The Mosaic Company (MOS) Earnings Call Transcript & Summary

Thank you, and good afternoon, everyone. My name is Adam Samuelson. I'm the agribusiness equity research analyst here at Goldman Sachs. I want to thank you all for continuing to join us here at our Industrials and Materials Conference. And this afternoon, we're very pleased to host The Mosaic Company, one of the largest potash and phosphate producers in the world. From Mosaic today, we have Clint Freeland, their Chief Financial Officer; Jenny Wang, their Head of Global Product Management; and Laura Gagnon, who heads up their Investor Relations effort. I think I'm going to pass it on to Laura briefly for a quick safe harbor and then Clint's going to start it off with some prepared remarks and then we're going to dive into Q&A. Just for everybody on the webcast, I just want to remind everybody that there is a question-and-answer function in your webcast window. Feel free to submit those. We love to receive the electronic questions and make this interactive. So please do send us in and we will get to those as we move through our session today. So with that, I'm going to pass it on to Laura briefly and then on to Clint.

Thank you, Adam. I just want to remind you that we 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 our press release and in our reports filed with the Securities and Exchange Commission. Clint, on to you.

Great. Thank you, Laura, and thanks, Adam, for inviting us to be with you guys today. I thought I'd just open up with some prepared remarks and then we can go to Q&A. So first of all, obviously, COVID-19 is top of mind. And to date, the company has moved very quickly to protect our employees and our operations. And at this point, we've really seen no material to our operations, to our supply chain or to our end markets. We have had a couple of facilities that were temporarily idled under government pronouncements, namely Patrocínio in Brazil and Miski Mayo in Peru. But really that's had no material impact on our production. And I think those facilities are back up and operational. When you look at our end markets, global fertilizer demand remains strong. Obviously, it just came through the spring season. Now that's finishing up in North America. Saw a very strong spring season here and believe that really most of the inventory in North America has been cleaned out as would normally be the case in our business. But it's not only North America, we've also seen strength of demand in Brazil, seen strength of demand in India as well as China. So certainly, positive developments on that front. We had our earnings call last week, and just a handful of things that I would highlight from that. First of all, the company continues to execute and operate very well. As many of you, I'm sure, are aware, last year, as part of an Investor Day, we put out a number of different targets and metrics that we expected to hit by 2021, next year. And I'm happy to say that in all of our business units, in all 3 of our business units, we achieved certain milestones and actually hit certain metrics early. I'll start in Mosaic Fertilizantes. Mosaic Fertilizantes, looking at the cash cost of rock in that business unit, we've gotten to a point on a real basis where our target is for 2021, which is certainly very, very helpful. And again, that's before the impact of currency on those metrics. Second, our potash cash cost of production, again has met, if not exceeded, the target that we put out, again, adjusting for movements in currency. And then in our phosphate business, our cash cost of rock, again, has -- was better than our target for 2021. So operationally, continuing to perform very well. Another thing that I'd highlight is we had a very meaningful synergy program down in Mosaic Fertilizantes. So we concluded last year, exceeded our targets earlier than expected. But then announced that we had a new transformation target of generating up to $200 million in additional adjusted EBITDA over the next 3 years. We had, under that program, a $50 million target for this year. We're well on schedule to hit that, realizing $17 million in the first quarter alone. And then finally, on our K3 project. That's a very significant transformational investment for the company, and I think the momentum on that project continues to go very well, and we expect that by the end of this year, that K3 will be at a run rate level of producing 3 million tonnes of potash annually, again, by the end of this year, which should allow us at that point to begin the process of shutting down our existing K1 facility. From a liquidity standpoint, at the end of the first quarter, we had about $1.1 billion in cash. And in addition to that, had another $1.6 billion in committed revolver capacity behind that. So I think from a liquidity standpoint, company is in a very strong position. We noted that we had accessed some of our working capital and revolver facilities to try to build that cash balance, really just as in an abundance of caution given the environment that we are managing through today. Our liquidity has continued to improve since then. And so I think as we move through the year, I think we're more inclined to start using some of the cash on the balance sheet to repay some of those facilities as we go. So I think overall, the company continues to perform well, operate well. We've seen good market demand, not only in North America but globally. And I think from a liquidity and balance sheet standpoint, we are in a good position. So Adam, maybe I'll turn it back over to you.

