The Mosaic Company (MOS) Earnings Call Transcript & Summary

Welcome to Exane BNP Paribas 23rd European CEO Conference and today's presentation with global potash and phosphate producer, Mosaic. [Operator Instructions] My name is Rikin Patel and I work in the chemical stream at Exane BNP Paribas. I am now delighted to hand over to Mosaic's CEO, Joc O'Rourke; CFO, Clint Freeland; and VP of Global Marketing, Jenny Wang. Joc, please take it away.

Well, thank you, Rick, and hello, everyone. I appreciate the opportunity to be here with you today. But before I start, I'd like to just remind you that I will be making forward-looking statements, and I encourage you to look through our notes on that. Let me start by focusing on the results that you should have been able to see on your screen now. The steps we have taken over the last 18 months to drive significant positive shareholder value are having a real significant impact on our business. Mosaic is delivering results through proven transformational outcomes, a global footprint that provides strength and agility, competitive products and leadership that remains focused on positioning Mosaic for continued success. Results like this don't happen by accident. Our 6 strategic priorities are fully embedded across Mosaic and understood by all of our employees, which means they provide enterprise-wide alignment and ensure that all of our eyes and hands remain focused on what we can control, which is to deliver to our shareholders and other major stakeholders. Now while I'm pleased, I'm not surprised by our results this year, it's also important to note that we're not done yet. There's a long way to go. In our North American Phosphates business, next-gen digital transformation initiatives are well underway and expanding into the next phase of deployment. Our road map for the next 3 years impacts nearly every aspect of our operations, and we are well on track to deliver our target of $175 million of incremental EBITDA by 2023. In our North American Potash business, the Esterhazy K3 mine was ramping up quickly. When complete, it will be one of the lowest-cost potash lines in the world. This transformational initiative is setting the standard for innovative and safe mining and driving our 2023 annual EBITDA target of $225 million. But before I move on, I'd like to address our announcement on Friday about our decision to immediately stop production at K1 and K2. And our plan to resume operations at Colonsay. While we've successfully managed brine inflow at K1 and K2 since 1985, inflows accelerated over the past couple of weeks, and we were faced with inflow rates that exceeded our pumping capacity. On June 3, we made the decision to stop all work as inflows reached the point where it could be kind of potential risk to the safety of our underground workers. So we immediately accelerated the transition to K3. We also decided to resume operations at Colonsay. Now Colonsay at 1.5 million tonnes had a cash cost of roughly $100 per tonne prior to our idling the facilities. And while that is higher than Esterhazy, we're changing the operating model there and believe there's an opportunity to bring future costs lower, but we won't know to what extent until full operations have resumed. Now we've always viewed Colonsay as an option to be exercised in strong market like the current environment and a way of mitigating inflow risk. We will use the asset when the market needs it and if it's sustainably profitable over the long term. Colonsay provides an attractive opportunity that is very profitable in the current market, and we will continue to run it as long as it stays profitable. So let's put all this into a perspective. Today's potash markets are very tight and inventories are very low. This tightness is expected to be exacerbated by our announced loss of about a 1 million tonnes of production in 2021. We believe this tightness will continue well into 2022 as the outlook for new supply over the next few years is relatively limited. So we will not sell as many tonnes as we originally thought in 2021 as our expected sales for the rest of the year are now approximately 8 million tonnes. However, revenue losses related to these tonnes could easily be offset by expected price increases. Looking forward, by the middle of 2022, we have fully transitioned Esterhazy to K3. As we originally planned, K3 tonnes combined with Belle Plaine's capacity will provide 9 million tonnes of the lowest-cost production in North America. In addition, we will have incremental volumes from Colonsay, generating attractive gross margin at today's prices. As a result, the flexibility in our portfolio of assets and what we have done with them, we believe we are very well positioned not only to recover from the early transition but to capitalize on potash market strength that we believe will extend well into 2022 and continue to deliver exceptional shareholder value. So let me step now over to Mosaic Fertilizantes. This continues to deliver impressive record-setting performance as we capitalize our position in this one of the real powerhouse agricultural markets in the world. Here, our first grower advantage is really starting to give value. We are exceeding the 2023 transformational targets, which is driven by operational improvements and aggressive sales growth initiatives. We believe that we can add up to 2 million tonnes of distribution sales without any additional capital spending. Altogether, we expect to generate adjusted EBITDA growth of $700 million of incremental value by 2023, all from Mosaic's initiatives alone without taking into account the continued positive trends in our market, which I'm going to cover in a moment. This positive scenario gives us the opportunity to strengthen our business and our balance sheet as we continue to execute our capital allocation strategies. Our approach will remain balanced across a number of priorities, including quick payback, high-return capital investments, debt retirement, and shareholder returns, like our previously announced 50% dividend increase that we announced last quarter. Now all the work we have done and continue to do to improve Mosaic's competitiveness will serve us well in any market. That said, I believe that Mosaic's performance will appreciably accelerate given the combination of our internal initiatives and the promising market dynamics we're facing today. Farmer economics around the world are very strong, giving growers the incentive to maximize yields from every acre. As a result, global fertilizer demand is running really high. With fertilizer inventories low, prices for our products have risen to 8-year highs for phosphate. And potash prices continue to move upwards. We believe these compelling market dynamics will continue throughout the remainder of the year. Finally, we also take our commitment to deliver shareholder value very seriously. And we also take very seriously our commitment to achieve the promise of our mission, which is to help grow the world -- the food the world needs responsibly. In that, in 2020, we expanded our view of sustainability by launching 13 new environmental, social and governance performance targets. These include reducing greenhouse gas emissions and freshwater used by 20% per tonne of product by 2025 as well as targets for a more diverse and inclusive corporate culture, more employee involvement hours and many others that really change who we are as a company. So to summarize this brief chat, Mosaic is performing very well on many fronts to the benefit of our shareholders and all of our stakeholders. And we are very positive about our outlook ahead. We're setting aggressive transformational, financial and ESG targets, and the company is well positioned to deliver on all 3. I'm energized about the significant opportunities before us. And I look forward to answering your questions about our strategies, plans and progress. Rikin, back to you.

