The Mosaic Company (MOS) Earnings Call Transcript & Summary

Good morning, everybody. My name is Ben Isaacson. I'm the chemical and fertilizer research analyst at Scotiabank. We're very pleased today to welcome The Mosaic Company. And with us speaking is President and CEO, Joc O’Rourke; and Jenny Wang, Vice President of Global Strategic Marketing. Joc, before we jump into questions, do you want to kick it off and just give us a quick 2- to 3-minute overview in terms of where you guys are at right now and what the outlook is?

Sure. Thanks, Ben. So let me start by giving you 3 things that we expect here in the next little while. First of all, we absolutely expect the market will remain strong for at least the next season and probably beyond that. Our company is really in a great position to take advantage of this strength and generate very significant cash flow over the next number of quarters. And we expect to deploy that excess cash in a very balanced method. So our markets are strong. Global grain inventory are very low. Stock-to-use ratios are at a range where one expects to have high planting. We expect strong pricing and, of course, because of that strong fertilizer use. And it's estimated that 60% of yields are attributed all to crop nutrients. So this really feeds our belief that the fertilizer demand is going to continue strong. We are benefiting from the strength of the market more than ever before because our transformation efforts have lowered our costs, expanded our business, both geographically and through the continued growth of our premium volumes. So what this means is we're going to generate significant excess cash. And we expect to deploy that in a balanced fashion. And to emphasize that, let me look back on the last quarter or 2. We've repurchased $50 million worth of our own shares, including 25% of the Vale positioned [indiscernible]. We've retired $450 million of long-term debt. And this is in addition to raising our dividend from $0.20 a share up to $0.45 a share in 2022. And then on top of that, spending $450 million on various opportunities, including the completion of our Esterhazy K3 shop. So a balanced approach. We continue to strengthen our balance sheet, invest in our business and return money to shareholders through dividends and buybacks. Where we do invest in business, I want to highlight, though. These are high-return projects. We're not considering greenfield investments. We're talking about short payback, high-return projects that would exceed the value of buying back our own shares. So we're talking about simple paybacks in the 2-, maybe 3-year time frame depending on the projects, but a very measured, careful use of capital. So with that, we believe our company is in great shape. We're well positioned to take advantage of the situation the markets are in today, and we do expect those markets to continue for a while at least. So we're pretty optimistic of where we stand as a company.

Fantastic. Thank you for that, Joc. Why don't we start with -- we'll take a step back and look at where the farmers are at. Over the last year, we've seen crop prices come off a little bit. We've seen, obviously, fertilizer and other input costs have increased. Some farmers are grumbling, but we're starting from a very, very high bar. So how would you assess farmer economics right now and going forward into 2022?

Well, let me start with North America. We've had some work done by University of Illinois and Purdue and 2021 based on fundamentals, and this is an item-by-item review of costing from Midwest farmer, corn belt farmer. Their profitability in 2021 is probably going to be the highest in at least a decade. And as we look into 2022, absolutely agree that it will be lower than what it is in 2021, but it will probably be the second or third best year they've had in a decade. So the farmers are doing very well. And the other thing on the farmers is they don't have access to buying a lot of new equipment because of supply chain problems. So a lot of their investment is going to go into better crop nutrients, better seed, et cetera. So using what they can to maximize yield, which is what you would expect with the stock-to-use ratio as being as low as they are right now. If I go to Brazil, it's a very similar story. This -- what is it, 2021 season?

Yes, ''22.

2021 and then the '21, '22, recognizing the Southern hemisphere being on the split recently. But again, we're looking at very strong returns for the farmer down from what they were because input prices have gone up. And this is not just fertilizers, the price of seed, the price of fuel, everything has probably gone up. So the Brazil is in good shape. It continues to be in good shape. Around the globe, I think that's probably consistent. The only exceptions are probably places where the government intervenes like India, in particular. So I think intervention by -- in India as the farmer economics are still good, but the importer economics have been stressed. So that's hurt. But in general, around the globe, farmers are doing well. Crop prices are high. You look in Indonesia and Malaysia, for instance, in palm oil, which is MYR 4,600 or something right now compared to it was sitting around MYR 1,500, just a year ago. So you consider those things as being great market drivers for our products. Potash, in particular, is driven by palm oil use in those areas. And then from a phosphate use perspective, it's not just corn and soybeans, it's sugarcane, it's rice, it's [ soy ], it's wheat, it's all of those products, and all of those commodities are up. So right now we feel good about the future.

