The Mosaic Company (MOS) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to our day 2 of the conference. Today, we'll have many ag companies presenting. And starting today on the ag side, and our first company is Mosaic. And from Mosaic, we have Clint Freeland, Senior VP and CFO; and also Jenny Wang. Clint brings 25 years of business experience to Mosaic and has held CFO position at NRG Energy and most recently, at Dynergy before joining Mosaic. So with that, it's my pleasure to welcome Mosaic. Clint and Jenny, good morning.

Hi. Good morning, P.J. And first of all, thank you for having us at the conference this morning. As you mentioned, Jenny Wang, our Vice President of Strategic Marketing, is with us this morning and available to answer questions as we go through the session. I'm also joined by Paul Massoud and Laura Gagnon from our Investor Relations Department. So again, thank you for asking us to participate and including us. And certainly, thank you to all the investors that are listening in this morning. I thought that I would just maybe begin the conversation with kind of a status overview of what we see and how the company is doing, and then we can go into a Q&A session with you, P.J. I think as we look out across our markets for phosphates and potash around the world, markets continue to be constructive. We continue to see strong demand, farmer demand for fertilizers, and a lot of that is being driven by continued constructive pricing in the grain and oil seed markets. Farmer economics, I think, still remain constructive. We're keeping our eye on that as input costs escalate and change. But again, as we look forward, that still looks positive to us. And so I think we've got constructive markets, strong demand for both potash and phosphates and specialty products on a global basis and strong prices. And so that certainly is benefiting us, but I would also highlight that another thing that's really helping us in this cycle is the work that Mosaic has done over the past few years. So the addition and building out of our presence in Brazil through the transformation initiatives at all of our business units. What that's done is not only giving us a more significant presence, but it's also really leveraged the company from an operating leverage standpoint to markets like this. And so we're as well positioned as we've been in our history for markets like this, not only to deliver operationally into our customers, but also financially as we go forward. And as a result of that, we've been generating strong earnings and cash flows and expect certainly constructive financial performance to continue into the future. We get a lot of questions around capital allocation. And I think as you look at what we've done this year, I think it's been a roughly balanced program, as we've talked about doing. We've continued to invest in the business, whether that's our K3 completion and ramp up, whether that's in some of our transformation initiatives, some opportunistic investments. So we've continued to make those investments to continue to grow and improve the business. We've also allocated some capital to improving our leverage profile and our financial footing for the long term. One of the things that a lot of times maybe gets missed is in this kind of environment with the earnings profile that we have, your leverage statistics look very strong and robust. And -- but we've seen, as you move through different cycles and different points, your leverage profile will change and can change materially. And so what we've done is we've put a target out there around improving our balance sheet, just as we're improving our company for the long term and for all cycles. And we took a first step in paying down some debt earlier this year. But also, we don't do those 2 things at the exclusion of returning capital to shareholders. When you look at some of the things that we've done this year between the common stock dividend paid to shareholders as well as the share buybacks that we've done either on the open market or through the Vale sale of shares, that is roughly $450 million, which again is roughly equivalent to the debt reduction and the investment in the company. And so what we've tried to do is to kind of reach a balance at least this year between those 3 buckets, improving the company itself and making those investments, strengthening our foundation -- our financial foundation and also returning capital to shareholders. But as I take maybe a longer-term look at that and what we've been doing from a capital allocation standpoint and then kind of project forward, one of the things that I would observe is, over the past few years, there have been uses of capital that I think were important for the company, and whether that was completing K3 and getting it up to full ramp, whether that was the integration of Brazil or investment in our transformation programs, I think both of those are -- certainly, the K3 investment is coming to an end. Our transformation, I think we've invested quite a bit, and I think there's more work to do, but not from a financial standpoint. I don't think it's particularly significant from a capital standpoint. So I think that's -- we've achieved some of those objectives, and we're about halfway to our balance sheet paydown target. And so I think as we roll forward, I think a lot of the bigger uses of capital are kind of coming to, I wouldn't say an end, but are moderating. And our balance sheet target is close at hand. And so I think as we go forward, longer term, I think we're going to be happy with where our balance sheet is. And then it really comes down to a competition for capital between share buybacks and returning capital to shareholders versus certain investments. And given where our share price is and kind of the outlook for our business that we have, investments need to be pretty compelling to compete with capital return options. And so that certainly is going to be an area of focus for us going forward. So I almost kind of see us moving from a period of time where there was more internal use of capital to complete initiatives or to strengthen the company or its balance sheet into more opportunistic allocations of capital as we go forward and maybe more competition between things like share buybacks and investments. So maybe I'll stop there, P.J., and maybe hand it back over to you.