Thanks, Joc. That was very clear. I'll start by asking a couple of questions of my own before we turn over to the audience. I think a good place to start would be your announcement from Friday on Colonsay and Esterhazy. Maybe just from a broad perspective, can you just walk us through some of the puts and takes when it comes to the costs associated with accelerating the closure of both K1 and K2, along with the ramp at K3 and Colonsay?

Yes, sure. And let me start off by saying, as I mentioned earlier here, although, our paramount focus is the safety of our employees and making sure that we're doing the right thing, the responsible thing as we manage this. So a couple of weeks ago, the rate of inflow accelerated at Esterhazy K1 and K2. And we took the difficult decision to stop that mine early because we felt we could put employees at risk if we continue, and we're not willing to do that. But that started a series of events. First of all, K1 and K2 were providing approximately half the tonnes for Esterhazy at this stage. And so now in the short term, that will be stopped. And that's what really created this 1 million tonnes gap until we get the K3 second phase running, which we expect to be somewhere towards the very last quarter of this year, although we are working hard to accelerate that into October. We do expect, at that stage, we'll be able to really ramp up K3. Simultaneously, we are bringing in -- starting to work on bringing employees back to Colonsay to restart that operation, which again, is there to not only mitigate the loss of tons from Esterhazy, but it's in recognition of a strong global market right now where Colonsay would be quite profitable and will be quite profitable with -- at these prices. So for a couple of reasons, we've done that. The basic implications from our perspective, of course, will be a tight market that will be created. We will lose some sales. As I said earlier, we will go to probably 8 million tonnes of sales this year down somewhere in that 800,000 to 1 million tonne range. We will, however, see a price rise which should offset at least some of that. And then as we get to the end of the year, we'll have Colonsay to take up the gap. And then into next year, we'll have Colonsay running at full capacity and Esterhazy both running at full capacity, and we'll be back to where we were before. In terms of the price improvements, it has been so dynamic that I wouldn't mind handing this over to Jenny to just talk about what has happened in terms of the price dynamic in the potash market.