Great. Thank you, Clint, for that -- those opening remarks. So I think what I'd like to do is to start -- again, anyone on the webcast, we're happy to solicit questions online. You talked a little bit about Mosaic's market view across businesses and then get into a little bit of some of the company-specific actions and levers that you have to pull to mitigate some of those. So maybe starting just in the phosphate side, just help us think about kind of the phosphate market and where we go from here. I mean stripping margins, they have improved from the lows at the start of the year but do remain pretty low relative to levels over the last 5 years really. Just help us think about kind of the factors prospectively that will drive kind of the market into a deeper deficit. Or is there a risk of more surplus as we move into the -- move to rest of 2020?

Yes. So I'll maybe share my thoughts, but then probably I'll also invite Jenny to provide any additional information. I think as we -- I guess a number of different thoughts. First is, as we look at kind of what has led to kind of a more challenging price environment over the last year and as a result, margin pressure in the phosphate business, I think it's our view that what's really led to that has been more of a demand shock and a demand issue with 3 consecutive application seasons that were weak, including last spring. And so as we look at it, I think our view is that the first thing that we need to see is we need to see demand recover to a more normal type of level. We need to see inventories drawn down to get the excess out of the system that serves as an overhang to prices. And I think we've started to see those things, starting with some of the curtailments of supply. Obviously, we had a couple of curtailments within our fleet of fourth quarter of last year and actually earlier in the year as well, but carrying through the first quarter of this year. OCP also had some curtailments. And so I think that began to set the stage for an improved supply and demand balance. But what you really need to see is the follow-through of the demand. And I think that's what we've seen in the spring, that we've seen a very strong spring, particularly in North America but, as I noted, even in other markets. And I think what that's done is it has served to really clean out the inventory levels, particularly in North America. I mean our view is that we're going to end the spring with very little, if any, inventory really in the system. And as a result, as you move through summer fill and into the fall and so forth, you should start to see a more normalized environment for supply and demand. I think as we look at the supply and demand fundamentals, we do a very detailed buildup on both the supply side and on the demand side, and I think our view is that, that really does remain fairly balanced as we go forward, taking into consideration seasonal demands and some of those items, but also the supply stack. And I think we have not only seen some of the idling that I mentioned just a minute ago but we've also seen like one of the largest Chinese phosphates manufacturers, GPC, who produces about 5 million tonnes or about 1/3 of the DAP in China, has talked about redirecting some of the P2O5 in their system to other uses and away from more commoditized DAP, which has the effect of taking about 500,000 to 1 million tonnes of production out of the system. I think that's certainly constructive. And so I think as we kind of look at the inventory situation, I think that overhang has been removed, which I think is what we need to see. We've also seen kind of continued management by different suppliers on the levels of supply. I think that's constructive. I think as we look forward, we see a more balanced S&D both this year and as we follow through into next year and beyond. Even with some of the debottlenecking initiatives that some of the other players in the markets have, we still see kind of between that and some level of market growth, still see a level of balance there. So I think it feels like the things that you need to see, to see a recovery in prices and margins are happening. And it's just a matter of now we need to follow it through with a more normal level of demand and application beyond today into the summer fill and into the fall. Jenny, I don't know if there are maybe any other observations that you have on this?

No. You covered it very well. Thanks, Clint.

Okay. Thanks, Jenny.

Okay. So maybe in that then, just thinking about what it will look from here, I mean, how do you assess the risks on demand if we are in a lower crop price environment? USDA is looking at 2020, '21 carry out north of $3 billion for those who can [Technical Difficulty] right now with normal weather, do you think that the both stocking level in the distribution chain but also the farm level applications, whether it's in the U.S. or other kind of associated market feel some of the same pressures will be there? Or is that something that you're watching pretty closely going forward?

