The Mosaic Company (MOS) Earnings Call Transcript & Summary

Hi, it's Vincent Andrews. Welcome to Day 2 of the Morgan Stanley Virtual Global Chemicals, Agriculture Conference. We're going to begin today with Mosaic. And with us today is Clint Freeland, the company's CFO; as well as Corrine Ricard, Senior Vice President of Mosaic Fertilizantes; Andy Jung, Laura Gagnon and Paul Massoud from Investor Relations. And I'm just going to give you some brief disclosures, which is to invite you to go to the Morgan Stanley website, morganstanley.com/researchdisclosures, where we have some important disclosures that we recommend that you read and any questions you have, please refer to your Morgan Stanley contact. We'll also be doing Q&A after the fireside chat, and you can ask your question directly through this Zoom application or the web portal, and I will ask it for you, and I'll ask it anonymously. You're also free to e-mail me any questions that you have, and I'll do the same. So with that, I'm going to turn it over to Clint for some opening remarks.

All right. Good. Thank you, Vince, and good morning, everybody, and thank you for joining us this morning. Maybe have a few prepared remarks and then obviously go to Q&A. So I guess, a few different things. First, as I'm sure that you're aware, we released our earnings last week, and when we look at how the company is performing despite lower prices year-over-year, our third quarter earnings profile was improved. Our gross margin was up about 27% despite that pricing environment. And really, the primary reason for that is our cost management and the transformation efforts that are going on throughout Mosaic, both in North America and in Brazil. The next thing that's transpired earlier this week, we held the second part of our analyst presentation series, really focused on our Brazil business, and that discussion was led by Corrine Ricard, who's with us today, and is available for questions around that part of the business and really try to highlight not only the constructive market dynamics that we see down in Brazil, how we're positioned, but also the continued transformation efforts down there. And as we disclosed, as we've talked about, we continue to be ahead of schedule on those initiatives. And then beyond that, one of the things that I think we've all seen is that our markets have continued to trend higher. Obviously, a very constructive USDA report yesterday. I think our belief is that it still is underestimating some of the Chinese corn imports, but we can talk a little bit more about that in this session. We do have Andy Jung with us who is primarily responsible. Well, for a number of different things, but including the company's view on supply and demand and global dynamics. So look forward to having Andy weigh in on that discussion. So maybe I'll stop there, Vincent, and turn it back to you.

Sure. Thanks, Clint. So what I thought we'd do is just sort of dig in on your 2 business segments and then transition into the cost transformation efforts, both in North America and then down in South America and the Fertilizantes business. You mentioned sort of the constructive backlog or backdrop that we're seeing in the grain and oilseeds market. And so maybe we could talk a little bit about the phosphate business, what you've seen year-to-date and what you think the transition into next year is going to be from a supply and demand perspective? And then overlay, what impact do you think a more constructive commodity -- soft commodity price environment could have on the overall outlook for phosphate?

And maybe I'll start, Vincent, and then maybe ask Andy to comment as well. I think this year, obviously, at the beginning of the year was somewhat of a challenge in the phosphate market. We actually -- we slowed down production at some of our facilities. But as we got into the spring, certainly saw very healthy demand in the spring, not only in North America, but globally in Brazil, in India, China, elsewhere. And a lot of that excesses was drained out of the system. Inventories got tighter, prices began to improve, and we actually saw -- when we look at the pricing dynamics this year, we saw a real inflection point kind of at the beginning of the third quarter, and we saw prices continuing to improve throughout the quarter. And I think we spoke about that on the earnings call, and we would expect those price realizations to continue into the fourth quarter. We spoke a little bit about that and kind of our view on order of magnitude, what we would expect to see. So I think as we've kind of continued on, up to this point, we continue to see good demand. I would say, inventories continue to be somewhat low, I would say, actually quite low globally. And so as we look forward into next year, particularly with the backdrop of improving commodity prices, we see a constructive environment going into 2021. Andy, if I can maybe ask you to weigh in here as well.