Sure. Before the announcement was made on Friday, the market was already in the rally with a concern on the potential sanctions against BPC. Since we announced the closure of K1, K2, we saw price increases at dollar on Friday by $20 per short tonnes. And then other $20 price increases in Midwest warehouses in the U.S. on Sunday as well. This morning, when the Brazilians came back from holidays, the price quoted from the market has indicating somewhere between $50 to $100 increases than the last week. So basically, the market is very dynamic. The buyers are very clear that this is a short market -- tight market. We are building up the prices. On the supplier side, it looks like nobody is really in the market quoting the price, $100 price increases in Brazil was indicated at this time, very dynamic market.

Thanks, Jenny.

Sure. Thanks, both. That's very clear. Maybe just one quick follow-up and this sort of ties into the strategy as well. To your point, the lowering of production this year will come into what is already quite a tight market in potash. Once you do reach that 10.5 million tonnes of operational capacity in 2022, beyond that, would you explore or consider further capacity additions if that view of the market is so constructive in the midterm?

Well, what I would say and what I have been saying and we've been saying is, look, we do see the markets growing. I mean they grew a lot more than we -- than anyone expected last year. I think the market growth was 6 million tonnes last year. And we're looking at probably another 2 million tonnes of growth this year, which means the demand, particularly internationally for Canpotex tonnage, which is the tonnage we sell internationally through that joint venture with Nutrien, the demand has been going up. And we fully expect that Canpotex will have to increase its sales. So we do expect that to happen. But having said that, there is a lot of latent capacity within ourselves and Nutrien right now that we can bring to market over the next couple of years without any need for new production either brownfield or greenfield. So at this stage, there seems to be no immediate need for those kinds of expansions.

Sure. Makes sense. And that segues nicely into the next question I had. And this relates more broadly to the potash market. But as everyone know on this call, there's been a lot more talk around BHP and the Jansen mine over the last couple of weeks and suggestions of a potential cooperation with one of your peers. I'm just curious what impact you think any such co-operational partnership could have in the market over the next couple of years? And if you could just give us your view again on the Jansen mine and how you think that will impact the market, especially in this new environment we have in ag?

Well, first of all, let me say, we have no more information than what's publicly available. So at this stage, I can't really I tell you what the structure might look like, what they're thinking or anything else. So -- but having said that, I do believe that if Nutrien were to operate and market that product, I think that's good for the market. It will come on a more rational and controlled way. You also asked the need for Jansen in the short term. And I will say, I've just said we have 2 million tonnes of capacity at Colonsay that by the middle of next year or by early next year will be incremental to our 6 million tonnes at Esterhazy plus 9 million tonnes -- or sorry, 3 million tonnes at Belle Plaine. So we'll be in the range of 10.5 million to 11 million tonnes of capacity. Nutrien has stated that they have 5 million tonnes of incremental capacity that they can bring on. So I certainly believe that those brownfield or -- sorry, latent capacity tonnes should come on long before the BHP tonnes. Now Jansen itself, even by their estimate, if they made a production decision tomorrow, will take 5-plus years to complete and then a ramp-up. So it's hard to say what the need for the market will look like in 5 years, but if it continues to grow like it does, I would be of the view that that's probably not going to be all that disruptive as it doesn't accelerate too fast.

Sure. Makes sense. And then just moving on to another topic within potash, which has been quite prevalent over the last couple of weeks. Belarus has been back in the news over the possibility of EU and possibly even U.S. sanctions being imposed on potash exports. I just wonder if you could help us understand from a broader context what impact that could have on the global potash market, i.e., trade flows into Asia and Europe? And then secondly, if Europe does go short of potash in the near term and domestic or local suppliers cannot fill the gap, would Mosaic or Canpotex be able to conceivably fill that gap, assuming the netbacks are favorable?

