The Mosaic Company (NYSE:MOS) Q3 2023 Earnings Call Transcript

The Mosaic Company (NYSE:MOS) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning, and welcome to The Mosaic Company’s Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. After the company completes their prepared remarks, the lines will be open to take your questions. Please note today’s event is being recorded. Your host for today’s call is Paul Massoud. Mr. Massoud, you may begin.

Paul Massoud : Thank you and welcome to our third quarter 2023 earnings call. Opening comments will be provided by Joc O’Rourke, President and Chief Executive Officer, followed by a fireside chat and then open Q&A. Bruce Bodine, President; Clint Freeland, Senior Vice President and Chief Financial Officer; and Jenny Wang, Senior Vice President, Global Strategic Marketing will also be available to answer your questions. We will be making forward-looking statements during this conference call. These statements include, but are not limited to, statements about future financial and operating results. They are based on management’s beliefs and expectations as of today’s date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results.

Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release published yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our press release and performance data also contain important information on these non-GAAP measures. Now I’d like to turn the call over to Joc.

Joc O’Rourke : Good morning. Thank you for joining our third quarter 2023 earnings call. Before we get to the normal part of our call, I’d like to take a moment to discuss the next step forward for our company. Last month, we announced that I plan to retire at the end of the year. It has been an honor to work at this outstanding organization and lead this incredibly talented team. We’ve accomplished a tremendous amount over the last eight years. But one of the areas I take most pride in is our focus on identifying talent and developing the next generation of leaders. As a result of those efforts, mosaics Board of Directors appointed James O’Rourke, President and selected him to be Mosaic’s next CEO starting on January 1, 2024.

Bruce is a Mosaic veteran who’s been with the company for 24 years and led several functions across our business, including most recently as Senior Vice President of North America. As a member of Mosaic senior leadership team for the last eight years, he’s played a major role in establishing our current strategic priorities. The board takes succession seriously, and has been planning for my retirement for some time. Bruce’s selection follows an exhaustive evaluation of both internal and external candidates. Bruce’s broad experience strategic mindset and leadership throughout the organization make him the ideal person to lead Mosaic into the future. Please join me in congratulating Bruce.

Bruce Bodine : Thank you, Joc. I’m excited to take the next step in January as CEO. And I’d like to take a moment to lay out my vision for the future. Mosaic as a global leader in the fertilizer industry. Over the last few years, we have grown our footprint in the world’s most important agricultural regions, expanded our portfolio of value-added specialty fertilizers, and built one of the world’s most efficient potash production complexes. These investments were being made while we were reducing long term debt by $1 billion and repurchasing 15% of our outstanding shares. Looking ahead, we will continue creating value for our shareholders. With the expansion of MicroEssentials capacity at Riverview, and the investments we’ve made in Mosaic Biosciences, we’re pushing further into non-commodity value add Ag products.

We’re also continuing to explore enduring the purified phosphoric acid market for lithium iron phosphate battery production. We’re engaged in discussions with auto and battery manufacturers, and our board has already approved engineering work on a commercial plant. In Brazil, Mosaic is already the country’s largest supplier of fertilizer, and we’re expanding our footprint even further with a 1 million tonne distribution facility at Palmeirante in the fast growing northern region in Brazil. In potash, we’re further optimizing our Esterhazy facility by debottlenecking the mills and adding 400,000 tonnes of very low cost production. Across our business, we’re pursuing cost reduction initiatives. Operational improvements and our global digital acceleration program are expected to drive significant savings throughout the enterprise of at least $150 million, which you’ll be able to see in our segment results in SG&A.

These are all modest investments with very high returns, which means we expect 2023 to be a high watermark for capital spending. Next year, we expect total CapEx to be down by up to $200 million from 2023. This will allow us to continue returning all excess cash to shareholders through share repurchases and dividends. We believe our shares present very compelling value. I look forward to continuing this dialogue with all of you. But for now, I’ll hand it back to Joc for his final discussion on broader markets and our results.

