The Mosaic Company (MOS) Earnings Call Transcript & Summary

Good morning, everyone. My name is Ben Isaacson. I cover agriculture chemicals and fertilizers at Scotiabank. We're very pleased to have with us today Mosaic, and in particular, Clint Freeland, who is the CFO; and Andy Jung, Vice President of Market Strategy Analysis. Good morning, gentlemen. Good to see you. Hope you guys are doing well.

Let's just jump right into it. We saw the CBD announcement last week by the Department of Commerce. And maybe you can talk a lot about -- there's a big debate going on about this NOLA premium. And that premium has swung from a deep discount last year and that premium has started to erode. And so talk about kind of what you think about that right now? And how do you see that playing out over the next 6 to 12 months?

Yes. And first, Ben, thanks for inviting us to join you today. So as you noted, we have seen a swing in NOLA discounts and premiums over the past handful of months. And one of the other dynamics that we've seen before we get specific to that is just a general increase in global prices as a result of much tighter global supply and demand. And then on top of that, we have seen some movement in how NOLA moves relative to global prices. And I think that's what's really influenced by the CBD filing. As you noted, for probably 18 months before our filing, NOLA traded at about a $20 or so per tonne discount to global prices, and with the filing of our CBD petition and some of the changing trade flows as a result of that, NOLA did trade up to a pretty meaningful premium, call it, $40 to $50. That has begun to, as you noted, begun to subside. I mean it's closer, probably, $20 today. And as we kind of think about it, our view is that ultimately, NOLA should trade in line with the global phosphate prices. Certainly not at a discount. I wouldn't expect it to trade at a meaningful premium. We think it should trade in line with global prices. You're obviously adjusting for things like logistics cost and freight and what have you. But that's kind of our expectation longer-term is that NOLA should price rationally with global phosphate prices and other price points around the world, again, adjusted for things like logistics and freight.

So Morocco and Russia have pulled out of the U.S. market for now. Who is filling that gap? And who is filling that void? Where are those tonnes going and which tonnes are coming in?

Yes. So one of the things, as you noted that we've seen, obviously, they have stopped, at least, for now to the U.S. And what we have seen is that suppliers that have historically not sent a lot of products into the U.S. have started doing so. So not only do you see us kind of giving some thought to our product flows and maybe directing more tonnage into the domestic market, but you've also seen other international suppliers from Australia, from Mexico, from Tunisia, from Egypt, from other locations that historically have not sent tonnes to the U.S., that now are. And frankly, we kind of view it as -- that's a sign of a healthy market. And that's the -- that we think is constructive, where price is dictating product movement and flows.

And let's take a step back in terms of phosphate outlook. You talked a little bit on your Q3 call, phosphate being a little bit more balanced in 2021 versus the tightness we've seen in 2020. A couple of the puts and takes there is inventory rebuilding and what China is going to do. Can you give a comment on those specifics and how that relates to the balanced outlook you have for some time next year?

Sure. And Andy, if I could ask you to comment on that?

All right. Sure thing. We'll start off with China. And this year, we expect that their exports are going to be down to about 9.3 million tonnes versus 10 million tonnes last year. Looking into next year, we think they'll be down slightly. At least, that's our baseline forecast, but there's a couple of interesting dynamics in play that could further limit Chinese export availability and that is, domestic demand has now, after several years of fairly linear and significant declines has stabilized and actually looks poised to turn higher next year, particularly if you look at corn pricing in China at near $10 a bushel. There's an incredible incentive to maximize yields. At the same time, much of their industrial phosphate industry that was predicated upon thermal phosphoric acid has continued to shut down. And to offset that lost production, other fertilizer producers are diverting wet process acid from fertilizer production, purifying it further and converting it into industrial phosphates. So you've got those 2 factors at play that could make for more downside to Chinese exports next year. Then on the inventory side, and I think this -- I'll have to confess that I perhaps don't do an adequate job of illustrating this, one, because it's fairly tough. But if you look around the world, and we don't have perfect visibility into inventories, but we do have a few pockets we can look to. And pretty much anywhere you look, whether it's North American producer inventories, which Mosaic is obviously the largest, our inventories are lower year-over-year. The China Producers Association, they announced that their producer inventories are lower year-over-year. India, channel stocks in India, which we have visibility to, they're down roughly 50% year-over-year. So you look at the opportunities for not only a rebuilding of inventory at the producer level, but also within the channel, which we think has been pulled incredibly low here in 2020. Next year, if anything, I think the risk to our shipment forecast is to the upside. And therefore, we're very comfortable with our position that the phosphate market looks balanced next year from these much -- versus the tightening we saw in 2020. But again, I think the risk would be that we'd see further tightening next year.

Are there -- is there new capacity coming on in China? Or are there further closures that you expect to see next year?

There's nothing beyond the -- there were 3 facilities closed this year. We don't see or forecast further closures. It's likely that there could be 1 or 2 in the years ahead. But as I mentioned earlier, with those thermal phosphate producers being shuttered, you have the basic equivalency of a closure in the fertilizer business because those fertilizer producers are now diverting their phosphoric acid into industrial use. So the net result is essentially the same.

Let's jump into potash, if we can. We've been told for, I think, about a year now that high port inventories in China would eventually subside as that product moved inland and we've been told anecdotally that inland inventories were always low. But yet, the port inventory has remained stubbornly high. What's the reason why it hasn't moved inland or we haven't seen those -- that improvement? And do you expect that to change over the next 6 months?

And, Andy, do you want to comment on that?

