The Mosaic Company (MOS) Earnings Call Transcript & Summary

We'll go right into presentation today. Obviously, we're going to be talking about, this morning, fertilizer and crop chemicals and agriculture. And our first presentation will be from Mosaic. It's one of the world's largest producer of phosphate and potash fertilizers with a growing Brazilian distribution. Clint Freeland, the CFO, will offer us some introductory remarks before we go into a fireside chat. We also have, we believe, Jenny Wang, the VP of Global Product Management, if my technology is correct here. And we have Laura Gagnon, VP of Investor Relations. She's just going to read some opening safe harbor statements. Laura? Laura? Just unmute your phone, Laura.

I am unmuted.

There you go.

Good. The company will be making forward-looking statements during this presentation. 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 the company's most recent earnings press release and 10-Q report filed with the Securities and Exchange Commission. Before I hand this over to Clint for opening comments, I'd like to acknowledge that a deck was posted erroneously last night on our website. It contains dated and incorrect information, and the correct slides have now been posted. Clint?

Thanks, Laura. And Joel, thanks for the opportunity to meet virtually with the group today. Before we get started, though, with the Q&A, as you mentioned, I'll just make a couple of statements, talk about a handful of things that certainly are topical for us. First, yes, COVID-19 is obviously an important factor for everyone today and for Mosaic. We responded quickly to protect our employees and our production and really had, had no direct impacts on our ability to produce fertilizer and ship fertilizer to our markets. Our joint venture in Peru was curtailed for a short time under a government mandate, but we don't really expect that to impact our production as we have plenty of available rock at that facility. That's rock actually to our Louisiana concentrate facility, and there we have plenty of rock. Our markets are holding up well, and the global fertilizer demand is strong. And while decreased demand for biofuels as a result of some of the COVID pressure that's pressuring near-term grain and oilseed prices, there is a recognition that once we get into the other side of this, that there continues to be growing need for food and agriculture is going to need to continue to produce. As we look at results for the first quarter, we had our earnings call last week, and I would say that the company has executed really well. And I think that's reflected in the first quarter results. First, along those lines, last year at our Investor Day, we put out a series of targets, particularly cost targets for 2021. And in the first quarter, all 3 of our business units hit certain of those targets and Mosaic Fertilizantes, our cash cost of phosphate rock, in real terms, ended up exceeding our '21 target. In potash, our cash cost to production also exceeded our target, even after we normalized for the movement in the currency rate. And then in phosphates, our cash cost of rock again exceeded our target for 2021. This year, at Mosaic Fertilizantes, we targeted about $50 million of transformation savings and improvement. The first quarter, we're on track for that with a total of $17 million realized during the quarter. And then as we look at our K3 facility, which is really the transformational project for our potash business, that continues to show strong momentum with an expected run rate capacity approaching 3 million tons by the end of this year. So I think when we look operationally, the company is doing well. Our markets continue at this point to perform well with a strong spring. And as we look at our liquidity position, that's strong as well. We ended the first quarter with about $1.1 billion in cash on the balance sheet. As we had previously disclosed, we did access some of our liquidity facility, just to put some additional cash on the balance sheet, just out of an abundance of caution. Behind that cash, we also still have $1.6 billion in capacity under our committed credit facility. So in short, I think we are continuing to execute well as a company, continuing to drive down costs, focus on our targets for 2021. And I think we're well-positioned from a financial standpoint to weather any disruption that we see in the near term. So Joel, maybe I'll stop there and hand it back over to you.

We can't hear you, Joel.

Sorry. Can you hear me now?

Yes.

Okay. And Jenny, can you hear us?

Yes, I can hear.

Okay. So -- great. Okay. Great. Okay. Let's go through a bunch -- and by the way, please, in the Q&A portion of the Webex platform, to all the investors and attendees out there, please enter your questions throughout this presentation throughout the 2 days. We definitely want to ask your questions first, and please answer.

So maybe we could talk about, first, Clint and Jenny, a little bit about the different commodities, so -- that you're involved with. Let's talk about potash first. It's a very interesting time right now. We signed -- we've seen now Canpotex signed Chinese, Indian potash contracts this week. Other players have signed Chinese contracts. A lot of different demand forecasts, supply forecasts out there. Is this the bottom in potash prices? And do you get worried about some of your competitors really trying to hit potash volume targets this year that maybe aren't realistic considering demand growth levels and other supply issues?