Sure thing, Clint. I think you've covered it very well. And I just reiterate that the market was quite loose certainly, as we entered into 2020. As we look at 2021, we think it's more balanced than it has been for the last couple of quarters, which saw a pretty dramatic tightening of the global S&D. That doesn't mean that we're expecting prices to now fall back to where they were at the start of 2020. It's -- we're starting from a higher base. I think the potential upside or potential downside is rather muted as we move to 2021, much more range-bound pricing paradigm next year.

Andy, is there any sort of market mechanism that helps inform that view on sort of a range-bound price? In other words, are we at some level of the cost curve or something where this high demand level is sort of forcing somebody with a higher cost stack to produce that gives you confidence in sort of a range-bound outlook?

There is. And we look at the market from 2 different sides. So we'll look at the cost curve side and certainly, nonintegrated production in India, the higher cost producers in China are still marginally economic at best, if not uneconomic. At the same time, we'll look at the S&D balance, and we'll say, look, there are some additional incremental supplies coming in next year, whether that's a recovery of production at facilities that were impacted by COVID-19 and had to curtail, the ramp-ups of couple of small projects around the world. And if we look at that, juxtapose against our demand forecast, we think the market looks generally balanced.

Okay. And then you referenced, or Clint referenced low inventory levels. Is that a sort of a global comment? Or is that issue more acute in certain regions? Any thoughts there?

Clint can go on.

Yes, Andy. If I could ask you to comment on that.

It's pretty globally based. So certainly here in North America at both the producer level as well because being a very large phosphate producer, we understand that inventory position. But also at the wholesale and the retail levels, we understand that inventories are quite thin. We looked at India. There's public data where stocks sit on a daily basis. We know that that's down pretty significantly year-over-year. China producer inventories are reported by their producer association. Those are down considerably year-over-year. So whether it's at the producer level, whether it's at the distribution level or retail level, we're quite confident that inventories are much thinner than they were a year ago, and I would go as far as to say they're below kind of a long-term historical normal level as well.

Okay. And then the other issue that's out there in the market is the countervailing duties petition that you filed a few months ago. We're going to get some update on that in the coming weeks. But I don't think there'll be a final ruling until sometime in the first quarter. So maybe you could just give your view on what impact, if any, that's had on trade flows or market dynamics? And it's never easy to guess the outcome of something like this. But if there -- could you maybe just talk about what you anticipate would happen if the requested duties are placed into the market, or if they're not, or maybe there's some in between answer there as well? Just to give folks some idea of how do you think market dynamics will adjust to whatever the decision is.

Yes. And maybe I'll speak a little bit. I'll start with kind of what we had seen, what we're now seeing and then what we could see in the past. So before that filing, frankly, for the last -- for the previous, say, 18 months, obviously, we have seen very heavy imports into North America. But from a pricing standpoint, what we've seen is NOLA trading at a pretty significant discount to the world market on a fairly consistent basis. And I think it was because of that pressure. Since we filed the CVD, I think what we've seen is we've actually seen NOLA go from being at a discount, at a consistent discount to the world price to be in a premium. And I think it reacted pretty quickly and to a pretty high level, I think, $40 to $50 premium. But then it's migrated back down. I think, now it's more like maybe a $20 premium. But part of that dynamic is that the 2 countries, or the producers that were part of the CVD filing have stopped imports. And so what you've seen is that, that product has been diverted to other areas. We've seen that product go to India, to Brazil, to other locations. And consequently, other Mosaic and other producers that historically have not shipped product into North America, like from Mexico, from Australia, from the Middle East, we've seen more product kind of fill that gap. And so our expectation has been that the outcome of the CVD is not likely to have a meaningful impact on world price because it doesn't affect the global S&D. What it does affect is trade flow and where product goes. And I think we've already seen that begin with the diversion of product, again, from those suppliers to other locations. And again, new product or product from maybe nontraditional producers sending product into North America. And so we've already seen that trade flow change start to happen. As we look forward, I think it kind of depends on what the outcome of the CVD is. I think if there are very high tariffs put on, or charges put on, I think that trade flow continues in the same direction. But I think a lot of that's probably already happened, and it's already begun. I think if there are low or no tariffs, you probably, at least directionally, go in a direction back to where kind of we started where there would probably be more imports, now maybe not at the same level, but I think trade flows would begin to directionally revert back to probably where they were before. But again, nothing has happened to global S&D. I think it's just a matter of where is product going without, in our view, affecting the global price that, again, is impacted more by S&D than by things like CVD in one of the regions of the world.