Yes. Well, I think, along with many others, I think we're watching that as well. Certainly, are mindful of biofuel demand and the knock-on effect that, that has on corn demand or on sugar demand down in Brazil. I think our view is that -- and I think the USDA's estimate is 97 million acres of corn and maybe 85 million for soybeans, and I think our estimate for corn is more along the lines of 94 million acres. And so when we do our S&D, we calibrate it to those type of expectations. And so certainly, we are going to be watching the impact that some of those dynamics have on phosphate demand, but we've tried to capture that in our forecasts to date. The one thing to also keep in mind -- I guess two things that we've noted for folks, is that a couple of things to watch. One is that from a farmer economic standpoint and a farm income standpoint, one of the things to continue to keep in mind are some of the government programs, that certainly grain and oilseed prices are very important, and they're going to drive farmer economics and farmer income. But looking at the programs that have been approved and are being considered, I think can have a meaningful impact on that and if everything goes into place as expected, I think our view is that farmer income may not be that different than it was in 2019. Obviously, the mix could be a little bit different. But I don't think it'll -- our view is that we don't think it will be that different than 2019, which is helpful given where grain prices are. The other thing to keep an eye on is -- and you mentioned the carryout being particularly -- potentially pretty high. Conversely, what you see is kind of the expectation in China is a very low stocks-to-use ratio, one that's historically low. And does that prompt some international purchases from China. And whether that's from the U.S. to soak up some of that excess carryout, if that were to happen or if it's from Brazil, it doesn't really matter for the international grain prices. So I think that's something to watch, where there may be a high level of carryout in the U.S., there are also may be some structural deficit in China that needs to be made up. And to what extent that's factored into some of the numbers that are out there, we don't know, but we do think that maybe that's something that's maybe underestimated at this point.

Okay. That's helpful. And so maybe just one more on China on the phosphate side, and then I'll move over to the potash outlook. But in China, I mean, the production levels and the export levels in recent years have stayed pretty healthy. And how does Mosaic assess that moving forward? And help us think about your view of the cost curve to actually maybe change some of the supply out of China that's been weighing on [ C1 ] prices?

Yes. Well, I think that's really been an evolving market. And again, I'll probably invite Jenny to comment here in a minute. But one of the things to note is over the past, I don't know, maybe 5 to 7 years, you've seen about -- from a total capacity standpoint, you've seen about 9 million to 9.5 million tonnes a year of capacity come out of production or be taken offline in China. Now a lot of that capacity wasn't being used. Maybe I think our estimate is around 2.5 million tonnes of production has been taken out. And so what you've seen is you haven't seen that translate into lower imports because of lower internal demand in China. I think our view -- and we think that, that's because of some of the regulations, the government regulations on fertilizer use kind of translate into the far more efficient use of particularly phosphate and what have you. But what you've also seen during more recent years, over the last 2 or 3 years, is more flattening in the yield growth. And the question is, how durable is that, how long-term is that an acceptable trajectory. And so kind of looking at that, we have the sense that we've probably or likely have seen kind of most of the decline in internal demand. We think most -- that that's mostly over. And that is probably more at a more sustainable level of internal demand at this point. And so any further reduction in capacity and production internally, is likely to translate into exports. Coming into this year, even before the COVID-19 situation, our expectation was that you'd see an extra 500,000 tonnes of exports -- or that exports out of China would be lower by another 500,000 tonnes compared to last year when we also saw a decline in exports. And so we -- our expectation was that, that would continue even before the COVID situation. Now I think the current COVID situation has changed some of those dynamics, but we still think that, that's ultimately where China ends up toward the end of this year. So it certainly is developing. I noted the dynamic with GPC a little bit earlier as far as redirecting some of the P2O5 to -- that they have to other uses. And so I think it still remains kind of a constructive dynamic that directionally is positive. I think it's just a question of at what pace and how far does it go. Jenny, I don't know if there's any additional color that you would add to that.

Yes. I think you have covered all of the dynamics about phosphate industry change in China. Just to add a little bit more on the cost impact due to this environmental certainly policy change or regulation change and that happened -- started from 2016. Over the last 5 years, as Clint mentioned, with some significant removal of the capacity and the production reduction, the cost has been really added due to this environmental compliance, including some of the major capital investments required for the compliance and also ongoing operating cost as to comply with the environment. And these are built-in costs and it is going to be carried forward. I think I just want to add that one. That is going to -- in longer term, is actually going to change the cost curve of the Chinese producers. As a result of it, like Clint mentioned, GPC has started to look for some more value-adding product than DAP, MAP. And also, there was also a proof that people don't necessarily give credit to is so-called industry discipline as they are moving towards to the breakeven economics. Clint, I just want to add this point.