Yes. I can certainly put a few points out there. Port inventories have been stubbornly high. Imports have continued to pace here in 2020. They have now finally slowed in November and we'd expect the same to continue into December. And that's including major suppliers like Uralkali, EuroChem, Canpotex, putting their product elsewhere and not continuing to fill that channel. Port offtake continues to be pretty robust. So we would think over the course of November and December that we would see those port inventories starting to pull lower. And also an interesting dynamic is the change to the the mechanism by which their strategic reserve for potash is measured, which will likely mean that port inventories will actually have to show a higher physical volume than they have in the past because there is an audit mechanism to ensure that those physical tonnes are truly available at the port in the reserve stockpile. But I think that as we transfer from 2020 into 2021, early part of next year, we should see an impetus to get a contract settled much more quickly than what we saw here in 2020.

Clint, let's talk about capital allocation for a moment. So given improvements you're seeing in both major commodities that you produced. How does this change your capital allocation philosophy? Could we see buybacks? Could we see a dividend bump? What are your thoughts there as we look into '21?

Yes, Ben, I think as we go forward, I think our approach to capital allocation, I don't think really materially changes. I think our approach is to try to have a balanced program, where between debt reduction, investment and returning capital to shareholders, I think we've talked publicly about continuing to reduce debt on the balance sheet, targeting up to $1 billion in debt reduction over a period of time. We've got some debt maturities coming due over the next 2 years. So we kind of have a window of opportunity to begin making progress on that. We've also, I think, talked quite a bit in the last 6 weeks or so about some of the transformation and organic investment opportunities that we have in the company. So certainly, those will remain at the forefront. And then, again, as part of a balanced program, I think looking at returning capital to shareholders over time is also an important part of that. I think as the -- particularly as the transformation initiatives take hold, our cost structure improves. We see that flowing through in earnings like we have been seeing. I think that gives us more room and more comfort with kind of taking a fresh look at the dividend. I think that's something that we do look at on a pretty regular basis, and I think we'll continue to do that. And then I think share buybacks should be a part of that program. We did some share buybacks last year, but I think that will remain on the table as we go forward to supplement the dividend kind of at the right time.

When you think out 5, 7, 10 years from now, how do you want your EBITDA profile to look, both from a product mix point of view, whether it's potash phosphate for MF? Or from a geographic point of view? Are you where you want to be? Obviously, you want to make the size of the pie bigger. But in terms of the slices of the pie, is that the best mix?

I think we're generally happy with the mix that we have. But I do think as we look at Brazil, I think there's a real opportunity there. Not only is it one of the largest agricultural markets in the world, it's the fastest-growing agricultural market in the world. And at this point, I think we have a very, very strong competitive position there, and one that we should look to leverage and to push. And so I think as we look at our portfolio and look at kind of where are the natural areas to grow, I think it's probably Brazil that, that's kind of more of our growth platform relative to maybe the other 2 businesses. Although I think there's still a lot of potential there as we've tried to demonstrate with some of our transformation program. So I think as we look out 5 to 7 years or more, I think, kind of seeing a balance in that portfolio between those businesses, maybe with a little bit faster growth rate in Brazil is what I would expect.

Just a couple more quick ones, if I may. As the U.S. presidency transitions from Trump to Biden, what are the different puts and takes on how it affects Mosaic, whether through the energy policy, agriculture taxes? What are all the considerations there?

Yes. And I think it's a bit early to tell on that. Certainly, one of the things that's kind of been front and center is around tax policy, and we'll have to see. Obviously, there's still some dust to settle on kind of what happens in the Senate and how much flexibility there is on policy, but that's something that we're obviously keeping an eye on. But I think at this point, it's probably a bit early to tell on some of these other areas, again, kind of depending on where a number of things shake out.

Can you just briefly highlight your ESG road map? And over the next few years, and starting with senior leadership, how are you incentivized or motivated to kind of execute on your ESG plan?

Yes. One thing, Ben, that I would note is that sustainability has been a focus of Mosaic's for a long time. I think we've been putting out annual sustainability reports for a decade. Certainly it has been at the forefront of our mind, been part of our investment program and how we run the business. Just recently, earlier this year, we re-upped our 5-year commitments, our 2025 commitments. We have 13 new targets across a wide variety of areas. And we're looking to make progress, obviously, on all of those. When we think about how senior management is incented, there are currently mechanisms today and some of the incentive programs around safety and EHS and some level of sustainability. But I think that is an area that may evolve over time. We've been having a number of conversations with some of our large shareholders around kind of what are they seeing, what their expectations would be? And I think that's something that I think is something that we could see evolve over time because it is an important part of our company, of our decision-making and how we want to run this company. And trying to align that with the appropriate incentive structure is important to us. But again, I think that's probably an evolving topic for us at this point.

And then, finally, any key takeaways you want to leave investors with?

Ben, I think the things that I would note is that, obviously, we're seeing more constructive markets for our key products. But beyond that, the company continues to make very significant progress on our transformation initiatives. And again, over the last 6 weeks, we've had a couple of investor calls to outline what those look like and the impacts that those can have. I think we've already started seeing some of those impacts in some of our financial results, and we would expect that to continue over time. So I think as we go forward and we see an improving cost structure and more efficient operation, hopefully, teamed up with a more constructive market environment. And at the same time, allocating capital appropriately, strengthening our balance sheet and improving the resiliency of the company, that all of those factors should be coming together to really improve the company as we go forward.

Well, gentlemen, we're pushing up against time, unfortunately. But I want to thank you both very much for taking the time to chat. Good day, and look forward to talking to you guys soon. Stay safe.

All right, Ben. And thank you, Ben, for having us. Really appreciate it.

Thanks, Ben.

Thank you.