not utilized the necessary products this year. Even if they are not currently refilling, purchases will be essential.

Yeah. Thank you. Good morning, guys. So a quick question on farmers' affordability. It has improved quite a bit as fertilizer prices declined over the past several months. So that’s good for the farmers. But what’s good for you is for fertilizer prices to start moving higher. But if they do, doesn’t that bring back your affordability issue again? So my question is, how do you try to balance that delicate line?

This is a significant challenge for us as we operate in a global commodity market. While we work to ensure that price fluctuations remain reasonable and that farmer economics remain stable, what we observed at the beginning of last year was a rush of panic buying. Everyone was concerned about securing their products. However, farmers expressed that prices were quite high, and although farmer economics were not poor last year, the psychological aspect took a toll. My concern for this year is that people might hesitate to purchase your product until there's another price spike, which could affect farmer affordability and deter them from buying fertilizer again. I believe that while you can manage things for one year, if this situation continues into a second year, we may begin to see a decline in yields. A drop in yields will then influence the underlying agricultural commodities. This year, it seems to be self-correcting; if farmers don’t use the product, yields will fall, leading to rising commodity prices that should drive demand. Ultimately, this situation may be out of our control. I hope that farmers decide to buy early enough so we can navigate this in a rational manner and keep farmer affordability at a reasonable level.

Yeah. Hi. Thanks for taking my question. I just wanted to follow up on an earlier point around, I mean, similar to the prior question in terms of potash affordability. But maybe specifically with the markets that you said were more price sensitive when you are talking about Africa, Asia, etc. Are we at a point where that’s not an issue today and you are going to see or expect buying to return and is there a range if prices move up $50 a ton to $100 a ton, that’s still going to be a point where it’s attractive for that region to buy or are we still at the point where that’s still questionable?

Thanks, Josh. When we look globally, it really varies by region. For those purchasing fertilizers, most of it is used for large-scale and export crops. If you're selling your produce in an international market that offers competitive pricing, demand remains stable. This is the case in North America, much of South America, and Europe. However, in Africa, the situation is different. Many farmers there are engaged in subsistence farming to feed themselves rather than selling in international markets. As a result, regardless of whether crop prices are high, their ability to afford fertilizers is limited because of their financial constraints. We've also seen reports from the U.S. State Department indicating that certain areas in Africa are transitioning from hunger to starvation. In Asia, I believe they can manage the costs, but this isn't true for the poorest regions. While this situation does not significantly impact the overall market since these areas are not major consumers, it remains a deeply concerning issue.

Good morning. I wanted to go back to that discussion on Colonsay and Esterhazy. If I am mistaken, Esterhazy is your lowest-cost potash mine by far. Just why wouldn’t the next incremental ton be coming from Esterhazy? Is there anything that we should be thinking about from a mill or hoist perspective or bringing on incremental capacity?

Yeah. Thanks, Jacob, and good to have you back on the call. Yeah. Your comments are exactly correct. Esterhazy is by far our cheapest or at least expensive to operate mine. And you can think about this as, each new miner that comes in, it gives us approximately 400,000-ish tons of new capacity and there is no limit. As we see it, we expect no limit on the hoist and we will be plant limited at about the 1 million tons of incremental capacity that we have talked about bringing on. So we will be plant limited by, let’s call it, the middle to the end of this year, and at that stage, yeah, Esterhazy, we will maximize tons from Esterhazy first and only use and then Belle Plaine and then use Colonsay as required.

Hey. Good morning. Thanks for taking the question. I just want to go back to LFP. We have seen a couple of LFP projects announced recently in the U.S. I am kind of curious what’s Mosaic's view on the domestic LFP opportunity and maybe this is a little bit early given you are doing some pilot testing here, but I appreciate any initial thoughts, like, if you were to produce a purified phosphoric acid for batteries, like, what would be required for that to happen and will they do that with the current rock that they have or do you need a different type of rock or what kind of upgrades would you need to do to your processing plants today and what kind of costs would that involve? Thanks.

