Mosaic Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Murray Company's Second Quarter 2022 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. Your host for today's call is Paul Massoud, Vice President of Investor Relations and Financial Planning and Analysis of The Mosaic Company. Mr.

Operator

Masood, you may begin.

Speaker 1

Thank you, and welcome to our Q2 2022 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat as well as open Q and A. Glenn Freeland, Senior Vice President and Chief Financial Officer and Jenny Wong, Senior Vice President of Global Strategic Marketing will also be available to answer your questions. We will be making forward looking statements during this conference call. Statements include, but are not limited to, Statements about future financial and operating results.

Speaker 1

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 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.

Speaker 2

Good morning. Thank you for joining our Q2 2022 earnings discussion. I hope you've had a chance to review our posted slides as well as our news release and performance data, which were made available on our website yesterday. I will provide more additional context Mosaic delivered 2nd quarter net income of $1,000,000,000 and earnings per share of 2.85 Adjusted earnings per share were $3.64 and adjusted EBITDA was $2,000,000,000 Free cash flow totaled $794,000,000 allowing us to return 6 $67,000,000 to shareholders during the Q2, including $612,000,000 of share repurchases, bringing the year to date buyback total through June 30 to over $1,000,000,000 We've continued to buy back shares aggressively through July because we believe our portfolio positions us to continue driving strong results and generating significant cash flow through the rest of the year and into 2023. As such, Mosaic's Board of Directors has approved a new $2,000,000,000 share repurchase authorization to begin once the current one is exhausted later this year.

Speaker 2

Before digging deeper into our business, Let's discuss the broader agricultural markets. There are several issues threatening global food security. The war in Ukraine continues to create uncertainty around food supply from 1 of the world's most important crop producers. In addition, Europe and U. S.

Speaker 2

Have experienced very high temperatures, while Southern Brazil is showing signs of drought conditions. And all of this is happening at a time of lower overall nutrient applications because of constrained supply. Each of these issues alone can have a material effect on global crop production, but together, the risk to food security is significant. This suggests global stock to use ratios, which are already near 20 year lows, will remain under pressure. Because of this, we see a tight supply and demand scenario for global grains and oilseeds continuing through 2022 and into 2023.

Speaker 2

As we focus on the potash and phosphate fertilizer markets, the fundamentals remain quite strong. In potash, we continue to expect Belarusian exports to be down 8,000,000 tonnes this year. Some of that will be mitigated by incremental supply producers like Mosaic over the next 18 months, but that will not be enough to erase the deficit that we see lasting well into 2023 at least. In phosphates, China has continued to restrict exports as it prioritizes domestic industrial and agricultural demand. We now believe full year phosphate exports from China could be down as much as 5,000,000 tonnes from the prior year total of 11,500,000 tonnes.

Speaker 2

Shifting focus, we believe global fertilizer demand in the first half of twenty twenty two was down about 10% from the same period last year, which aligns with the shortfall we've seen in supply. Grower sentiment has grown more cautious, but supply constraints are supporting global prices and margins well above historical levels, a situation we believe will continue at least through the rest of the year. North America and Brazil have been well supplied thus far in 'twenty two, but much of the rest of the world is continuing to see unfilled demand of both phosphates and potash as a result of limited supply. In North America, a compressed planting season, macroeconomic headwinds And volatile crop prices impact spring season consumption. First half applications were down from the record year in 2021, but remained in line with historic levels.

Speaker 2

Looking forward, we expect normal demand leading up to fall application. In Brazil, We saw first half demand in line with historic levels. Channel inventories were built in country by importers, driven by concerns over supply availability stemming from geopolitical events. Significant customer prepays though indicate farmer demand will ramp up India's phosphate inventories are low and concerns over availability persist. Farmer demand for nutrients remains very strong and the government continues to indicate it will ensure adequate supply for domestic consumption.

Speaker 2

In China, port inventories of potash sit below 2,000,000 tonnes. And in Southeast Asia, shipments of potash appear below historic levels. We see these dynamics impacting demand beyond 2022 as reduced application this year will require a catch up in future years when supply availability improves. As we look at our business in the context of today's global markets, we remain optimistic. The investments we've made over the last decade have positioned us well for today's environment.

Speaker 2

In Brazil, our 2018 acquisition of the Fertilizantes business Has driven significant shareholder value. We've seen EBITDA grow from less than $70,000,000 in pro form a 2017 to $1,200,000,000 over the last 12 months. And we've completely recapitalized the business, having now bought back all of the shares issued and repaid all of the borrowing to fund that deal. Looking forward, Mosaic Fertilizantes will continue to benefit from its market position as the country's Largest producer and 2nd largest distributor. We are seeing inflation in our cost structure, but believe ongoing optimization Should offset much of the impact.