Great. Clint, that was a good overview and a good setting the stage. Let me ask you sort of a broad question. Currently, a very strong backdrop in ag. Farmer incomes are up. You've seen green string driven by Chinese demand. Where do you see that going? And also secondly, related to that, how do you see the acre mix coming into play for next year, corn versus soybean and total acres?

Well, I will probably ask Jenny to comment on this as well. But you're right. I mean we've continued to see strong demand for grain and oilseeds globally, but particularly in China. And we, I think, expect that to continue. And again, when you look at global inventories, you look at stocks-to-use ratios, they're roughly at [ 10-year ] lows at this point. And again, that's, I think, one of the main reasons for the pricing backdrop that we see, and again, driving the demand for yield and therefore, fertilizer and other inputs. I think as we go forward, we continue to see a need, given again where stocks-to-use is, for continued focus on yield and continued production. And I don't think that, that necessarily, from an outlook standpoint, doesn't really change from what we see this year. And as you mentioned, farmer income and farmer economics continue to be constructive. It is something that we keep our eye on, given the escalating cost of inputs. But again, I think what we see generally is constructive. Jenny, do you have any additional comments that you'd make?

Yes, sure. Clint, probably I just want to add a little bit color on the Chinese demand. As we all know, the ag commodity prices are somehow almost impacted by the demand of China. We don't foresee any major changes of the Chinese demand to the overall wide range of ag commodities, including corn, soybean, wheat, and also others and palm oil, usually people don't pay attention, and also a wide range of meat. So we don't foresee the changes. I would also want to really remind our investors, pay attention to the structure change in the livestock production, meat production in China. They are moving really from backyard production to the commercialized meat production, which means there will be increasing need to commercialize feed. So that's basically the thing that I want to emphasize. We see this trend is ongoing, and we don't see that any changes going to impact that part on the Chinese demand. I also want to touch P.J. your questions on the crop mix, especially in the U.S., between corn and soybean. We are watching very closely, especially as Clint mentioned, the escalation of the crop nutrient prices, particularly nitrogen. Ammonia and urea probably already reached to the price historically high, which might drive some of the decisions for the American growers. The decisions of growing more soybean, which will need less nitrogen or more corn, which might -- if everyone shifting -- making the shift, which is going to push corn price even higher, right? So that's going to be a very interesting dynamic that we are going to watch. Bottom line towards Mosaic, there's no major change to the demand to potash and phosphate between corn and soybean for us.

That's very useful. And you're right, we've been hearing about this commercialization of Chinese farms and feeding animals proper meals, and it looks like that's a long-term trend, not a short-term trend. Great. Now let's move to phosphates. Can you give us some perspective that China halted phosphate exports in the second half to ensure domestic supply? What impact does that have on second half and then into 2022? And then similar question on Russia, they did the same thing and they announced similar policies. So are we going to have enough fertilizers around the world, if that's the case outside of those 2 countries?

And maybe I'll start, and then Jenny, have you comment as well. I think one of the things -- one of the dynamics that we see in China is a real focus on food supply and food security. And the government wanting to ensure that the farmers have all the fertilizer that they need in order to provide as great a food security as they can. And so at affordable prices, right, particularly given the price backdrop. And so certainly, I don't think it's surprising to see them take that step. But you're right, one of the ramifications of that is that their exports come down. And then that, as we look at global S&D, tends to tighten that up outside of China. Russia has done the same thing, I think, for very similar type of reasons. And so as we kind of look around the world, and again, inventories continue to be very tight on a global basis, I think that's just another data point that adds to that level of tightness. But again, the world is still demanding strong levels of phosphates. So we've continued to see strength in that market certainly through the end of this year and would expect that to continue into next year. As far as how long do we expect that to continue, I think it's unknown, but I think our belief and assumption frankly, at this point is that those restrictions probably remain in place kind of into the first part of next year through the spring planting season. No indication that they'll go beyond that. Could it? Sure. But I don't think we assume that or believe that at this point. Jenny, I don't know if you'd have any other color on that?

No, I think very well said, Clint. The bottom line, P.J., is though, yes, the market will be -- will be tight and will be short given all the restrictions.