So Joc, that's a good segue into potash. And you spoke about how Brazilian farmers are doing okay and doing quite well. We have heard some grumblings out of Brazil that for -- by some farmer associations to reduce fertilizer application rates, not just in Brazil, but we've seen it elsewhere. So can you put that together and give us your view on whether or not it's possible that potash demand grows next year? And just before you answer that, Joc, maybe we could break it down to, do you think consumption will grow and will rebuilding of inventory actually lead to an overall increase of shipments?

Well, you've made a really good point on the inventory, and I'm going to hit that first. Channel inventory is about as low as I've seen it. Inventory for potash in China is down significantly. They're getting into their strategic reserve. India is down by, what, 70%, everything is hand to mouth. And there just hasn't been the supply to meet the demand. And so yes, there's some grumbling. So first of all, there's going to -- I think the global channel inventory can probably vary by up to like 4 million tonnes. And so knowing that -- if there isn't the demand on the ground, you will refill some of this inventory, I feel there still will be a normal growth for -- a reasonable growth year for potash irrespective. And then if you look at it from the perspective of what you would maybe call demand destruction or encouragement of demand destruction, you look at Brazil as an example, which is a depleted tropical soil. They have to apply fertilizer every year. If they don't apply fertilizer, their yields will go down. And when you start looking at it, it doesn't make sense to not put fuel in the Ferrari. How is that for a way to use an analogy.

Very good.

If they don't put the fertilizer down, they won't get the yield. Now what we could see in places like Brazil and North America, maybe, is a switch from corn to soybeans because of the high price of urea and nitrogen products right now. But we're agnostic to that because we -- the phosphate and potash demand is pretty similar for the 2 or at least it's on the margin, any differences, right? So from our perspective, we see good continuing demand. I've been to Indonesia, Malaysia a few times. And the farmers there say that you don't your potash, a year later or you don't get the yields, and you don't get the quality of the oil. Well, they did that 2 years ago and now you see the result where you've got great demand and lower production. So I think a smart farmer will just use what he needs to use to get the best yield.

Perfect. Joc, one more question on potash. I remember the last time potash prices were this high, I believe it was '07, '08. And then, of course, we had the financial crisis in '08, '09, and we saw a very sharp drop in potash prices. I think most people expect prices to be a little bit softer by the end of 2022 than where they are right now. Can you tell us why this time is different than what we saw in '08, '09? Should we expect to see a hard crash or more of a kind of very slight erosion of potash?

I think there can be a soft moderation, let's call it moderation or soft landing after the spring season. I mean it's -- it would be natural. Normally, there's a little bit of moderation after the North American spring and basically after you've positioned for the second season in South America. But there are some of the differences. First of all, you talk about channel inventory. The inventory held by, for instance, North American retailers was incredibly high. There was this porting of potash at the -- in the '07, '08 range. And a lot of people got caught very short there when the price went down. Since that time, a lot of them have put very strict risk management processes in place. And so they don't come out of a season with very much inventory. So first of all, they're not at risk of having to dump or write-off like they have in the past. So that's the first piece, there isn't that inventory. The second piece is, if you look back to them, it was in the '05, '06 range that Potash Corp and others started really ramping up production. And then you saw a lot of that production was either in circuit or ready to be in circuit by that '09, '10 range. So you have a -- and you had a situation where even before that, there was long summer shutdowns. There was -- the Potash Corp in particularly really moderated the production to manage the market. And when that sort of changed, and then there was BPC at the same time. So they were probably selling less than they had available. And so when all that came together, you had a very different situation. Today, all of the excess production, the only real incremental production sitting out there today available sits in the hands of the Canadian players, ourselves, our nutrient really. The expansions by k+S and Bethune is largely completed. The Usolskiy expansion by Eurochem is done. And then you look at Belarus and there's the uncertainty around their supply and what that will mean. So I don't see the catalyst for a hard drop. It doesn't mean it won't moderate it. They always do, but it will take time to reestablish the supply to keep up.