Yes. Maybe I'll start with a couple of observations and then Jenny, if you want to jump in as well. So Joel, as you noted, obviously, the China contract was signed and the India contract was signed. And one of the things that we did see, and as we think about that, the China contract was signed at 2 20 [indiscernible] that the market was looking for a bottom and that they were waiting for the China contract to be signed. And that provides -- once that got signed that provides a level of stability and market visibility into pricing and that should form a base from which we can improve from. And I think we've seen that. And one of the things we talked about on the first quarter earnings call was that we did see that in Brazil, where literally within just a matter of days, we saw a meaningful bump in pricing in Brazil. We saw that pricing was up to -- and Jenny, correct me if I'm wrong, but up to about $220 to $225 CFR basis. And that kind of pricing has held, if not even got a little better. And so I think from the standpoint of kind of the benefit of the China contract, I think our view of this is that we believe that, that does represent a bottom. I mean it does kind of solidify the pricing environment and from there we can build. I think from a forecast standpoint and I think you've noted it before, as far as different views on forecasts for the year, obviously, we're not going to really comment on anyone else's forecast. But as we put together our forecast, the things that we try to take into account in our S&D were particularly things like weaker biofuel demand that you could see coming out of the part that you think you are seeing coming out of the COVID situation as well as kind of anticipated weakness around some of the palm oil markets. And so everyone's going to have their own view, but those were 2 of the main things that are factored into our view. And then when we look at the supply, Andy and our team do a pretty detailed walk-through some global supply and demand. And even with us, some of the impacts of those factors that I just mentioned earlier and taking into consideration some of the volume increases that we see from EuroChem, from Bethune, and I think some of those have even noted that Uralkali has some extra inventory. When we factor all those things in and compare it against our demand profile, taking into consideration the factors that I mentioned earlier, we still see a fairly balanced market. And so I think we're fairly constructive as we go forward. Jenny, I don't know if there's anything else that you can add to that.

No, Clint, very well said. And I guess that the only latest update on the sales sets we are -- the price we are seeing in Brazil market, actually, we have already been selling our MOP in-country Interior at $230 per tonnes of MOP, which is around $20 to $25 increase than before China's contract was settled. So that's all I can update.

Okay. Thanks, Jenny.

And as you think about -- I think Mosaic has done a lot of heavy lifting, Nutrien too, but Canpotex has only done heavy lifting in trying to balance the potash market. I mean got a little bit different dynamic this year with EuroChem, who's at this conference, ramping up some more this year. When you think about Mosaic's -- and I also think ICL made an interesting comment yesterday and they'll be here this week too, which is, they said that they are expecting the big players like yourself to do their job. In other words, they can run full out and let you do your job and balance the market. Can Mosaic balance the market more? You've put -- you've closed Colonsay. You've done a lot of discipline-like moves. Can you take more discipline here? Or at some point, will the elastic band snap?

Yes. Well, first, I think as most everyone knows, I mean, as you look at last year and some of the discipline that was exhibited in the market, it wasn't just Mosaic. There are a lot of producers -- the sixth largest producers showed a level of discipline in a weakening market. So yes, certainly, it's not all on us. But to your question around flexibility, Colonsay historically has been our most flexible facility where we can surge if we need to, throttle back if we need to. Obviously, if we did that, we'd indefinitely idle that at this point. So I would say that at least that tool for flexibility has been used. When you think about our remaining potash assets, there's really 2 assets: Esterhazy, which obviously is going through a pretty big transition; and at Belle Plaine. And I would say that compared to last year when Colonsay was in the portfolio versus now, I would say directionally, we probably have less flexibility than we had in the past because we've used one of those tools. But I think we still retain a level of flexibility within the fleet to be able to adjust to market. And the thing that you have to kind of factor in to that decision is that if we don't want to slow up the ramp-up of K3, just given all the benefits associated with that of buying, the cost structure and what have you, it's got a lot of momentum right now. So are there things that maybe we can do as it relates to K1 and K2 possibly, but we wouldn't want to derail the ramp-up of K3. So I guess, kind of getting back to your original question, we probably have a little bit less flexibility than maybe we did when Colonsay was in the portfolio. But that doesn't mean that we don't have any, right? And so I think we still have a level of flexibility to adjust to market conditions. It just may be a little bit different tool than maybe we've used in the past.

That's very helpful. And again, everyone, please, listening in, please enter in your questions we really appreciate today and this presentation throughout the day. Okay. And maybe if we switch to phosphates. Maybe it's also another question related to discipline. How disciplined do you think the phosphate industry is when you look at some of your major players in North Africa and China? And how does Mosaic navigate that environment?

Yes. And Joel -- and that's a good question. We get this question quite a bit. And again, I'll invite Jenny to provide her comments here in a minute. But one of the things that at least we preserve is that I think it's probably fair to say that there's maybe a little bit more discipline in that market than people have either realized or really acknowledged. And I say that -- obviously, last year, we took steps around our own portfolio with markets where we've been and we've got some flexibility to do that. But what you also saw late in the year, and again, maybe it was delayed, but it happened, was some production rationalization from OCP. I know recently, they've put out some statements about potential adjustments to their production in the second half of this year. So I think you're seeing some movement by them. And again, it may have taken a little while last year to adjust, but we did see it. And then finally, in China, when you look at the GPC, they produced about 1/3 of the down in China. Again, Jenny, keep me correct on this, but I think it's about 5 million tonnes.