Great. Before I ask my next question, let me remind all the investors listening that on your landing page, there is a link on the right-hand bottom corner, please click on that, if you want to ask any questions. They will come to me via e-mail, and I'll read them out here. So please make this interactive and send any questions you may have. My next question is as prices of NP and K have spiked, is there any concern in your mind that farmers will cut back on fertilizer usage, particularly in P and K where they can? In nitrogen, they have to put down nitrogen. So they might switch, like Jenny said, from corn to soil. I mean yes, corn to soy. But any concern on P and K cutbacks?

I think it's something, P.J., that we're keeping our eye on. Probably wouldn't be that surprising to see some level of cutback, particularly in more marginal areas. But again, as you look at farmer economics, you look at stocks-to-use ratio and the need for additional production and that farmers through economics are still incented to produce, even at these higher prices, economics still work well in most areas. I think our expectation is, is that while you may see that maybe around the edges, and it certainly is something that we're watching for, I'm not sure that we see it as being a really significant dynamic at this point. The other thing to also recall in one of our key markets in Brazil, you've got pretty tropical soils there, which don't retain fertilizer and nutrients maybe as well as in other locations. And so there really is a need to continuously fertilize and add nutrients in that location. So again, you may see some of that dynamic in some of the marginal areas. But right now, we still believe that people are incentivized through economics or just agronomic need to continue to apply. I don't know if there's any additional color that you would have on that?

Yes. Clint, probably just 2 data points. One is really the U.S. corn growers. So based on the annual tracking from the University of Illinois, basically showing next -- for next year, the expected farm economics are going to be probably the second highest one in the decade, just after this year. This year is probably the highest one. And next year is expected to be the second highest one. So the farms are doing -- the farmers are doing well in the U.S., very constructive. The -- similar situation in Brazil. The summer soybean, which is going to be planted next year, based on the current expectation, the current crop nutrient prices. The farm economics are not going to be as good as this year and the last year, will be still very constructive if you look at the long range. So the 2 data points hopefully can provide some of the commentary that Clint mentioned.

Okay. Okay. And just sticking to phosphates, before we go to potash. What's your outlook on raw materials? So ammonia, which has really gone up and maybe you can talk a little bit about sulfur as well?

Yes. Well, again, I'll ask Jenny to comment as well. But certainly, we've seen raw material prices increase this year. And earlier this year, in particular, we saw sulfur prices spike because of some of the weather impacts, particularly, and COVID impacts on refining activity. And so we did see that impact sulfur prices, and they've continued to remain robust. But I think as we get into '22, I think we generally expect a moderation of that given the overall refinery utilization at this point and kind of what the expectations are. I think from an ammonia standpoint, certainly, we've seen prices continue to escalate. That's driven mainly by increased natural gas prices. And so I think it really kind of depends on your view of natural gas prices. But also recall that in our raw material supply chain, we do have internal production, which helps blunt or hedge some of that market pricing dynamics. So we have cost of production there. We also have our CF contract that we've been taking meaningful volumes under again, based on more kind of production level type of economics. And so as you kind of think about the overall market impact of ammonia prices on us, I would say, kind of given how we source ammonia and where we source it from and how much of our ammonia sourcing is done based on producer economics, which is favorable in today's environment, we're probably not as impacted as others and certainly those that would be more exposed to that market. Anything that I left out or that you'd add?

No, I guess just one more data point. Given the very low percentage of our ammonia sourcing exposed to the market, we are actually at a very strong competitive advantage versus our major competitor. And I just saw a report from Argus reporting OCP fertilizer production exports year-to-date reduced by 10%. Although there were a little bit upside on phos acid, but that helps you the ammonia cost has an impact to them. Therefore, instead of first selling more phos acids than finished DAP.

Right. Really interesting. You talked to phos acid. And on the 3Q call, you talked about demand increasing for phos acid from lithium ferro-phosphate, LFP batteries, especially in China. How big is this market for phosphoric acid? And what is the total addressable market TAM? And can it have a real impact on your phosphate business?