So let me start with the expected sanctions against Belarus. My expectation, I guess, is that Europe will do something, the EU will do something there. I wouldn't guarantee it. But if I was buying into Europe, I would be very cautious about buying Belarusian product because of the fear of those sanctions. And what we're hearing in the U.S. is the same sentiment. There's some 700,000 tonnes a year from Belarus that comes into the U.S. And I believe that the fear of getting caught out with sanctions would be enough that people would be looking for alternate suppliers. So I think the -- it's almost a given that it will be unlikely that you'll see the -- or you'll see a decrease in tonnage going to both the U.S. and to Europe, which means that the Belarusian or BPC will have to export to India, China, Asia and some buyers probably in Brazil because they'll be excluded from the European and the U.S. market. To fill that gap, in Europe, I would suspect that the Russians, EuroChem and Uralkali, will fill part of that gap and the rest of the gap would be filled by the Israelis, the ICL, and maybe Jordanian potash. So there's enough potash out there for the European market. And really what it would come down to is trade flows. And I think that the BPC will have to go to lower return markets and the higher return markets will be taken up by those suppliers. And maybe BPC will ship more tonnes into Russia and that domestic FSU market. So look, trade flows will change. I think it means short-term uncertainty for supply, particularly into Europe and U.S. So I think that's the reason you see price moves. But ultimately, it'll figure its way out like all these things, assuming that they can still produce.

Sure. And then maybe just pivoting to phosphates. I'm just curious, how do you think India's recent decisions to raise phosphate fertilizer subsidies impacts your view for global demands during 2021. Because if I remember right, that was a part of your guidance for the market, which you were maybe less positive on a couple of months ago. So I'm curious how that decision impacts your view of the global market.

Right. So I'm going to let Jenny talk a little bit about the whole supply and demand. But let me say, when we were looking at this at earnings time last quarter, the only real clouds on the market that we could see were Indian import volumes. And the reason was is because there was such a mismatch. I mean, India is such a controlled market that there was quite a mismatch between what the global market was and what the Indians could afford to pay for their phosphates. Now since then, as you mentioned, the subsidy has been increased by 140%, largely removing that risk. So now we expect -- for the Kharif season in India, we do expect a very good phosphate demand. And last, I saw the in-country inventory was down over -- well over 1 million tonnes, possibly 2 million tonnes from previous years. So there is not a lot of inventory in country. They will have to import to meet the demand of this year. Jenny, do you want to just give a highlight of what the market looks like overall?

Yes. So with the subsidy increases, the farmers' affordability is dependent on retailer price is probably more than affordable for the farmers. We have seen very strong response from the farmers since the subsidy situation was changed. With a very favorable monsoon forecast and a very positive crop prices, farmers demand are going to be -- probably going to be beyond anyone's forecast for sure. We will have more growth in India for DAP than last year. The last bit of the uncertainty, which everyone's waiting for the clarify was really the importer's economics. That is not a real issue. It's really kind of the value allocation between farmers and the retailers. It will get solved with such a low inventory in India. All in all, we see this is a very positive news for the phosphate global demand.

And do you want to just talk a little bit about where phosphate prices have gone to lately?

Yes. So globally, phosphate price has increased over the last 2 weeks as well. In North America, NOLA MAP barge price has increased to 640 of short tonnes, which is $700 per tonne -- per metric tonne. Brazil price has reached to the same parity last week. Today, we saw another $15 price increases in Brazil for MAP, which is $715 dollars per metric tonnes for Brazil. So this is -- I would say that is $50 price increases over the last 3 weeks. With the resolution of subsidy situation in India, we see the price gradually increase at CFR level as well at the 575 in India.

So bottom line is global markets are strong, and the clouds that were on and -- is being driven by great commodity prices for agricultural products, which means that there's a great incentive to farm, great incentive for more acreage, great incentive to maximize fertilizer on the acreages you have. And so all of that is driving globally, a great demand picture. And that's driving tightness in the market, which is a good place to be.

