The Mosaic Company (MOS) Earnings Call Transcript & Summary

So good afternoon, everyone. This is Jonas Oxgaard from Bernstein, and I'm very pleased to host Mosaic for our fireside chat. We have a full host from Mosaic today. We've Karen Swager, Corrine Ricard, Bruce Bodine and Clint Freeland as well as Laura Gagnon. I believe that Laura wanted to say a few introductory words before we kick into questions. As a reminder, questions are as usual through pigeonhole. You can either add or submit questions or you can vote on the existing questions, whatever you think is most important. And I will try to get through the questions, ideally in some sort of organized fashion, but as best as I can. With that, Laura?

Yes. Hi, Jonas, this is Clint. I think Laura probably passed it over to me to maybe just make a few introductory comments and then obviously get right into Q&A. So as everyone's aware of, we posted our -- and had our quarterly [ earnings ] call just a couple of weeks ago. And I think there are a number of things of note that came out of that. And most notably that -- despite having lower realized prices year-over-year, the gross [ margin ] of the company was up about 27%, and some of that was due to higher volumes, given the demand that we've seen in our markets. But another element of that has been the impact to some of the -- the cost management and transformation initiatives that the company has been pursuing. We've talked about those quite a bit, and those are multiyear programs, but you're really starting to see them [ in ] the financial performance of the company. We also had a recent Investor Day, I believe it was about a week ago, [ talking about ] Brazil transformation. I think Bruce hosted a North American transformation call recently as well and then had one on Brazil. And again, try to provide a little bit more detail on those transformation programs, the capital investment required, the benefits associated with the timing and so forth. But again, even when you look at our third quarter earnings report, you can start to see those benefits kind of roll into -- in our financial performance. At the same time, we've paid down a lot of the short-term debt that we incurred earlier in the year. So our balance sheet is strengthening. And that is coming about at the same time as our markets globally are continuing to strengthen, both in phosphates and more recently in potash. And so I think as we look -- as we go forward, I think things look fairly positive as we continue to work on our transformation programs, and improving market and certainly, our balance sheet and liquidity profile is in a good position. I'll stop there, Jonas, and hand it back to you.

Well, I usually go for the financial questions last, but given that we have Clint live on the mic, might as well start. So my question is that you're still doing a lot of initiatives. You still have the K3 opening. So how should we think about the long-term CapEx commitment here? Is still in that $1.1 billion, $1.2 billion range?

Yes. The way that I tend to kind of break it down is I start with kind of sustaining our maintenance CapEx. And I think overall, we tend to be in a range of, call it, $650 million to $750 million per year, toward the upper end of that range next year. I think we've got some additional work we need to do in our phosphate business unit. But generally, we should be in that $650 million to $750 million from a sustaining CapEx standpoint. I think then outside of that, we have a number of different programs. You mentioned K3. Our target spend this year is somewhere around $300 million, maybe a little under that, but right in that zone. But as we roll forward into '21 and '22, you would expect to see that begin to step down as we reach kind of full operation for K3. So we'd expect maybe $100 million step down next year and then a further step down in subsequent years as we get to completion of that. This year, we've got some consent decree CapEx spend that will moderate over time as well. So depending on -- we also have kind of the buckets of growth. I think that we've given some detail around Brazil and North America. So I would expect, over time, longer term, that the kind of $1.1 billion to $1.2 billion in CapEx each year, probably is more elevated than I would expect on a go-forward basis. I would expect that to moderate down over the next 2 to 3 years as some of those bigger projects like K3 come to completion.

When you say moderate, are you thinking more in the $1 billion range then? Or...

I would think kind of between there and our sustaining level. And I think it's going to depend on a per-year basis. Kind of where that ends up, what kind of opportunities, what kind of growth projects we have and elements like that. So I would say somewhere between kind of that sustaining level and probably the $1 billion level is probably kind of the right ZIP code for us to be in kind of opportunities.

Okay. So you identified a large number of initiatives in your Investor Day here. So what's your process for allocating capital against these projects and also across the businesses?

