The Mosaic Company (MOS) Earnings Call Transcript & Summary

All right. Thank you, and good morning, everyone. I appreciate everyone continuing to join us here at our Goldman Sachs Industrials and Materials Conference. My name is Adam Samuelson, I'm the agribusiness and packaging analyst here at Goldman. Really pleased today to continue our conference with The Mosaic Company. We've got Joc O'Rourke, the President and Chief Executive Officer; as well as Jenny Wang, who's our Senior Vice President of Global Strategic Marketing. We're doing this in fireside chat format. We do want questions from the audience. There is a microphone that can circulate. So please don't be shy. I will happily take questions from the floor as we get going. But Joc and Jenny, thank you so much for joining us today.

Obviously, look, we're in the middle of the spring. It's a pretty dynamic time in the agricultural markets. You just reported earnings last week. I think maybe just to start with the high level on on-demand and fertilizer across products and phosphate, what you're seeing as we move through a pretty critical North American spring season?

Yes. So if we look at North America right now, we've had a very strong, certainly very strong start and middle of the season with last year's lower application, and this year's, we've got much better pricing to compared to grain pricing for fertilizers, and it seems that, that has created a very strong demand for our products. And we're seeing, I think we reported last week, the highest April we've had in over 5 years. So that really bodes well for the spring season. Generally, it seems to me the farmer economics are good. Farmers know they need the product, so they're putting it down in the U.S.

Okay. I want to maybe split this a little bit between talk about potash and phosphate a little bit because of the dynamics of the 2 small related do have real differences. And maybe we'll start on the phosphate side. Can you just maybe lay out kind of as you see the market -- as it's evolved this year, kind of with the dynamic moves in inputs with ammonia and sulfur, where do we see the cost curve today? How do we think about that helping to inform pricing as we see here?

Well, it's been a very interesting couple of years for the cost curve, if you will. There's really 4 main players at the bottom of the cost curve. There's OCP, there's the Saudis, there's ourselves and there's the Russians, particularly FoCi group. If you look at the Saudis, they are highly advantaged on their price of ammonia because they buy their natural gas at probably under $1 an MMBtu. So in cases of high natural gas prices, high sulfur prices, the Saudi Arabians go right to the bottom of the cost curve. And that's probably what we saw up until probably the middle of last year. And you saw, they did quite well financially. Certainly, our joint venture paid out its first dividend. And so they've done quite well. On the other side, you have the Moroccans who have inexpensive rock costs, but they pay market price for both ammonia and sulfur. So in the case of during the runoff when the European gas price was in the 30s per MMBtu, the price of ammonia went up to, what, $1,600. So you're dealing with a $1,600 ammonia price. In which case, our advantaged ammonia costs probably put us ahead of everybody except for the -- well, the Russians would have done fine too, except in the North American market where there -- it's assumed that they are actually being subsidized for that. But it puts us all ahead of Morocco. And then when you swap back to where it is today, you probably move us tomorrow around the middle of the cost curve. Now the nonintegrated players, obviously, are always going to pay the large price. So today, they're probably in the $550, $600 range, if you consider a rock cost of maybe $175 ammonia, $350, $400 and sulfur at $150, if you're buying. So in that case, you're probably talking about, like I say, $600, $550, $600 total cost. And whereas the rest of us are probably in the low $300s, so it's quite a steep cost curve and gives some real strength to the long-term pricing environment.

So as I think about kind of that framing and probably some distinction between your Florida and U.S. operations versus your Brazilian operations, how we think about the sources of cost advantage versus those high-cost producers for each region to inform kind of a more normal phosphate margin that you should be realized.

Yes. So in the U.S., obviously, we have the advantage of location. We have a big advantage on ammonia between the CF contract and our own production. I think next year, we're only looking at maybe buying 25% of ammonia on the open market. Now obviously, in today's market, I don't think our CF contract is highly in the money. It was earlier in the year, but it's not highly in the money now, although still in the money. If you go -- so here, we have that ongoing competitive advantage, I think, in this market. When we export to Brazil, we're just -- and like anybody else on the cost curve. If we look at Uberaba or Araxá or some of our Brazilian operations, when costs, at least $100 to get from the coast to anywhere in the center of Brazil, we hold that bottom of the cost curve because of that transport. So while our costs are probably in the sort of average range for a nonintegrated -- for an integrated producer, sorry, so middle of the cost curve, when you take into account where it's located, we have a pretty good advantage there. And we can normally take advantage of that and have a pretty strong position.

Okay. And so if I'm thinking about the pieces of that, especially in Fertilizantes, there's a distribution component. You've talked about the normalized margin $30 to $40 a tonne in phosphate -- sorry, in the distribution business in Brazil. On your production business down there, you produce 3.5 or so million tonnes of finished product. And some of it's MAP and SSP, and the other products, what's that freight advantage that should be pretty structural when you think about your delivery pricing?