Yes.

And they recently put out some statements about really reallocating some of their V2O5 from DAP reduction over into other products. And then that would result in, call it, 500,000 to 1 million tonnes of production of DAP coming offline. And so I think they're -- the major players -- some of the major players actually have exhibited a level of discipline or willingness to adjust production profiles or ability to do those kind of things. And I think when you kind of look at that in total, I think there's maybe a level of adjustment and discipline that may not be as apparent or viewed as widely as maybe we see. Jenny, I don't know if there's anything that you'd add to that.

No. I think you said very well, Clint. I think apart from the majors like you mentioned, ourselves and OCP, and there was a very clear evidence in this last quarter of 2019 to see so-called the Chinese version of the industry discipline. You have seen a great operating rate adjustment among producers. And also, you see a major reduction on the production and exports out of China in the last quarter into the first quarter this year as well before COVID. So just want to reconfirm with you, Clint, that people probably have not fully recognized the similar discipline in the phosphate industry than other industry that people usually talk about.

Okay. That's helpful. In phosphate as well, I mean, we've seen -- you've -- Mosaic bought MicroEssentials, I don't know, maybe a decade ago, a little bit less than that. And what is the push to more custom products versus more commodity products? How has that been working? What are the challenges in producing more custom versus commodity products, the margins? And I suppose if you create a cargo of custom products and it doesn't end up not being able to go to one place, is it harder to then ship it to a second place to redirect that shipment?

Yes. And Joel, I think when you look at our -- particularly our MicroEssentials products, obviously, that's been a key product for us for a while. We got great uptake in the market, and one of the things that we've seen is that it's a pretty durable product. When we look at some of the weakness that we saw last year, while demand for commodity products obviously was weaker, and we did see some weakness in MicroEssentials, but it wasn't -- you didn't see the same reduction, percentage reduction in demand for MicroEssentials that you did for commodities. Fast forward to what we're seeing now and I would say we're seeing very strong demand for specialty products, obviously, they're higher margin for us. But those are -- the demand for that is strong. I think the margins are kind of where they have been historically. And so I think it's been a very well-accepted product, that's a really good thing for us. And frankly, it continues to grow in Brazil, as a matter of fact, I think. And again, my team, check me on this, but I think first quarter saw record MicroEssential volumes hit Brazil. So kind of continued strength in that product. Now as far as needing to redirect and ease with which you can do that, I maybe would ask Jenny. But I think -- I don't think we see a lot of that because I think typically, we know where the demand is, we know what the customer needs are before we ship. And sometimes, we put that product in our warehouse, but in areas that we know that there's going to be demand. So I don't know that there's really much in the way and the need to, to redirect product once it's left our hands. Jenny, I don't know if there are any other observations you have on that?

Yes. Very well said, Clint. We know before we ship our product, we have a very clear understanding of the forecast about what is the return on investments for the growers in that specific areas by using MicroEssentials to their crops. We -- so far, we are -- we have not really seen any cases that we have to redirect MicroEssentials to different locations.

Thank you. And that's helpful. So if we turn to the Brazilian business to Mosaic Fertilizantes. What do we -- I mean, what is the legitimate run rate earnings for that business? What levers do you still have to pull? Any portfolio, regional gaps that you want to address?

Yes. I think let's have the investors think about that business, I mean, it's kind of hard to say what kind of run rate is, given prices are constantly in flux. But here's how I think about it medium to longer term. When we bought that -- the production business, beginning of 2018, the pro forma adjusted EBITDA for that business was, I believe, about $60 million. Since then, we've gone through a synergy program. That's added about $330 million of benefit. On top of that, we're pursuing our next phase of transformation down there. That's another $200 million. If I just add all of those up, that gets you to about $600 million in EBITDA in a pretty flat pricing environment. And so to me, that's one of the place to start. And then kind of whatever you believe kind of through-cycle pricing levels are, I'd kind of add some there. But I think it's really kind of dependent upon what people's view of through-cycle prices and margins are. But I would say, certainly, the -- kind of getting to $600 million should be pretty easy just to see your way clear to that kind of number and then adjust from there. I think as we think about the business more widely, I do think that there are going to be opportunities for continued portfolio management down there, to continue to refine and hone that business. And I do think that there are going to be quite a few opportunities to grow. I mean when we look at Brazil, we view that as one of the real growth platforms for us, not only given the size of the market, the growth of that market, the highest level of growth in a major agricultural market in the world, and we really believe that we are kind of extremely well-placed and not kind of have the full position in Brazil. So the challenge for us is how do we press that advantage and take advantage of that and continue to build the business. And I think whether that is in areas like -- as MicroEssential demand continues, do we put some production capacity in-country instead of importing it from Florida? Are there opportunities to supplement and maybe fill in some gaps on the distribution business? So I mean, I think there's going to be any number of ways that -- from continued transformation initiatives on the existing portfolio, things like portfolio management down there, which obviously we've made progress on in North America over the years and I think that's still going to be in play in Brazil, and then on top of that, looking for some of those growth opportunities, like I just mentioned, and there may be others.