So -- and the S&D is clearly tighter today than it was several months ago. So would you anticipate, regardless of the CVD petition, do you think maybe that, that discount that NOLA had would be narrower now, all else equal, just because there's just more demand for products. So NOLA becomes less of sort liquidity zone that it, historically, maybe has been for excess products? So if the duties don't go through, we don't go all the way back to where we were before as the market is tighter, and you won't have such a discount and maybe the global price will be higher anyway. Is that the right way to think about it?

I think that's probably the right way to think about it. As an example, when we look at the S&D, and we see that those producers have shipped a lot more product into India, they've shipped a lot more into Brazil, and I think we noted this on our call. Yes, prices there are still going up 25% to 30%. And so I think that is an indication of kind of the tightness of the global market, the pricing dynamics that we see. And again, as the CVD comes to a conclusion one way or another. We think, ultimately, the global S&D is what's going to determine global prices. And again, you may have some discrepancies between liquid locations, but probably at a higher price level.

Okay. And then maybe just give us an update on your phosphate mine reserves. I think there's been some discussion about you found capability to increase the footprint of your existing mines, which is providing some efficiencies in terms of production and cost and CapEx. So maybe tell us a bit about that.

Sure. So one of the dynamics that you have in our phosphate business and mining in particular, is that a lot of the significant investment, as an example, would be in a beneficiation plant. And as you mine around that plant, you typically will pump some of the ore and some of the stuff that you mine over to the beneficiation plant to begin the process. Historically, kind of the view and the thought was that there's about a 7-mile limit on how far you can actually pump from the mining area to the beneficiation plant. And so that tends to define or has tended to define what that mining area is before you need to build a new, very expensive beneficiation plant to kind of move along with your reserves? Well, through a lot of hard work and ingenuity and innovation, our pumping distances, we believe, are now closer to probably 15 miles, so probably twice as far. So what's happened is it's opened up reserves that previously we didn't think would really practically be available to us. It's now opened up those reserves. And when we kind of look at the economics and allocation of capital, it is much more efficient for us to secure those additional reserves and continue to use that existing beneficiation plant and capability instead of building a new one. And so that's kind of the trade-off that you have is that because of some of that innovation and longer pumping distances, it now enables you to use very expensive equipment for quite a bit longer and really drive efficiency out of your operations.

Okay. Why don't we shift gears to potash and do something similar just in terms of bridges, where the market sits as we chat here today in 2020 -- into 2020, '21. This -- potash has been in a digestion process of some new capacity coming out of Canada and coming out of Russia. Where do you see us in that evolution? Demand has been solid, certainly picked up following the bottom in prices that we're seeing earlier this year. So what is the sort of trajectory into 2021?

Yes. And maybe if I could pass that over to Andy. I know that's kind of an area that he spends a lot of time in. Andy? Andy, I think you may be on mute.

We might have lost Andy. So I don't see his camera. Why don't we go to Mosaic Fertilizantes, and we'll come back to potash.

Okay. Well, and I think overall, I think what be -- just a couple of -- Andy, are you back?

There he is. Andy, can you hear us? You are on mute.

Yes -- and Vincent, maybe I'll maybe make a couple of comments. I think -- and maybe I'll make a couple of comments, and Andy, if you're back with us, and I'll hand it over to you. I think we have -- kind of similar to phosphate, we've continued to see strong demand for potash in kind of global market. Obviously, there's some new production coming online. But as we look forward from this year into next year, I think we still see a relatively balanced, almost an unexciting market. Andy, kind of -- can we maybe try going back to you again?