I think for the high analysis of products like the MAP, then you probably have that $100 is pretty baked, and that's really what you get. You end up with that $100 margin pretty regularly. If you think about SSP though, SSP is a lot more dependent on what the Chinese might bring in or the Egyptians. So that market is a little different. And obviously, the cost of making it, it doesn't include ammonia. So there's -- and a lot of it, we make -- well, for instance, with Fosfertil, we make it right at the coast with purchased rock. So the air saws and stuff like that, yes, we have a pretty good thing. But you probably can't capture that whole $100 on SSP all the time obviously, depending on market.

Okay. And maybe then thinking on the supply side and on phosphates. Of the 3 nutrients, this was the one that was probably the least directly disrupted by events in the Black Sea in Russia last year. But certainly, cost curve with ammonia had volatility, but it saw seemingly some more demand declines and had a lot of -- trended a lot of the same directions as the other two. Kind of where do you see the supply/demand in phosphate today? And what are the big swings that kind of would move from a tight market to seemingly, it's been a kind of a buyer's market for the last 9 months.

Let me -- I'm going to hand part of this over to Jenny because she has all the S&D details, obviously, more than I do. But let me start by saying with the changes last year, we saw the biggest one was, of course, a much lower export from China. I think last year, we were somewhere in the range of 6 million tonnes out of China. So from a supply side, we were down significantly. I think at the same time, we didn't see extra tonnes from either OCP or ourselves so that left a pretty good hole in the market. So I think overall last year, the market was actually supply constrained, and it started not because of the war, but because before the war when China started putting on the restrictions on exports. And so we saw very much the same pattern in pricing where the price went up to $1,200 a tonne and people slowed down their purchases. As we've come out of that, I would say phosphates more than potash has held price fairly well -- sorry, it's held margin fairly well because the price of the inputs has gone down quite a bit. But let me get Jenny to walk through some of the supply-and-demand dynamics around the world.

Sure. Sure, Joc. From the demand side, last year, you're right, Adam, we had some disruptions out of Russia, Ukraine, well, especially the EuroChem facility in Europe. As Joc mentioned, the biggest drop was actually out of China, largely reduced export out of China. And that drop of the supply basically constrained demand, and that was about 10% last year. We believe this year, the demand is going to largely recovered because of the supply situation is slightly different. On the supply side, we believe China export will stay restrained, restricted by the Chinese government. We will see some moderate increases from last year on the Chinese export side. We think EuroChem's production site in Europe will come back slightly like 50% of operating rate, which they were completely down last year. And we baked in the forecast of OCP will come back as well. Last year, their total DAP, MAP, TSP sales were down over 10%. We don't know the reason. We believe this is going to come back. And we have some production pickups over the last year because of the hurricane side. We baked in our production to recover as well. So all add up together, this market is going to be slightly short on supply. We believe it's going to be 9% of the recovery on the demand. Again, this is a supply constraint. Looking -- going forward over the next 3 to 5 years, there's no immediate new capacities coming out of the market over the next 3 to 5 years. The major ones as announced the Saudi, Ma'aden has announced their Ma'aden III. And the current forecasted starting point is 2027. And we have been through this with our own joint venture. It will take 3, 4 years to get to designed capacity, which is basically beyond 5 year's time frame. OCP, their last announced expansion, which is F-line basically fully wrapped up in the first quarter this year. So there's no new P205 production announced over the next 5 years. One announced in the southern part of [ Morocco Layan ], and it's against 2027 time line. So that's the major new capacities, if you look at relatively mid- to long term, over the next 5 years, this is going to be a very tight market. The only swing factor is China.

Okay. So as we think about, you feel comfortable on demand returning to more normal levels this year and the North American spring is certainly encouraging evidence of that, how do you think about channel inventories today? I mean, outside of the U.S., which is in the middle of the season, that would be a clear signal that, that demand is coming -- could be coming back and improving the market in the back half of the year?