Yes. So as we look at these, one of the things -- I guess, one of the things, Jonas, that I found in my experience at Mosaic as well as at other companies is that some of the best investments you can find are in your own company. And I think that's what we're finding in the transformation programs, both in North America and in Brazil. If we look back to the synergy program down in Brazil and the $330 million in synergies that we realized last year, that required very little capital. But -- so that's an easy allocation of capital, right? Then you roll forward to the transformation 2.0 program, where there's another couple hundred million dollars in EBITDA improvement that we'll be looking at. And I think we've said that from a CapEx standpoint, that's maybe $60 million or so in CapEx, kind of give or take [ to find ] those opportunities. But again, that's a very effective use of capital. When we look at the overall transformation program, including North America, again, when we look at paybacks as just a simple metric, it's about a onetime payback when you look at the EBITDA -- recurring EBITDA benefit versus capital deployment. And so again, we find those opportunities, they're very compelling and again, fairly easy to allocate capital to.

Okay. So how do you differentiate between improvement programs or turnaround programs, or you call them what, improvement, I guess, versus growth programs or M&A for that matter?

Yes. Well, I think you kind of look at them -- in a way, you look at them separately -- or excuse me, similarly, in that what you're really looking for is for each dollar of investment what is the impact on the business and what's the risk adjusted impact on the business. So that’s earning profile, but what does it do to the risk profile of the business. So we look at risk-adjusted returns and we look at things -- we incorporate things like operational risk, construction risk, we look at technology risk, we look at country risk, currency risk and all of those things and try to factor that into a risk-adjusted return profile, and then use that to assess different investments and frankly, stacking up against one another, so that we're effectively allocating capital to the best opportunities.

Do you have a formal hurdle rate for these?

It -- we have [ bands ] within which we're looking to be in. I'm not sure I'd want to kind of talk about them publicly. But certainly, we're looking for are compelling risk-adjusted returns, not marginal type of projects, certainly well in excess of our cost of capital. And again, kind of given some of the metrics that we've talked about, the returns that we're seeing, at least on the programs that we're pursuing and funding are quite compelling.

Okay. So let's continue for a little bit on the financial side. So your debt ratios have come down quite meaningfully. So why are you still targeting to pay off another $1 billion?

One of the things that is obvious with our business is that our earnings profile can change meaningfully from one year to the next.

Somebody's talking about it.

Yes, I know it's shocking, I know. But what -- the work that we've done around our balance sheet is to think through what are the different scenarios, not only that we could see in the future, but frankly, we have seen in the past. And we want to be sure that when we run the different scenarios of the pricing environments that we could operate in and what have you, our balance sheet is always strong and solid. And that's for a number of different reasons. When we look at the cost of capital, we've done a -- the most recent one was a 12-year cost of capital analysis, looking at different cycles, different points in the cycle, sometimes better, sometimes weaker, but kind of what balance sheet would give you the optimal cost of capital. And what we found is, is that kind of strong BBB type of credit metric balance sheet that the vast majority of the time, that gave us the lowest cost of capital. And so that is from one consideration. Another consideration is when we look at permitting and kind of extending our mining operation, one of the things that we have to do is to provide financial assurance to the regulatory authorities and so forth. And that process is much easier and, frankly, more efficient, if you have a strong credit rating. So again, kind of in that same BBB type of ZIP code seems to be optimal for us. And then again, the other element of it is that when -- and I think the Vale -- the acquisition from Vale is a prime example, is that a lot of times strategic opportunity can present itself during periods of stress. And we want to ensure that we have a balance sheet that is not only resilient during those periods of time, but also provide us some opportunities to act if that were the case in the future. And when we look at those 3 things: cost of capital, the operational needs and then flexibility and resiliency, that kind of helps us 0 in on the type of balance sheet metrics and kind of associated ratings, if you will, that we're targeting. And then when we run our math and we say, well, how does that quantum of debt that would meet those requirements compare to what we have today, that's what's kind of get to that $1 billion in debt reduction. So what I don't want to do is necessarily chase a debt-to-EBITDA ratio because our EBITDA can move so much. What I really want to do is to have us focus on how much debt should this company have given its specific economic dynamics and drive to that level. And again, so as we think about it, we still have some work to do. I don't think we need to do it all at once or rush to that or make that our absolute top priority because I think there are other things that we should balance against that, but I do think over time that we should continue to strengthen our balance sheet through additional debt repayment.