Joc O’Rourke : Thank you, Bruce. Today’s agriculture market is tight. Food security is a major concern around the world, but crop production is constrained. Global stock to use ratios for grain and oil seeds remains near historic lows, which highlights the crop supply is struggling to keep up with demand. Weather conditions around the world, particularly in developing markets have impaired production. Today, El Nino weather patterns are having an impact across Southeast Asia and Australia. The situation has been exacerbated by persistent under fertilization. Over the last two years, we’ve begun to see a significant relationship between insufficient nutrient consumption and disappointing yields. And of course, key growing regions are being impacted by geopolitical flare ups and all out war, as is the case with the war in Ukraine.

Over the last two years, Ukrainian grain and oilseed exports are down 32% from pre-invasion levels. It’s difficult to see how other regions will be able to offset the shortfall, given poor weather and reduce fertilizer applications. Despite reduced production levels demand around the world remains strong. China’s import of soybeans, beef and wheat are at record levels. India, which accounts for nearly 40% of global rice trade has a limited ban on non-basmati white rice exports and places duty on a portion of its remaining rice sales in order to ensure adequate domestic supply. Additionally, we’re now seeing emerging demand from renewable diesel and sustainable aviation fuel. In the U.S., biofuels represent a quarter of soybean consumption. These dynamics mean elevated crop prices could persist through 2024 and beyond and growers will want to maximize yields.

This brings us to the fertilizer market. The supply of potash and phosphates is being impacted by sanctions, weather disruptions, and evolving producer behavior. And potash, sanctions and other disruptions continue to limit exports from the former Soviet Union. Belarus remains blocked from port access in Lithuania, forcing it to find other outlets for its shipments. Some of those exports have shipped via ports in Russia or by rail into China. Though total shipments remain well below pre-sanction levels of 12 million tonnes. This year, we expect Belarus exports to be in the range of 8 million to 8.5 million tonnes and we expect limited increases from that range in 2024. In Canada, labor strikes, rail congestion, and terminal repairs have limited the West’s ability to mitigate lost FSU tons.

More recently, the conflict in the Middle East, in addition to the ongoing war in Ukraine highlight the risk of further supply disruptions. In total global potash shipments are expected to be in the range of 64 million to 65 million tonnes simply because the supply isn’t there to meet additional demand, particularly in developing markets where crop supply is primarily made up of subsistence farming. In phosphates over the last decade, China grew to be the largest exporter of finished phosphate fertilizers, supplying about 30% of the seaborne market in 2021. But over the last 18 months export restrictions and a shift of production away from agriculture to industrial markets, has significantly reduced phosphate fertilizer exports. This year we estimate China’s exports could be 3 million to 4 million tonnes below the 2021 level of 11.4 million tonnes or roughly 7 million to 8 million tonnes.

On the demand side, we are seeing strong consumption returning. We saw this play out in the spring in North America after a slow start to the season, favorable economics and depleted slow reserves brought farmers back to the market. Our phosphate and potash shipments in North America were the highest in the last five years. This was followed by a great summer fill program and a very strong fall application season. The last three months through October were a record for Mosaic’s North American potash shipments. We saw similar dynamics play out in Brazil, the after-season fertilizer shipments ended up being very strong. For the full year we expect total fertilizer shipments in Brazil to be 43 million to 44 million tonnes, the second highest total in history.

With destocking of fertilizers in Brazil complete inventories are quite low and will need to be replenished for 2024. In India, we continue to see strong demand driving elevated imports. Phosphate inventory levels are near the low end of the most recent five-year range, which suggests shipments are going straight to the ground. Potash inventories are also very low, and we’re seeing indications of price acceptance that could drive higher shipments going forward. For several quarters now we have discussed that once volumes begin to move prices will follow. We’re now seeing available volumes move and pricing has stabilized and shown seasonal strength in many markets. These dynamics highlight the value of Mosaic’s portfolio, our business is well positioned to meet customer needs and deliver value to shareholders.