And how do we -- how do you think about the capital allocation decision? So if you think about some of the forecasts Mosaic hoped to achieve a year ago when the commodity pricing were a bit lower, volumes a bit lower, so you're running at a lot lower levels than you were to hope 14 months ago on your last investor -- or 15 months on your last Investor Day. And now we're facing potentially a weaker crop price environment for obvious reasons, a weaker macro environment for obvious reasons too. So how do you think about -- with your leverage, with your situation right now what are the moves that you can make? What are your priorities? You've got Vale. The lockup has expired. Lots of ways you could spend your cash, protect your balance sheet or not. I mean how do you think about what you need to do right now in this environment?

Yes. I think -- well, for the immediate term, given the disruption that we're seeing as a result of the virus and what have you, obviously, liquidity and balance sheet is key. So that's obviously been our focus. But I would say, longer term, as we think about capital allocation, I think we still maintain our view that balance sheet matters. In capital-intensive cyclical commodity businesses like ours, balance sheet and liquidity matters. And so I would say that our -- from a capital allocation standpoint, continuing to reduce debt and leverage over time as those opportunities to present themselves I think remains a priority within our capital allocation program. I think we also want to -- we're -- when you look at where we're allocating a lot of capital today, obviously, K3 is kind of front and center. But when you look at what that does for us and not only does it drive down things like brine costs, what have you, but it changes where our fleet is on the cost curve to our advantage. And so when I look at that kind of capital allocation decision, I see that there a very structural improvement in the resiliency and cost competitiveness of our business. And so I think when we find opportunities like that, that makes sense economically, those are the kind of things that we would do, certainly as we think about Brazil and, again, trying to press our advantage there, being thoughtful but looking for growth opportunities there, I think those are kind of the -- generally the areas where we give a lot of thought. I would say, start with the balance sheet, be sure that you're on the right path there. We've talked about needing to continue to reduce total notional debt over time. I think that remains a priority. Then continuing to refine and hone and improve the existing fleet, and then are there opportunities to, at the right time, grow in the right places, not just grow for growth's sake.

Okay. And what do you think is the #1 thing that the market is missing on Mosaic? Like what's the one opportunity that you think investors, the market just doesn't get? And then what do you think is also the biggest risk for the company in the next few years?

As far as what has -- I always hesitate to say that the market doesn't get something. I tend to think of it more in terms of maybe we just have different views. But I kind of look at the value of the transformation work that is happening in all 3 of our businesses, I think, is very significant. And I think it will be very value-accretive and earnings-accretive over time. And I think we -- I think investors know that and then it's just a question of how is that viewed in value. So again, I hesitate to say that somebody doesn't get something. It may just be a different view. But to me, that's -- when I look at Mosaic, that is a very significant element of what we are driving toward over the next several years. And there may be different views on how valuable that actually is. And then -- I'm sorry, the second part of your question was what's the biggest...

What's the biggest risk, the largest risk you're facing, do you think, there?

Obviously, we -- in near term, kind of shorter-term type of dynamics, obviously, we saw the effect of weather on last year's business in S&D. I think that always is a shorter-term risk that we need to be mindful of and be prepared for. I think longer term, it is going to be -- we continue to see a level of supplier discipline, and that's something that is not just evident in our business. But as I kind of look at, I've been in other capital-intensive cyclical commodity businesses where when you make big investments, those are 50- to 100-year decisions, and there are periods when things other than economics can drive decisions and can influence where S&Ds go in the medium term. And so I think to the extent that, that discipline remains and that we do have a growing market in our nutrients and as new production is coming online, we think that as of right now, we're seeing market demand is able to absorb that. But if -- yes, I think one of the bigger risks is what we've seen historically in the industry where there ends up being too much supply and people respond by adding too much supply over time. So again, as we kind of look at what's happening today, there are facilities that are ramping up responsibly if the market is there to absorb that extra supply business.

Great. Well, thank you, Clint, Jenny, Laura. I appreciate the presentation. So everybody, we started a little bit late, first one of the conference. We'll keep going at and we're going to start with ICL in a few minutes. So thank you, Mosaic team.