Yes. No, those are great points, Jenny. Thank you.

All right. And so maybe switching gears to potash for a moment. And help us think about the market balance over the next -- through the end of this year and into early next. We have a China contract, so I think we have some understanding of kind of where pricing will sit for the near term. How do we think about the demand? And how do we think about kind of supply where it's safe to keep the market balance based on whether it's your outlook or nutrients, which differ a little bit, really do count on pretty restrained production from Canpotex from the Canadian producers including yourselves this year?

Yes. So when we do our S&D analysis, we have, I think, built in a level of conservatism around the impact of biofuel demand. And then also, as Jenny, I think, was noting earlier, a level of conservatism around palm oil pricing and demand. And I'm not really sure kind of -- I don't want to comment on anybody else's demand forecast but those are the factors that that I think really factored into our view of demand. And when we look at that, when we take into consideration the continued ramp from EuroChem, when you look at some additional tonnes from like a Bethune and you look at some of the other incremental sources of supply, we still see a fairly balanced market that we believe remains constructive. One of the things that you'll probably note is the tenor of the contract with -- between Canpotex and China. And I think as we've commented on before, we're glad that the contract has been signed, and certainly, the Indian contract as well. I mean I think those are important benchmarks, not only from a production management standpoint as a supplier, but also as a -- because it does influence buyer behavior, to know kind of what that price is for China. So we are pleased that the contract has been done. I think it's also fair to say that we were disappointed in where the pricing came out. And I think that is reflective of the tenor that Canpotex and its partners, including us, wanted to be locked into that price for. Because, again, I think as we look at the supply and demand dynamics, our sense is that it's a fairly constructive balance between supply and demand, and therefore, our expectation is that things could get better from here. Now when you ask, okay, well, do you have any data points, and I think we commented on this on our earnings call, but I think it still maybe bears mentioning that one of the things that we did see -- and this goes to buyer behavior, one of the things that we did see was a lack of buying in Brazil in April. You can see that in some of the import statistics and then with our distribution business there, you could see it. But then within a matter of days of the China contract being struck, what we saw in country was about a $20 per tonne jump in price. We saw buyers coming back into the market for volume. And it wasn't just kind of a momentary blip. I mean it was on, what I would say, real volume as opposed to maybe some other instances of pricing that we see in some of the publications, but it was on real volume. And that higher level of pricing has had follow-through. We've seen it tick up a little bit even since then. As we look further out into kind of the June, July time frame, we're seeing even better pricing. And so I think as we look at the overall potash market, our view is that the supply/demand dynamics are roughly in balance. We view it as even with some of the levels of conservatism that we've at least tried to put into our forecast for global demand. We still see that as the case. And again, kind of the -- Brazil being kind of the first country that's kind of a big buyer at this point. You're seeing those data points materialize there. And I think right now, we're kind of in a low period in North America but I think our expectations as we go further into the year and that normal summer fill and buying behavior begins here that we would hope to see a similar dynamic. Jenny, I don't know if there's anything else you'd add to that, that maybe I missed?

No. You covered everything. Thank you.

Okay. Thanks.

Okay. Great. Well, great. Well, I want to maybe shift a little bit to some of the levers that Mosaic has at its disposal. Obviously, you operate in commodity businesses and really so much you can do to control the potash and the phosphate price. But help us think about beyond 2020. So you talked this year, about $225 million of kind of internal kind of initiatives or an absence of some negative last year on the production side of Brazil that are earnings tailwinds. Help us think about beyond this year, kind of what that can look like between Fertilizantes, K3 and maybe some initiatives in Florida on the phosphate side?