In potash our third quarter results reflect the strong sales volumes in North America. To meet that demand and mitigate the impact of Esterhazy’s planned turnaround, Colonsay was restarted at the beginning of the quarter. Looking ahead, we expect fourth quarter potash sales volumes of 2.4 million to 2.6 million tonnes and netback MLP prices at the mine in the range of $235 to $260 per tonne. Our pricing guidance reflects a product mix shift towards overseas sales as North American fall application season winds down. In phosphates, we recovered quickly from the impact of Hurricane Adelia. And we’re able to restart operations in approximately three days, which really minimize the impact of the storm. Separately, we are working through the repairs that are Faustina facility and Louisiana following a power disruption by the local utility that occurred late in the third quarter.

Those repairs should be completed in the fourth quarter. We expect fourth quarter sales volumes to be in the range of 1.6 million to 1.8 million tonnes and that price is at the plant gain of $530 to $580 per tonne. Moving to Brazil, our Fertilizantes segment report is strong third quarter results. Let me emphasize that we pushed to destock high cost inventory in the first half of 2023. And this effort was completed early in the second quarter. Our distribution business is no longer experiencing the same pressures that others are, as you can see from our results this quarter. For the fourth quarter, over 90% of our sales volume is already committed and priced. With our order book and inventory position, we expect our fourth quarter distribution margin to be in the range of $40 to $50 per tonne.

Our approach to capital allocation has not changed. We remain committed to investing in our business, maintaining a strong balance sheet and returning capital to shareholders. Our CapEx budget for 2023 is $1.3 billion to $1.4 billion. And as Bruce mentioned earlier, we expect to reduce total capital spending for 2024 by up to $200 million. Our balance sheet is strong and our commitment to return capital to shareholders remains unchanged. All excess cash will be returned through dividends and share buybacks. Year-to-date, we have returned nearly $900 million to shareholders through buybacks and dividends, including $150 million of repurchases in the third quarter. Before we go to questions, let me summarize, the world needs more crop supply, and we won’t get it without good fertilization.

Farmers are seeing good economics and want to maximize yield with fertilizers. But supply is uncertain, and channel inventories are low. Mosaic is well positioned to benefit while continuing to deliver value to shareholders, and we’re returning significant capital while still investing in the business. I look forward to watching Bruce lead Mosaic into the future. Paul, let’s move over to questions.

A – Paul Massoud : Before we move on to live Q&A as we’ve done in past quarters, we’d like to address some of the most common questions we received after we published our earnings materials last night. For our first question Joc, many have asked us to discuss recent rulings regarding our countervailing duty petitions.

Joc O’Rourke : Yes, last week, the Department of Commerce raised duties on Russian product but it lowered duties on Moroccan supply. The Department of Commerce reviews are done on a yearly basis and are based on their assessment of foreign subsidies. While we welcome fair competition, we expect to compete on a level playing field. Unfair foreign government subsidies disturb that dynamic, so we will continue to seek remedies when foreign players use aggressive marketing based on unfair subsidies that cause harm to our industry. In today’s market, trade flows may shift as a result of these adjustments. But as we saw over the last two years, global supply and demand is unaffected. Pricing continues strong due to high demand and decreased supply particularly from China. In a tight market suppliers will seek out the highest return for their product and as such, U.S. consumers will need to meet global pricing to ensure sufficient supply for their needs.

Paul Massoud : Joc, others have been struggling with destocking in Brazil, but Mosaic Fertilizantes has performed quite well in the third quarter. What differentiates Mosaic’s business in Brazil from others, and what is your outlook for the rest of the year and in 2024?

Joc O’Rourke : In 2022, we like others in the Brazil agricultural industry, we’re carrying inventory to support the expected demand. When that demand slowed in the second half of the year, we were left with higher priced inventory. But unlike others in Brazil, who are reliant on third party distributors and retailers, they have limited ability to directly restock their inventory. We on the other hand, were able to effectively deal with the destocking in the first half of the year. And by the third quarter prices had stabilized and the distribution margins had returned back to our expected range of 30 to $40 per ton. And as I mentioned, with 90% of our product committed and priced in the fourth quarter, we expect margins to increase further to $40 to $50 per tonne.