Okay. You mentioned the strong BBB. What metrics do the rating agencies look at for you guys?

There are a few that they tend to look at. Certainly, debt to EBITDA -- one looks at debt to EBITDA, one looks at net debt to EBITDA. So depending on which agency you're talking about. They do look at things like FFO to debt. They look at interest coverage. And then they also look at business risk. They look at capital allocation philosophy and other things that are less quantifiable. But as far as ratios, it tends to be either a gross or net debt to EBITDA, interest coverage and FFO to debt.

So you said that you didn't think ratios are all that useful given how much it swings, and yet that's what the rating agencies look at. So is there room to educate them or rethink how to look at the business?

We have regular discussions with them, and I think that's part of it. And then also before that -- and I think most of the agencies do accommodate for the cycles and do understand that there are parts of the cycles when some of your ratios are going to be stressed, maybe a little bit -- a bit out of bounds, if you will. We do accommodate for the nature of the industry and some of that variability. And then I think that's where things like capital allocation philosophy comes into play. That's where business risk comes into play to kind of help them sometimes bridge those periods of time or maybe some of those ratios where they would like to see them for a given rating.

Okay. So given all that, under what circumstances would you increase -- or will you increase your dividend? And how do you think about dividend versus share buybacks?

Yes. So I think we view the dividend as an important part of our capital allocation. Obviously, it's modest at this point and I think it's something that we're going to continuously reassess as we go forward. I do think that as time goes on, as our transformation initiatives begin to bear fruit or continue to bear fruit -- or more fruit and the CapEx intensity of the company declines somewhat and our balance sheet improves, I think that's going to be something that we're going to continuously kind of take a look at and adjust as appropriate. As it relates to kind of share buybacks versus dividends, obviously, our dividend is something that, regardless of where you are in the cycle, you want to be able to meet and -- that obligation and that commitment. And so we typically probably maybe be a little more conservative on that front, particularly given some of the company's history of having to adjust that. I do think that share buybacks are an important part of the capital allocation program as well, particularly as it relates to kind of managing excess capital. I think we do have good investments like we've talked about, particularly around transformation program that generate very, very strong returns, and I think we ought to fund those appropriately. But I think when we have excess capital in the system, I think we need to be thoughtful about how to return that to shareholders and to stakeholders as we go forward. So I would say it's an important tool in the toolbox. And as we've said before, I think maintaining a balanced program to where we don't get too far out over our skis in any one area, being sure that we're taking care of our balance sheet, we're taking care of our operations, we're investing in growth and returning capital on a regular basis. I think it's kind of the approach that we'd like to take.

Okay. So I'm going to switch over to more on the operations side. This is after all the operational decisions conference. This is close to my operator heart. To start, on your call last week, Joc said that the employees suggestion for improvements were driven by employing engagement and desire for the business to succeed, if I remember correctly. But that doesn't really answer the question in my view. So I guess the follow-up then is, how do you foster employee engagement to get there?