I think that if we look around the world, I mean, the big, one of the big consumers last year was India. They did a lot of the sort of the one that performed well. But I think all that's gone to the ground. And obviously, China they continue to want to bring their own product into -- to consume it internally. But there's also the move away from agricultural products and moving towards things like the batteries, right? In China, that's becoming a pretty big deal. So what gives me encouragement is, one, inventories around the world aren't building. I think in Brazil, they're probably built right now, but they're not going to -- I mean, once this starts, I mean, we're looking at probably the next couple of weeks just before you really start gearing up for the software season. Now they're waiting to the last moment. But once that happens, they've got to move, what, 40-plus million tonnes of fertilizer in the year. So it's going to have to move pretty soon. So I feel comfortable that the inventories aren't too high there. In any of these gap times like in March in North America where you don't quite have the market, you see this buildup of inventory and everybody starts getting concerned. But if you look at, as an example, in the U.S., that disappeared really in 3 weeks. And now I think everybody's hand-to-mouth now, right? We're resupplying the second and third time already. And so I think the same will happen in all the other markets. But you still have the monsoons to come and then you've got India, Pakistan, Bangladesh, all of those countries relying to all of those countries. And then you've got the Southeast Asia, Vietnam, Philippines, Indonesia, Malaysia and all that. So the big rice crop. So from our perspective, there isn't a lot of stuff sitting on the ground and there is a lot of pent-up demand because last year we just didn't use as much fertilizer and still got good yields. If you think about it, we were doing the math quickly here, and you'd probably remove about what was I saying about 70 kilos of DAP per acre in Illinois for corn. You probably remove 50 kilos an acre for potash. So you think about just how much has been removed from the soil last year with the under application, and it's a lot.

Okay. I want to come back to the battery point, after.

After potash.

After potash. I think, so maybe let's switch gears. And potash has been, I think, more dynamic and certainly a much more significant supply disruption in terms of the third biggest exporter, having kind of their main route to market, cut off at least temporarily. It's also one that seemed to have the biggest demand vacuum over the last 6 to 9 months. And how do we kind of -- how is this being resolved as we sit here today? And is -- are you seeing evidence of the demand elasticity is now back to a point where, hey, the pricing and the affordability works and there's tonnes going to ground.

Yes. I think in almost all markets now, if you look at it from that perspective, we settled in India. But the problem in India, of course, is that they haven't come up with their subsidies. So India is an artificial market, right? And I think the importers are waiting for the subsidy. China, we don't have -- and I got to come back to China to talk about that. But the palm oil producers, Indonesia and Malaysia, they're going to come back. They have to. They have to have their -- they have to put potash down every year for good palm oil. And if you think about oils with the loss of the Ukraine sunflower oil, edible oils are going to be tight. So that bodes really well for palm oil and others, some canola oil and whatnot. So those markets are going to be strong. Brazil is a depleted tropical soil. If they're going to get their yields that they need, they can't go 2 years completing. And then you've got U.S. doing very well. Europe has been slow. And I don't know what that means for -- I think where the supply gap is hurting is probably Europe and North Africa. Europe -- and having said that, we don't ship to Europe or anything, so our markets really don't get disrupted. What does that mean from a price perspective? I think you'll see -- you should see a strength coming of price when everything starts moving or is -- well, it's already moving. We're seeing, like I said, we saw a great April for North America. We're moving reasonable tons in Brazil. I think I saw today, at least for orders, Brazil is at 61% of a total 546 million tonne a year. So while they haven't been delivered yet, the orders are coming in.

45 million tonnes just for the oil. And that's...

That's for the whole fertilizer...

That's not just potash.

Yes. That's for the whole fertilizer market, of which what 25-ish percent is potash, which is almost all imported, right? Now the one that kind of throws a little bit of wrench in the normal supply and demand -- well, first of all, Belarus is doing probably a little better than people had expected. We think they're shipping 2 million tonnes through Russian ports.

Probably more than that 2 million to [ 3 million ].

2.5 million through Russian ports and 2 million through rail. So they're shipping 4.5 million tonnes, and we really were probably working on them being less than 4 million. So it's not huge. But that's -- 2 million tonnes is going by rail to China from the Belarusians. 2 million tonnes is going to China over the euros from the Russians. And that's always been there. But -- and then the Laos is actually shipping probably 0.5 million tonnes to China. So it just means that the demand balance, the global flows are slightly different because there's more product going to China from these sources than normally would be sea bound. So the China one is still up in the air, but you look at China, it's no longer really the bellwether it once was. It's a pretty minor market. I think it might be, what, 1 million tonnes for Canpotex, total. So it's of what were we last year, almost 14 million tonnes for Canpotex, so less than 10%, 5% to 7%.

So I think your shipping global shipment number for 2023 was 64 to 67 million metric tons, and that's relative to 2022, which was, somewhere 61 to...

Yes, 61.

So on a year-on-year basis, if the global market is growing roughly 3 million to 5 million tonnes, what of that, how much can Mosaic actually -- how much is Mosaic actually shipping kind of incrementally?

Well, Canpotex, I think you got to look at Canpotex there, and will they ship again, it kind of depends on what Canpotex ships. I mean North American market is going to be up. So that's going to be a pretty good market for us. But internationally, we're, what, 38% of Canpotex or 37% of Canpotex.

37% in the market they operate.