Well, again, this is something I know Jenny has done a lot of work on, so I'll ask her to comment on this as well. But I think there is a -- it is kind of a growing opportunity for phos acid, right? And I think you've seen it begin in China. And I think our assessment is that this year, it's roughly, call it, 0.5 million tonnes of finished product equivalent, if you will, P2O5 has gone into -- has been redirected, right, to LFP batteries. And we would expect that to continue to increase over the next several years. Does that go to 1 million, 2 million tonnes equivalent over the next 3 to 4 years? So I think the increase is there. And when you look at the advantage of LFP batteries versus more traditional lithium batteries, I think there is a case to be made as far as an economic case to be made, an operational case to be made around ability to cycle charges on a more durable fashion. It handles heat a little bit better than traditional batteries. And so particularly if you want to go down market as far as cost of electric vehicles, I think it's a good advantage as you're not using nickel, cobalt and other more expensive materials. So certainly, we are beginning to see that impact in China, and that's a structural redirection, right, of P2O5 away from fertilizer production and into battery production. We expect that to continue over time. Now that's just in China. I think as you look more globally, I think there's probably even more of an impact. I think as we kind of look at that opportunity, I think we're doing work right now on kind of what are the opportunities for us, and we have to look specifically at the rock that we have. I say here in Florida or in Peru or what have you, what does it take to get to the right purity levels and what have you in your purified phos acid? But I do think that ultimately, there have been a number of auto manufacturers that have talked about migrating to LFP batteries. I think Tesla is one of them, Volkswagen is one of them. I think Ford has talked about that as well. And so I think there is increasing uptake. And so what is the addressable market? I think it's kind of hard to tell right now, but it certainly seems like there is momentum there and likely could become material over time. And I think, on the one hand, there's a business opportunity on that side, which, again, we're focused on to see kind of where we might be able to play there. But the other thing is that on the flip side in just the phosphate market, as we're seeing in China, there's a structural redirection of P2O5 into another industrial source or another industrial use. And what that does is, again, when you think about SMB in the phosphate market, it begins to tighten it up. And the more momentum there is in the LFP market and the more capacity is needed to be redirected there, I think that is just one more longer-term structural benefit to the underlying phosphate fertilizer market. So I think it's beneficial probably on either side of that equation, whether you're still in fertilizer or if you're in electrification, I think there's meaningful benefit over time. Jenny, I don't know if there's any other color that you could add to that?

I think you got it covered, Clint.

Okay.

Great. Well, let's move on to potash. And I want to talk a little bit about potash cost curve, which is generally flat. You brought on K3 shaft with Esterhazy. So that should help your position. You also recently resumed operating at Colonsay. So taking both those into account, can you talk about sort of where do you stand on your cash cost on the cost curve?

Yes. Well, I think once K3 is up and fully operational, which we would expect first part of next year, we would expect both Esterhazy and Colonsay -- I'm sorry, Esterhazy and Belle Plaine, to be roughly kind of in the low to mid-$50 per tonne cash cost. And I think when you look at the total production there, that's, call it, 9 million to 9.5 million tonnes of capacity at that kind of cost profile, which I think is extremely competitive, really in almost any commodity price environment. I think we're very well positioned on that front. Colonsay, that's about a 1 million tonne facility as far as kind of regular run rates when it's operating. And historically, that has been our highest cost facility, call it, roughly $100 per tonne. But I think the team is bearing down on and looking for ways to bring that cost down. I think they have had some success. And I think they're on a path to be able to do that. I want to see that on a more kind of recurring and sustainable level. But I think if you just kind of assume the $100 profile for 1 million tonnes, but kind of low to mid-50s for the other 2 facilities, I mean that will get you to kind of what a blended average cost profile would be for the fleet in total.

Okay. Great. And what are your expectations for India and China contract for next year in potash? There's a lot of discussion going on, on that, but your early initial expectations?

I may -- P.J., I may just ask Jenny to comment on that. Jenny, if you don't mind?

Well, P.J., no one knows until it just gets settled. However, if you look at the in-country inventory, India in-country inventory of potash is 70% lower than the same time of last year. China is much lower than last year, probably 20%, 30% lower than last year. The Chinese government already dipped their strategic reserve of potash. So that tells you that there is a strong need for them to come to the table. So that's all I can say.

Okay.

I don't expect the contract to be settled in the middle of next year. I don't think so. I think it will be much earlier than that.

Much earlier. Okay. In interest of time, I'm just going to skip a couple of questions. You talked about your balance sheet targets and CapEx. How aggressive could you get on stock buyback once your -- most of the CapEx needs begin to decline, maybe starting next year?

Yes. So I think -- again, I think we kind of think of it in that there are kind of 3 elements of our capital allocation program, investing in the business, balance sheet and share repurchases or returning capital to shareholders. And I think as we look forward, again, with some of the more structural investments like K3 winding down, we would expect CapEx to probably be a little bit lower next year and then trend lower after that. And so I think the use of capital and kind of that bucket, I think, over time begins to kind of come down. Again, we're pretty close to where we've made a dent in our debt target. And I think over a reasonable amount of time, we'll hit that. So I think the focus really becomes on capital return to shareholders. And again, having that tension between any meaningful investments and capital returns. So I would think that, again, given where -- what our outlook is and where we see our share price and kind of what the economics of share buybacks look like, it's going to require a pretty compelling investment case to pull capital away from that. And so I think one of the things that we do want to be mindful of is that we want to actually have generated the cash and have the cash before we allocate big amounts of it. Obviously, we can plan for things, but I would expect for us to be a little bit more focused on capital return as we go forward, and share buybacks. And given that some of those other areas of capital deployment, I think we've hit a lot of our targets are on the verge of it.