Maybe I'll start by commenting, but I also think that Corrine and Bruce probably have some real thoughts on this. One of the things that I think we saw particularly down in Brazil. I think it's a good example, although we've seen it in other parts of the business. With the synergy program, is that our employees at each of our sites they know those sites and that equipment better than anybody. And what you find is, is that they see opportunities. The question is, do they have the opportunity to raise those investments up, is there a forum for them to share those ideas. And then to get traction for the good ones to actually execute and see them through. And in the synergy program, as an example, in Brazil, there is a very, very formal process and structure and what have you to have those ideas bubble up, to screen them, and then to basically turn the employees loose to go and execute them. And then what happens is, and it becomes a cultural phenomenon. One of the things that you find is that when people at the site see that success, see that [indiscernible] green light to do something and that there's been success, well -- then there's a level of energy that begins to build around that. And all of a sudden, more ideas come up. And when you kind of foster them, that becomes part of the culture at the site and at the company, and people see that level of success, they want to be a part of it, and then they're going to raise their ideas. And so when we talk about seeing hundreds if not thousands of ideas and having to sift through them all, that's the dynamic that you're seeing. This is not a kind of a top-down here or some big investments we're going to make. There are some elements of that, but I would say that there are a lot of ideas that are actually bubbling up from the individual sites on the floor that are really good ones. And maybe if Bruce and Corrine have some additional thoughts on that, that would be great.

I wouldn't have a lot to add. I do think that -- don't get us wrong, the employees do have incentive structures that are aligned with the overall success of the company. So they are not getting an incentive compensation because they came up with an idea or the idea had x amount of savings. But if the company is doing better, they are invested and aligned in that to success. And they are engaged and excited to bring forward those ideas and see them be developed. They participate on the teams that are doing the limitation. It's changing their work environment. In a lot of cases, these are ideas that make things better and easier and faster and more efficient for them. And so they've got that benefit in it as well. And part of why they cheer about it.

Yes. Jonas, I wouldn't have much more to add. I mean, don't underestimate also the power of recognition. And I mean we spotlight these projects. We spotlight the individuals in various forms of media throughout the company, and people really appreciate that knowing that they've helped contribute to something, whether it's EHS, whether it's financial benefits, whether it's just frustration in something that's happening, as Corrine pointed out, in their job and execution, they -- that they like to see that, and we try to make a big deal around that within the businesses and even at the enterprise level.

As a Swede, this is something I cannot expect to see in Sweden, not in the U.S., but if it works, it works. So I was also wondering that it seems that you're modernizing operations quite effectively. But trading looks inefficient, at least from an outside view, right? You have cargoes going from the U.S. to India, while you have modern cargoes coming from Saudi back to the U.S. You're shipping to Australia. IPL ships from Australia to the U.S., is there room to optimize the trading system, either inside Mosaic or by using partners?

I think, Jonas, as we look at it -- and look, over the passage of time, maybe there are opportunities to streamline and maybe improve that system. But at the end of the day, I think our view is that fundamental economics really drive the flow of products. And there are a lot of different things that factor into that, whether that's some companies like Mosaic, we have long-standing customer relationships that we continue to service and that we kind of look through maybe the kind of the short-term or momentary arbitrage or whatever because there's a long-term profitability that we're really targeting to keep that relationship. You also have kind of seasonality in freight rates that can affect some of the underlying economics of that system. But I think at the end of the day, we kind of view it and participate in that arena based on kind of the most economic trade flows we'll get products. The best netbacks is where product will go. And again, maybe there's some approach over time where whether partnering or other arrangements that could be made more efficient. But again, I think right now, our view is that product flows track economics. And that's what you would expect over the long term.

Okay. In North America, you consolidated North American potash and phosphate segments into one. Can you talk more about the rationale? And it's been about 6 months, give or take, what synergies have you realized?

Bruce, do you mind if I -- maybe if you like to address that?