Now, there is always some positional risk in a distribution business. However, I believe we have managed through this volatile market as effectively as possible, which really sets us apart from other ag input companies and emphasizes the value of the integration of our production and distribution businesses.

Paul Massoud : Joc, our next question is on the potash market. Pricing has been muted despite supply uncertainty. How do you see the potash market evolving over the next year?

Joc O’Rourke : Thank you. As you’ve seen from the slides we published last night there’s a clear relationship between under Application of phosphate and potash and below trend yields. Now farmers and retailers are recognizing this and demand is rebounding. As we’ve said in the past demand returns volumes move and prices follow. We saw this pattern play out this year with global volumes returning. Jenny, can you walk us through the volume rebounds and why we expect a higher potash volume in 2024.

Jenny Wang: Sure, Joc. We are seeing very strong broad based demand recovery in 2023, which we are forecasting 5 million tonnes of recovery to a 65 million tonnes. It is laid by North America market, we have had a very strong spring application, and then summer field replenished the amputee channel. And for this full application, we are seeing very strong application again, we’re still having customers buying tonnes for us for the in season application. And for this new tonnes, we have realized at $20 per tonne pricing for Midwest warehouses in North America, Brazil. Similarly to North America, we have seen very strong application for summer crop soybean applications. The window for the delivery has planned by two months, which give farmers opportunity to put down more potash into the market.

With the strong potash application in Brazil, that sets a very strong recovery in that market. And we believe there are big buying to come for the Safrinha corn season, which is about to start soon. And across the world to China, we are seeing China has record input to potash this year. And domestically in terms of the consumption, there’s probably 10% of the potash application interested in China. And that is driven by the concerns to the food security and also a very strong commodity prices there as well. So with this major market demand growth in 2023, which set well into 2024 that we’re going to continue to see broad based demand recovery. Starting from Southeast Asia, which in Malaysia, Indonesia, they have been working through their high priced inventory throughout 2023.

And we are seeing customers reengaging now to prepare for 2024 as they will come out of any new drought impact and or low inventory of the potash in the channel. And lastly, rice and palm oil prices are very constructive for the farmers there to put down potash which has been under applied over the last two years. India’s subsidy program is supportive to potash as well with lowered farmer price, we should see a boost of the farmer usage of potash in that part of the market. And with improved affordability and stabilize the price, we are going to see very broad range of the demand recovery across the world in 2024.

Joc O’Rourke : Thanks, Jenny. So Jenny has given a view of the demand side. From a supply side we’re modeling a recovery in Belarus from 70% to about 80% of presanctioned shipments. We’re expecting Uralkali to recover to prewar levels and modest growth from EuroChem’s [Indiscernible]. In Laos, we also expect to see some modest growth. So overall, if any of these fall short, we will see lower shipments not because of a demand problem, but because there is not enough supply.

Paul Massoud : Thanks, Joc. Operator, please open the lines for follow-up questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Steve Byrne with BofA. Please go ahead.

Steve Byrne: Well, thank you and it’s been a pleasure working with you, Joc. Wanted to drill into Fertilizantes a little bit here. Are we right that roughly 20% of the fertilizer volumes that you distribute come from your own phosphate production in the country? But we would assume the EBITDA contribution from that in country production is much greater than that 20%. Is that right? And what are your — what’s your prospects for either expanding that production or maybe switching into more TSP and reducing your ammonia purchasing costs down there?

Joc O’Rourke : Thanks, Steve. Yeah, so in Brazil, one of the benefits of the integration of course is we can move our own production through our distribution system. And while we sell a good chunk of it as a B2B business to other players in the market about 20% is not a bad number to estimate of what goes through our own system. That product we transfer at market price, so we try to keep this clean base between the two as possible. That said, now we would expect under general market conditions that your margins for the production business would be better than distribution, or at least they would be for products such as TSP, or DAP. As you say, our probably our least profitable product that we make down there would be the SSP for good reason.