So, thanks, Andrew. Let me say, we have been in the testing phase and I can tell you fairly definitively, that we are capable of making the grades of purified phosphoric acid required for batteries. And as you said, there is a number of LFP lithium iron phosphate plants being talked about in the U.S. here. And we are in discussion with some of those, and obviously, there’s nondisclosures for each of those sets of discussions. So I won’t talk about specifics. But I can tell you, there is a huge desire amongst those battery manufacturers to have one, a shorter supply chain, i.e., a more stable supply chain out of the U.S., and secondly, a lot of these subsidies and stuff require that the U.S. content to be there. So there’s a number of reasons why the market at least is very interested in that. And what we are doing now in conjunction with doing the pilot work on this, which is going to give us the design criteria, tell us help us define what the costs of both capital and operating will be. But at the same time, we are doing market studies to understand what the final size of this market could be here in North America in particular. But remember, as we think about purified phosphoric acid, there’s also the other industrial uses and food and everything else. So this could be quite a useful branch for us to de-commoditize to some extent.

Thanks very much. With fertilizer prices coming in, should working capital be roughly a source of $700 million in cash in 2023? And secondly, with all of the different ammonia facilities that are being proposed for the Gulf Coast, does it make sense in the future to buy more cost plus ammonia or are you happy with what you have got?

Thank you, Jeff. Let me address those two points. I missed your first question. Sorry about that.

Working capital.

Oh! Working capital. Depending on your assumptions, we are going to work our way through some product that is currently high-priced. Based on what you assume for the final pricing, there will definitely be cash coming into the system from working capital. In other words, our working capital needs should decrease as prices fall. This year, our working capital has been largely driven by the price of third-party products. The volumes of our inventory haven’t changed, but the value of that inventory has changed significantly, and this applies to third-party purchases, not produced products. Regarding ammonia, we are currently in discussions about our CF contract, which is an eight-year agreement. CF has indicated they wish to renegotiate, and we would likely have pursued this even without their notice. I believe it is sensible to hedge part of our ammonia needs with a cost-plus type contract, though the volume may not be as high as in the past or the pricing formula may differ. We see an opportunity to revisit that contract in a way that benefits both parties as we consider the future pricing of ammonia. There are also other players, like OCI, entering the market, so we find ourselves in a strong bargaining position moving forward.

Hi, Joc. Good morning. We will see you next week. I wanted to ask a bit more about Brazil to understand some of your color around margins, obviously, a big margin reduction in Q4. I think you said you expect margins in Fertilizante to improve by the end of the year. Can you give a bit more color, should we expect similar margins in Q1 and improving across the year and when you say back to you, I think, historical or average margin. But I don’t really know what that is anymore because, obviously, you bought the Belle asset, the mix changed, margins went up with the higher commodity prices, you did a lot of work to improve the assets you have there some optimization and synergies. What are historical margins in Fertilizante?

Yeah. Thanks, Joel. So, let me say, historically, we were talking specifically about the distribution margins, and if we look at the distribution margins over time, they have really ended up somewhere in that $30 per ton to $40 per ton. Now the production business, obviously, much more price of phosphate and potash dependent. But if I look at the distribution business, that’s not a bad place to start. In terms of how we expect this to play out, we are now buying product at today’s price, but that product won’t be sold until the end of quarter one and into quarter two. So the product we are working our way through is the higher-priced product from quarter four that we were purchasing at that stage because there’s that big lag in Brazil of, let’s call it, three months. So we do expect margins, particularly distribution margins to be similar to what they were in quarter four, but I may have been misunderstood when I said they were going to build over the year that over the average of the year, we still expect them to be in that same range of $30 to $40. So that means they have to rebound fairly quickly and we fully expect they will.

So, thank you everyone for all your questions and your interest in us. To conclude our call, I’d just like to reiterate our key messages. Mosaic delivered record results in 2022 and we expect strong business conditions throughout 2023. Farmers around the globe have strong incentives to maximize their yield and fertilizer is in short supply in many parts of the world. So we expect strong demand and Mosaic is well positioned to deliver this for our customers. We are also delivering for our shareholders by returning essentially all of our free cash flow through dividends and share repurchases. So, with that, thank you for joining our call and please have a safe and happy day.