Speaker 2

In potash, we are realizing the benefits of K3, one of the world's most efficient potash mines, and we're actively working to optimize that asset. We've reached our initial operating run rate target of 5,500,000 tonnes per year at the end of the first quarter and plan to continue our optimization of the complex with the addition of 3 new underground miners over the next year, resulting in an incremental 1,000,000 tonnes of production capacity. At Calanze, we've begun the process of restarting the second mill, which should expand output to 2,000,000 tonnes per year by the second half of twenty twenty three. In phosphates, we continue to benefit from our advantaged position in ammonia, and we're now seeing an improvement in sulfur costs that should begin to flow through to our production costs later this year. We've seen prices moderate down to levels we believe are sustainable for the rest of the year.

Speaker 2

As a result, we expect our stripping margins will remain well above Given the outlook for our business and the free cash flow we expect to generate, capital allocation remains a key focus for us. First, we continue to invest in our business. For 2022, total capital expenditures remain unchanged at 1,300,000,000 We remain open to modest high returning projects and small bolt on acquisitions, especially in Brazil, but we are not interested in large scale greenfield projects. 2nd, we're committed to ensuring a strong balance sheet and plan to retire $550,000,000 of long term debt in the second half of twenty twenty two, after which we see no need to further deleverage. The 3rd pillar of our strategy is returning capital to shareholders.

Speaker 2

Year to date, we've returned $1,100,000,000 to shareholders through buybacks and dividends, and we expect that pace to continue, if not accelerate, as the year progresses. In total, we expect to return essentially 100% of our free cash flow after the commitments to the business and the balance sheet we've discussed. Because we're approaching the end of our current authorization, our Board of Directors approved a new authorization of 2,000,000,000 That begins once we've exhausted the current authorization. At today's valuation, buying back our own shares provides better economics than any other use of cash, so we expect to take advantage of this as long as the opportunity remains. We may also consider supplementing share repurchases With special dividends over time depending on market conditions.

Speaker 2

As we said in the past, we will not build cash on the balance sheet just for the sake of it. Before going into Q and A, allow me to summarize. Mosaic delivered very strong results in the 2nd quarter, and we expect favorable dynamics as we continue through the year and into 2023. We're continuing to help the world grow the food it needs by ensuring customer demands are met and we're returning significant capital to shareholders while still investing in the business and strengthening our balance sheet. Now with that, I would like to move on to the Q and A portion of the call.

Speaker 1

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. Jacques, just to start, I think it might be helpful to provide an update on potash and phosphate supply constraints. What are we seeing in the market today?

Speaker 2

Thank you, Paul. Let's start with potash. The Belarusian and Russian exports together, we expect to be down by about 12,000,000 tonnes this year due to the effect of sanctions. Now we do expect recovery from both Russia and Belarusian exports as we move into 2023, But the world is going to need those tonnes if demand snaps back in any way over the next year. So what do we see?

Speaker 2

Russia, Probably easier to come back. They're finding ways into the market. We're seeing their tons, particularly in countries like Brazil, India and Central America. Belarus has had very little comeback. They are probably moving 100,000 tonnes a month through to China by rail.

Speaker 2

But other than that, we're seeing very little of Belarusian product in the market. So we expect between the 2 of them, like I said at the start, 12,000,000 tonnes. In phosphates, the biggest player, of course, is China in terms of export restrictions, and those have been extended into the second half of the year. Our projection for Chinese exports this year is down to 7 ish 1000000 tonnes from 11,500,000 tonnes. So we're seeing A good 5,000,000 ton reduction of exports.

Speaker 2

And again, because of the structural changes in China, We really don't expect them to come back in a big way even after the restrictions end. So in 2023, We expect domestic A and industrial demand to continue to restrict Chinese exports.

Speaker 1

Given the dynamics we saw in the Q2, we received several questions on the resiliency of potash and phosphate demand. Can you discuss how you see the second half playing out?

Speaker 2

Let me start by saying because of the lack of supply in both phosphates and potash, demand had to be rationed. And what we saw was that rationing of demand meant lower use in different areas, but specifically Lack of supply in some areas. So it's very regional how this played out. In North America, particularly, a compressed season because of weather in the Spring led to very late and very limited ability to add fertilizer to the ground. So this combined with Growers being willing to mine their soil because of the higher prices probably led to lower use in the United States and Canada.

Speaker 2

But remember, any of this missed or curtailed application will have be made up in the next couple of seasons. So we do expect a very robust normal fall application. Now again, caveat there being, it will be late because the planting was late, so the harvest will be late. So it could cross quarters from the Q3 into the Q4. But if I look at the overall Second half of the year, we expect it to be very much in line with a normal year here in the United States and in Canada.

Speaker 1

Jacques, we received a few questions on elevated inventory levels in Brazil, specifically around potash. How do you think this will affect new sales? And how might this also impact pricing?

Speaker 2

Thank you. As we discuss Brazil, we have to start by understanding that 85% of fertilizer into Brazil is imported. And at the start of the year, there was a huge concern with the constrained supply over whether or not the country could get the fertilizer it needed for its planting. To put it to a point, the Minister of Agriculture and the President of the country Both traveled the world to ensure that imports would be available for Brazil. As such, Brazil led pricing in the first half of the year for around the world.

Speaker 2

Now because of that, imports were up about 30% year over year in the first half. So as we move into the second half of the year, inventories are high. And because inventories are high, farmers believe they can defer. But ultimately, Solid economics for both soybeans and second crop corn are going to drive the farmer to apply fertilizer. And when they start applying, we believe the ramp up of buying activity will consume the inventory and we will end the year At a normal place.