That's great. Just one last question for me before I turn over to the audience. Maybe just on Mosaic Fertilizantes. I mean you guys have done a great job in executing the productivity measures there over the last couple of years. I'm just curious, for 2021, and I guess, possibly in the first part of '22, given the inflationary pressures that we have in the global context but also more so in Brazil, do the productivity measures that you have in place or to come over the next year, are those enough to offset current inflationary pressures in Brazil?

It's a great question. And there is some uncertainty there, which I would have to acknowledge. I mean we're starting to see, at least, in the Brazilian currency, the real, we are starting to see significant inflationary pressure. And part of that is real inflationary pressure. And of course, part of that is the devaluation of the Brazilian real over the last year or 2. So what -- how I would summarize that is in Brazilian real, we're definitely seeing inflationary pressure, particularly for anything that is based in U.S. dollars. However, in U.S. dollar terms, I think it's a lot more controlled, and we're doing a lot better on that basis. The one thing I will say about the overall economics though and driving towards better profitability is, of course, we also sell -- they also sell their products in U.S. dollars. So the exchange rate is certainly working in favor of a very profitable environment for the Brazilian farmer. And it's really been the high point of the Brazilian economy, the ag sector, and it continues to be. And so we continue to see great growth in product, we see -- and demand. And really, that sets up well for us. So in balance, yes, we're going to see a little inflationary pressure, but I suspect it's going to be quite manageable against the commodity pricing.

Great. That's very clear. And at that point, I will turn over to the audience for some questions. We have a couple in on phosphates in particular, around the ITC's decision earlier this year to impose duties on Moroccan and Russian exporters. The question here is asking, are you guys satisfied with the 20% imposed on OCP exports? And I guess you could overlay that with your general view on how that decision has impacted the market?

Yes. Well, I mean, am I satisfied? It is what it is. All we did was say we believe there was a case to be made that the importers to the United States were unfairly subsidized by their governments and that those subsidies were being used to damage the U.S. market, both of which were decided to be affirmative by the -- first, the Department of Commerce and then by the ITC. So from our perspective, there was some level of vindication that, in fact, these people do benefit from unfair government subsidies. We were not the judge in that. We were only the complainant. So I think that's the first point. And what has it done though, it's really balanced. So while the U.S. market was probably $20 or $30 below global markets for the 2 or 3 years before, the U.S. market has now gone back to global parity. I mean you've just heard Jenny, it's almost exactly a global parity. And that's all we really asked for. So if you ask me are these subsidies enough? I mean, they've allowed the market to go back to global parity. We're quite happy to compete in a free market environment. We just don't want to compete on an unfair level playing field. So in that sense, we achieved the results we expected to achieve. And now you have imports -- you have the same imports or even more because the U.S. demand is high right now. But they're coming from different places. They're coming from the Jordanians, the Egyptians, the Australians, the Mexicans and others who all are -- and the Saudis who are all producing. And they've been previously excluded from the market. But now with global parity, they're attracted to our markets. So that's a good thing. In terms of global trade flows, I think I'd probably answered that question with this, which is we didn't change the overall supply and demand balance. What we did was probably pushed Moroccan -- particularly Morocco, I mean, I guess that's the biggest tonnage coming into the U.S. I assume the Russians probably refocused on Brazil, Europe and the FSU. Morocco is focused more on India, Brazil. And so that's really made Brazil the more competitive market. But as you heard, prices are going up in Brazil. So this -- underlying this is the global tightness.

Great. And we have a couple of questions on ESG and what you guys have been doing in the last year in biofertilizers and some of the partnerships you've engaged in. The question here is asking what more can you do in this space? I suppose, from a capital allocation point of view, are you prepared to invest more in markets like this? And where, I suppose, regionally, I would add, do you see the most opportunity for some of these products?