Great. Now I'm getting some questions here, so let me stop my questions and take some audience questions here. How much visibility do you have into your order book? And how far forward are you taking orders for P and K right now?

If it's okay, Jenny, I'd just maybe hand that over to you since you're kind of ground zero at Mosaic on that question.

Thanks, Clint. Without disclosed specifics because I learned lessons. At today's price environment, we feel very good with today's price. So for Q4, this quarter, we're basically 100% done. It's all about execution. For Q1, we have sold a big chunk of our book on our phosphate, as we disclosed in our October result disclosure for phosphate. And potash, as many of you probably have seen the announcement that we made yesterday, we started our Q1 potash program in North America. Initial feedback was very positive. So yes, we are selling in the U.S. market. We are pretty well selling into Q1 at today's price level. Yes. And we already have some interesting inquiries to -- especially to phosphate into Q2, particularly from the market like in Canada, that where they see very strong farm demand and they're asking for Q2 numbers as well. Moving into Brazil, we always have a longer forward sales book and that's a similar situation.

Okay. Okay. My next question is do you purchase ammonia forward? And are you hedged for 4Q?

Jenny, do you mind if I hand that one back over to you as well?

Absolutely. So as Clint mentioned earlier, ammonia sourcing -- around over 1/3 of the ammonia is actually coming from CF contract. That is tied to the natural gas prices from Henry Hub. So if you look at Henry Hub prices, which is much lower than the price in Europe. So that part is basically tied to the Henry Hub prices. 1/3 is coming from our own production, which is basically the production cost. The natural gas price is also hedged to that one. The only exposure that we're having is about 30%, which is related to the spot market.

Great. Great. The next question is, is there any impact from Canadian rail outages to shipments?

Jenny, I know we were just talking about that this morning, but do you want to share what you were sharing with me?

Sure. So our Canpotex movement in Western Canada has been impacted by the B.C. flooding for sure. And Canpotex has been able to redivert the shipment to Portland to East Coast like Saint John and Brunswick and even Center Bay. So in terms of the net impact to Q4 shipment, from a revenue recognition point of view, Mosaic's rule of revenue recognition is based on the product reach to the destination port. Therefore, we see very limited impact to our Q4 result. There might be some reduction of the rail shipments out of the mines, but Canpotex has been working very hard to minimize that impact.

Great. And one last question, if I may ask, is you had a successful acquisition of Fertilizantes. When you look back, what are your thoughts on that? And given that success, would you look to add to more bulk and potentially an acquisition in that part of the world?

Yes. I think as we look back on that investment, certainly, we believe it was a terrific investment made at a good time. We've been able to probably exceed our initial expectations on the integration and synergies and transformation benefits that we'd be able to get out of that business. But also, as we kind of fast forward to today, and obviously, that's just a meaningful part of our business now. I also see us in a leadership position in Brazil, and that's one of the largest and certainly fastest-growing agricultural markets in the world, and we expect that growth to continue. And I guess the way that I think about it is that we've kind of got the pole position there. We've got in-country production. We've got certainly an extensive distribution business there. And so that's a platform, particularly with the growth profile of that market, that we need to leverage even further. Now how do we do that? Are there organic ways to do that? I think there are options. Might there be some opportunities along the way to kind of bolt some things on? I would think that those opportunities will come along. I mean we periodically look at opportunities. We just haven't found the right one yet. But certainly, I could see that being an area of investment to try to continue to grow and expand our platform there. Again, given the attractiveness of that market and growth profile of that market, coupled with our existing business profile there, I think we're in a great position to be able to leverage that and continue to be a market leader. I think we just need to be thoughtful about kind of what we would invest in, when we would invest and be sure that not only the strategic rationale is there, but the financial rationale is there. But certainly, I think we've got a great platform that we're looking to leverage in Brazil.

Great. And that's all the time we have. So Clint, Jenny, thank you very much. But thank you, and have a good day.

All right. Well, thank you for having us, P.J.

Thanks, P.J.