And so we’re constantly looking at how we make that product mix better, how we make it more profitable. And we can’t ignore dicalcium phosphate or animal feed as well in there. So which is again, one of our highest return products. So that whole area of mix we’re looking at, we’ve got a strong plan down there to reduce costs, but also to optimize production rates. So all of that is in works. And all of that will be something that Bruce and with Karen Swager and her team will be working hard to accomplish.

Operator: Thank you. And our next question today comes from Richard Garchitorena with Wells Fargo. Please go ahead.

Richard Garchitorena : Great. Thanks. And congrats, Joc. So my first question is just on the outlook for potash. Obviously, strong growth next year, 5 million tonnes. I was wondering how do you think about your operations heading into next year. Looks like in the 4Q guidance, you’re going to come in around 8.7 million 8.9 million tonnes of production. So do you expect to keep those production levels next year? For all them to grow with the market? How are you thinking about that? Thank you.

Joc O’Rourke : Yeah, thanks, Richard. And let me follow that with also a little bit of a discussion on how we look at Colonsay. For the first part of the question, I think, yes, we would expect the same sort of level next year, maybe a slight uptick because of increasing demand. But we’re looking at somewhere in that same range of production, like say maybe a couple 100,000 tonnes higher depending on Campotex in particular. But in terms of the strategy for it, over the last few years, Colonsay has been our swing plant. And, we’ve been able to ramp it up and down efficiently giving us the ability to run our lower cost Esterhazy and Belle Plaine at full rates while being able to flex production to meet demand. So as we look forward to next year, that is really going to be the question.

What is demand going to look like, and we certainly have the ability to go either up or down from the approximately as you say 8.9, which is about where we think we’ll spend and this year if you include Kaymak [ph]. So we always prioritize Esterhazy and Belle Plaine and we focus that on the North American granular grade market where we see our best netbacks. And then our next focus is meeting the international sales program of Campotex. This year strong North Americans demand coupled with lower enforcement, we needed Colonsay, both to offset Esterhazy is turnaround and to meet that increased demand. In the fourth quarter, we’re expecting strong international shipments through [Indiscernible 0:26:26] as global markets continue to rebound. So at this stage, we expect to need Colonsay to meet that demand and replenish our granular grade inventory in preparation for the North American spring season.

And then, so that would put us about probably about the same level. But as we move into the second half of 2024 and beyond Esterhazy K3 will be fully ramped up, and the addition of our hydroflow project will optimize their capacity there. And so at this stage, we’ll have to reassess the longer term role for Colonsay. And as always, we’re focused on running our assets in a manner that maximizes value taking into account the need for flexibility and to deal with the seasonality and market variability in our business. So just to summarize that in terms of your original question, we expect to run in that same sort of range maybe growing with the market which is growing at about 2% or 3% a year but next year we’ll grow even more. And if we need that volume or if we find good value adding sales for that kind of volumes we’ll run up.

And if we don’t, we’ll probably hold where we are today with Colonsay being the variability in that.

Operator: Thank you. And our next question today comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson: Hi, Joc. And congratulations as well. I got to follow up on that last question your answer because I’m confused. So you are saying Mosaic is saying today that you think demand for potash global is going to grow 5 million tonnes next year, from 65 to 70. Your Canpotex partner says 66 to 69, 3 million times 5 million tons, whatever, that’s great growth. Your answer says that you’re going to produce about the same in potash in Mosaic next year, then you said you might grow with the market which goes 2%-3%. But next year grows more, so explaining to this question. If the market is going to grow 3 million tonnes, 4 million tonnes, 5 million tonnes next year, and you Mosaic can’t supply more. And you’re tied offshore with nutrients and to Canpotex, who’s going to supply the extra 3 million, 4 million or 5 million.