So I mean, Jonas, we learned a lot in our Fertilizantes business and how more the execution from mine-to-market was within the portfolio and saw advantages of doing that in North America as well through benefits and improved alignment all the way from operations to the commercial organization, better decision-making that would lead to enhanced profitability. And as we first announced in March, the combination of the 2 segments and then more recently, moving the customer-facing organization into the North American business as well, we believe those same opportunities that we see in Brazil, the Fertilizantes are going to be available in North America. Some early synergies, and we'll get to what we've talked about from a number standpoint in a minute. But you can imagine, potash and phosphates in their original segment lands were pretty large organizations, pretty large segments. Each of those segments had their own HR organizations, EHS organizations, maintenance, oversight organizations. We've been able to consolidate that and eliminate that duplication now with a one North American approach. We've also looked at best organizational design at the sites and within those kind of now centralized functions within North American and have seen benefits from a different approach through learnings on what phosphates was doing or what potash was doing north and south of the border to really harvest the best of the best. And we took very meticulous time from the announcement in March, all the way really to just about 6 weeks ago in mid- to late September, to leave no stone unturned and treat this as kind of a once in a lifetime generation opportunity to really think differently about how to structure the business and learn the best practices across the North American greater organization. And we have put into practice now those organizations, and I'll talk about that in a minute. The last thing was really deep diving into how we approach processes across the 2 segments. And such things as EHS policies and procedures, emergency response, for example also our maintenance practices. As much as we've been potash and phosphates in North America for decades and decades, we still had unique differences on how we approach things that cause either duplication of systems perhaps or inefficiencies that one didn't really know about than another was doing much better. So we've looked at that as well as capital execution, and we've seen benefits in that. Most of our benefits have come so far on the people side. As you can imagine, in the consolidation and elimination of some duplication of roles. We announced in our chapter 1 of $30 million of anticipated benefit from this integration by 2022. And we're definitely on pace to achieve that with largely the big structural changes have been made. We still have some that will phase in over the next 18 months. But the big return from a synergy standpoint is going to come in 2021. As 2020, as you can imagine, cost to achieve has been kind of high and is offsetting any of the short-term benefits, but that will largely be booked in 2020 and then 2021, we'll start to see the run rate benefits of that.

Okay. So they're still reporting a separate entity. So how do you actually run phosphate and potash on a day-to-day basis then? Where do they actually join?

Yes. I mean, well, they join in a couple of different places now. So first, make sure we're clear that they are 2 very different supply and demand businesses, and they're still treated that way. And we also look at this very differently, as Clint talked about earlier from capital allocation and the needs of those business. So we're going to continue to report those segments separately, not only for transparency reasons, but because there is some unique demands and needs in the arenas of the markets and obviously from a capital infusion standpoint. But on a day-to-day basis, we have an integrated business planning process that takes into account demand plan in both of those segments, supply planning, and sometimes supply planning overlaps because some warehouses in our network have both P&K stored in them, for example. And then we have production planning that goes into that and overlay the overall market dynamics for execution week-over-week and month-over-month. So really, that hasn't changed. The sites still have general managers that oversee kind of the day-to-day production execution. That hasn't changed. What has changed structurally is now we have a Vice President of Operations that reports to me, that in the North America business oversees all of mining, which would include mining in Central Florida as well as mining in potash in New Mexico. And then we have a Vice President of Operations at overseas concentrates phosphate fertilizer production. Again, and that all reports into me. And then we have siloed functional support reporting into me for all of HR across the entire North American business, all of public affairs and government relations, both north and south of the border. And then operation services, which is kind of our technical groups that support both north and south of the border as well. So day-to-day, not a lot has changed. But there are consolidation points that are different. And we're seeing great advantages of sharing best practices very early on in this process, particularly around some of the digital and technology infusion. Although potash and phosphates are different processes at the highest level, there's still application of these technologies in both geographies and in both segments that we're seeing a lot of advantage.

Okay. You also set up a shared service center in North America. This seemed to be a common thing like 5 to 10 years ago. So what are you hoping to achieve? Why did you not have it in the past?

Yes, Jonas, if we could ask Karen to talk about shared services as that falls under her. Is that reasonable?

Happy to do that. First of all, we did do some of that in the past. We did have some shared services in North America. And what we did in Brazil when we stood at the Uberaba shared services center, when -- we went beyond what actually was in the service center in North America. That was really the model and the blueprint and the proof of concept that we could get more value by combining these functional areas under this 1 envelope and with the continuous improvement in the automation and the process mapping behind it to get value. And so what we're doing today in North America is expanding what we already had with an eye towards Brazil and their success, and we should gain even more value by doing those things centrally as opposed to distributed across the business.

Okay. Well, is there a financial impact from doing this?

Well, there's a financial savings from doing this. We expect wave 1, which should finish up in 2021 should be $6 million.