Right. Very good. Let's move on to phosphate. It's hard to believe that 2022 could even be a tighter year for phosphate than 2020 and 2021? I mean we have Chinese exports are banned. We see Russia pulling back. India is desperate to rebuild its channel stocks and demand remains strong. Is it possible that we are entering in a tighter year right now, Joc? Or do you see things being more balanced after the spring?

I think this is probably -- our own analysis would show us actually having a slight supply deficit again this year because you're seeing it, you're seeing growing markets. So if the markets grow and we see -- Jenny will go into this in a second here. But if you look at, for instance, India, I mean better lack of supply this year has got to turn into a pent-up demand. And again, you've got low channel inventory. You've got people getting protectionist about their product like China and Russia. So from our perspective, we do see very little new production coming on. We see China exports less. OCPs, hubs are all pretty much done and in same Ma'aden. While they're probably not going to be at their 3 million tonnes for Ma'aden II yet, really, there isn't a lot of increased capacity there. They'll probably -- my guess is that these prices, they'll announce one sooner or later, but that's 5 years away. So I don't see where maybe a bit of debottlenecking from the Russians and particularly PhosAgro. But other than that, I don't know where new production is going to come from. So I see this market staying tight. And then you look at the possibility of industrial needs for these new lithium iron phosphate batteries, and that's starting to take -- particularly in China, starting to take away from agricultural opportunities for phosphoric acid. So I see it staying tight for quite a while.

I wasn't sure if Jenny wanted to add something or...?

No, I think she...

Okay, okay, all good.

I probably took her spotlight there for too long.

It's all good.

No worries. So do you have interest in Ma'aden? Is that something that you're looking at? I mean is there officially a Ma'aden III yet? Or is that just...

No, there's not officially a Ma'aden III -- and look, I'll be blunt about it. I see greenfields in both potash and phosphate being a lot less of an opportunity than brownfields. How is that? And Ma'aden II was, what, $7 billion. That's a lot of -- a tough payback.

That's right. Fair enough. Joc, we have 3 minutes left. So I'll narrow it down to 2 questions, if I may. Can you just highlight what the impact is on Mosaic with respect to the logistics and supply constraints that we've seen, whether it's the storms in Vancouver and how that's impacted rail or what's happening in the Brazilian market or seaborne freight? How is that all starting to impact the company right now?

So in terms of the supply chain problems, particularly ocean freight, obviously, ocean freight is up a lot. And Jenny can give you the specifics on that. But just a short answer, ocean freight is up a lot. But we own a number of ports through ourselves and through Canpotex. So we do have some flexibility on moving the product around, and we can mitigate a lot of the supply chain problems and congestion at ports by that. But you're going to have to pay the higher price. I mean the price of freight to Brazil now is probably $50, Jenny, what we have out to China now?

From Vancouver, yes, it's about $30.

From -- up from what, $10 or so?

Yes, from $10.

So the price of everything has -- but that's going to -- this is one of the areas where we're probably advantaged because of our locations. And then in terms of the rail interruptions in BC, obviously, I think you probably heard it from Canpotex. Those are going to hurt them a little bit, but they are moving product to Portland, they're moving product to St. John, New Brunswick and their moving product through Thunder Bay. So we're using whatever we can to mitigate. And I believe the railways will get back moving. But the good news is there's probably a bit of an off-season time. So we'll have time to catch up.

Perfect. And just last one, we have 30 seconds. You just took a big slug of stock, taking out that 25% of the Vale shares. Is that time for a pause and a bit of a breather now? Or is it still going to be dependent on the amount of cash flow you generate and you'll kind of keep having a compete for capital along the way?

We have strong cash flows right now. And we see better place to invest than in our own shares. And so from our perspective, I don't think this is an end at all. This is -- we still have $650 million dollars of our allocation after the $350 million we've already spent. So we fully expect to take advantage of the fact that our shares are cheap. We're trading at very low multiples, and I don't see anything that's as good a deal as our own shares.

Very good. Joc and Jenny, thank you, both, very much for taking the time.

Thank you.

Thank you.

Thank you, sir. Take care.