Well, look, the whole area of the biologics and our investments in those, what we're really looking at there is the whole area of fertilizer efficiency, the fertilizer use efficiency, if you want to call that nutrient efficiency. And in that, we are making investments in areas that we believe can impact that over time. Those are relatively speculative investments, but we're building a product -- pipeline of products that can come to market and can change. And so from an ESG perspective, what's the benefit of those. Let me start by saying, as a producer, we're a relatively low carbon emitter when you compare ourselves to the nitrogen companies or really anybody in our space. Our processes are not carbon dioxide-intensive, if you will. So we're a relatively low emitter to start with. But how can we impact the market? There's a couple of areas. One, if you are -- the ESG aspect. One, if you can achieve higher yields from the same acreage, you're going to impact globally the agricultural impacts to climate change and any other environmental thing. If we can create a better use efficiency for both nitrogen and phosphate, we can hopefully stop or greatly reduce the amount of runoff from those 2. So again, a great opportunity. And then if you look at some of our products we're buying or we're investing in, ones that allow corn to fix nitrogen from the air, you could greatly reduce the amount of greenhouse gases emitted by making nitrogen using traditional methods. So if you compare the opportunity, I guess, which one way you could do it is the green nitrogen. The other way is find a way for the plant to do it themselves. So we think there's great potential in all those. They have an economic impact, obviously. And we're still a for-profit company, but there's a lot of good reasons for investing in these types of technology from just a impact of agriculture on feeding the world.

That's great. And I think we've got time for one more question. And we've got a couple of people asking about what's going on in China, both with respect to potash and phosphates. And I guess on the potash side, the key question is timing on the next potash contract. And then on phosphates, if you could give us some more color on exports and production for the rest of the year, that would be very helpful.

Okay. Well, I'm going to introduce this by highlighting that we have a quite an attractive distribution business in China, which reports up through Jenny. And that gives us a really good insight into what goes on in China as well as obviously a profitable business. But one of the real key benefits is we do have people on the ground in China that really see the day-to-day of what's going on. So I'm going to hand it straight over to Jenny to talk about the dynamics for potash and phosphates in China.

Sure, Joc. On potash side, we are seeing the latest import inventory already moved down to 2.5 million tonnes, which is below 3 years average, which is indicating that the supply in country are very tight as well. So what does it mean to the next contract negotiation? Well, definitely, the buyers will want to have the negotiation started now. In the global tight market situation, probably it's going to be difficult for them to get any suppliers to commit to a price that they like. So from our perspective, it does not really matter when the next negotiations going to happen. It really the matters for the buyer side. So that's specifically potash. And lastly, on potash, the in-country in China, price already appreciated over the last few months. And yesterday, after our news were out on K1, K2, in-country price increased by $25 as well. So if there was a contract to be settled today, the price will be at, at least $100 higher than the last contract price. So that's the potash market. It does not matter for the market when they're going to settle the contract. On phosphates side, the phosphate industry has gone through a lot of structural changes as we have -- we've been communicating with our investors over the years. The latest one, the question was with such a good international phosphate prices, are we going to see more exports out of China? Maybe. It's probably in our base case forecast. We think it is -- the exports out of China will be cleared at a similar level as last year. The reason we are saying that is that with the capacity reduction over the last 5 years, many producers, if not all, have reached to the cap of the operating rate. They are able to produce a lot more, but they are not able to export a lot more. Basically, most of the tonnes are -- incremental productions are kept in China for domestic demand, which is growing as well. One proofing point is that in the month of April, all the production of DAP has reduced 10% year-over-year or month-over-month. That tells us after running very far and very high operating rate, the producers have come to the point that they cannot produce more. So that's a proof that we believe the structural change in China for the phosphates industry is going to be ongoing. We believe that availability for the export of phosphate out of China will be limited.

Thanks, Jen.

Wonderful. That's great. With that, we have run out of time for this presentation. I would like to take this opportunity to thank, Joc, Clint and Jenny for joining us today at our CEO Conference. As a reminder, the next fireside chats will be with Nutrien and Seeker. I hope you all enjoy the rest of your day and have some good meetings. And thanks for attending. Thank you.

Thank you, Rikin.

Thanks.