Yes. So there are a number of different dynamics to maybe take into consideration. And you mentioned the $225 million in differences between last year and this year. And again, I think we're still very comfortable with that. We're seeing all of that materialize. But as we go forward and maybe one other dynamic that I would point to before kind of getting to K3 in Brazil and other things, is around cash flow this year. And we've had some questions around should you take a fresh look at your CapEx spend, maybe make some adjustments there. And I think, certainly, we are always looking at that, very mindful of that. We have made some adjustments to not only spend but also timing on those projects that maybe aren't particularly challenging to make changes to. Sometimes you have to just make trade-offs from a reliability standpoint, cost standpoint, what have you. So I think we have taken an active role on that. But I guess the -- also the other tact that we've taken on that has been to look for other ways of finding cash within the system. And as we noted on our earnings call last week, there's about $170 million of items that are kind of non-EBITDA related, that we're going to get cash in the door this year for. And about half of that, we already received in April and what that does is it actually has the, in my mind, kind of the same effect as having cut your CapEx by the same amount. However, you didn't have to make any trade-offs. And second of all, you didn't have to slow down, say, like your K3 development. You didn't have to slow down your transformation in Brazil. You can continue on with those and you still remain -- you still retain more active management around those as a lever if you need them but you find another way to manage through it. So I would say that's a lever that I think is important to think about. I think longer term, and you noted 2 of the more important levers in particular, certainly is K3, where as we go forward, our expectation is that K3 will be fully up and operational in 2022. By the end of this year, we would expect to be in a position to shut down our K1 mine and have fully migrated that production over to K3. And as we do that, the cost structure, the cash cost per tonne continues to improve. And you saw that in the first quarter of this year, where our cash cost per tonne was about $59 per tonne. But I think as we go through time, I think you're going to see an improvement in our cash cost per tonne coming out of the potash business. I think you'll also -- this year, you'll see probably a minor reduction in brine spending. I think, first quarter was maybe 10% below last year's first quarter. That's probably what we should expect to see for the year. But then next year, you would expect to see kind of a first step down in that spend and then have it step down again in 2022. And that last year was a little over $100 million in cash. So that's not insignificant. Then I think what you'll also see is you'll see the CapEx associated with K3 beginning to decline next year. I think we're reaching a high point this year. It'll -- it should step down next year and certainly, in the following years. So from an earnings perspective and from a cash generation perspective, I would expect our potash business to be transforming pretty meaningfully over the next couple of years. And then at Mosaic Fertilizantes, kind of same type of dynamic. We've moved through and completed our synergy program. I think we beat our targets as well as getting it done sooner than expected. But then we've seen so much opportunity down there as part of that program, that we've re-upped it into kind of the next wave of transformation. And that is a program that we're targeting a $200 million recurring EBITDA improvement in that business and to have -- to put all of that in place over the next several years. First, installment of that benefit would be this year, we're targeting about $50 million of improvement. And again, we're well on track to see that. But when you think about that business and you think about where Mosaic has taken it from the acquisition, when we acquired that business, the pro forma EBITDA for the combined company was about $60 million. Since then, we've added, call it, $325 million, $330 million in synergy value for recurring EBITDA. We're now targeting another $200 million on top of that. And so as I kind of think about this business rolling out over the next couple of years, I would think of that as a, call it, $600 million EBITDA business in a similar type of commodity price environment and to the extent that you saw some improvement in prices and margins, particularly in phosphates, I think that's additive. And so I think, when you look at the different pieces, certainly, potash is transforming in a meaningful way, Mosaic Fertilizantes is transforming in a very meaningful way. And then we continue to press the transformation work in the phosphates business, particularly here in Florida, really driving toward a lower cost structure through automation and process improvement. And obviously, we put some targets out there for that business. Our cash cost of rock, we've already gotten to a point where we're meeting or exceeding that target. And then we just need to see that follow through. So I think, Adam, as you go through the next 2 to 3 years, I think there are some very meaningful and positive developments that are happening really throughout Mosaic.

Okay. Great. Well, I think that's a good place to stop. We're just about at our allotted time. Clint, Jenny, Laura, I want to thank you and Mosaic for participating today. I want to thank everybody on the webcast. Hope everyone has a good rest of the afternoon and a good weekend. Thank you.

Great. Thank you, Adam.

Thank you, Adam.

Thank you.