Speaker 2

The best evidence from our perspective of this is the high prepay that we have seen in the last quarter, Which indicates that the farmers are getting ready to buy, the farmers are getting ready to apply. They're just waiting for the right time.

Speaker 1

We received a few questions from analysts about our Q3 sales volume guidance, especially for phosphates. Can you provide some context around our expectations for both potash and

Speaker 2

Yes, thank you. Let me start by saying this is mostly a timing issue. The expectation could come in the Q4 rather than the Q3 due to this delayed harvest. So While we expect a very normal second half, where exactly it plays out in terms of the timing is yet to be seen. In Brazil, planting for the 2nd crop corn or the soybeans won't happen till November, December.

Speaker 2

As such, there is time for them to delay their purchases until the last minute. Now Again, in Brazil, just like North America, we expect normal application in the second half of the year. But as always, with higher prices, People are deferring the purchase as late as they can. However, good economics will mean that in both cases, We believe normal application will occur. If you do note, the high range for the phosphate guidance does align with more typical sales But again, we could see those slipping into the Q4.

Speaker 1

Clint, this question is for you. We received a question on our working capital needs in the last few quarters. How do you see that playing out going forward?

Speaker 3

Thanks, Paul, and good morning, everyone. As we look at working capital, there are a number of dynamics to keep in mind. First, the overall Market pricing levels and seasonality that impact our income statement also impact our balance sheet, particularly around working capital. As we've seen the pricing levels and the overall market increase over the last couple of years, that has caused an increase in our core working capital accounts of Receivables, inventories and payables. So those tend to follow directionally what's happening with the overall pricing environment.

Speaker 3

And again, over the last couple of years, as a result of that, we've seen the overall working capital needs of the business increase. Now in addition to the impact of the pricing environment that we're operating in, we also have the seasonality of our business that plays out. And so you see some meaningful changes from quarter to quarter based on which season we're either in or entering into. 1st quarter, we tend to see preparation for the spring season. So we typically see inventory builds.

Speaker 3

We typically see our Accruals and payables from the previous year get paid out. And then as we move into the Q2, we tend to see receivables build. We tend to see Other impacts of on working capital. So we can see as we move through the seasons, it certainly will play out in our working capital Accounts, particularly the seasons in North America and Brazil. Now two things I think are Good to focus on or to recall, particularly as it relates to Brazil.

Speaker 3

1 is our growing distribution business in Brazil Does tend to hold quite a bit of inventory, particularly as it moves into the season and then it tends to liquidate throughout the season. So that can be a driver of half of the year and then reverse out in the second half of the year. And just to give you a sense of order of magnitude, first half of this year, We saw prepayments in Brazil increase by about $830,000,000 Again, that's another factor that's Influenced by the overall pricing environment. But again, we would expect to see the vast majority of that, if not all of it, reverse out in the back half of the year. And specifically in the Q3, I would expect somewhere between 50% to 75% of that number to reverse out of working capital.

Speaker 3

So Again, just keep in mind as you look at our working capital, overall pricing environment impacts it, but also the seasonality of our underlying business.

Speaker 1

That concludes the fireside chat portion of the call. Operator, let's open up the line to follow-up questions.

Operator

Thank

Speaker 4

Hi, Steve Byrne, Bank of America. I'd like to get your view on where do you take Fertilizantes from here, Joc, you mentioned you were looking at potentially some small bolt ons down there. What Businesses are you largely looking at? And can you also comment on how the gross margins in that business Differ between product you produce versus product that you buy and then redistribute. Do you see that split

Speaker 2

Look, let me start by saying probably as we look at Brazil, the Northwest or Northeast Kind of section of Brazil, as you go towards but not into the Amazon, obviously, It seems to be the area that's growing the fastest. It's growing probably at 10% plus per year. We have plans to build a hub that would allow us to be more participative in that region. So as that market grows, that's one area where we would expect to expand our distribution business. And then in the areas of production, we've got plans for optimizing our existing operations.

Speaker 2

We're looking at plans to expand and extend the life of our potash Our facility down there because we think it's a niche area where it can supply. So there's a number of opportunities we're looking down there that we think are going to have very quick paybacks and relatively limited capital requirements. In terms of the margins, Clearly, producer margins are better at this type of market Then distribution margins, but on the other hand, the benefit of our distribution business is that the margins stay very constant year on year. Where we what I'll say though, not to be too explicit about our actual margin Split is that our best margins are seen for things like MicroEssentials, where we pick up the production margin in the U. S.

Speaker 2

And then both the distribution and retail margin down in Brazil. So those margins are pretty fantastic. And then the other place where the margins are really good is our production B2B business where we sell it through our own distribution and we capture both of those margins. So But overall, I think our right now, our 2 thirds of our earnings are probably being driven by the production business.

Operator

And we can now take our next question. Caller, your line is open. Please go ahead.

Speaker 5

Hi, Joel Jackson from BMO. Just following up on the Brazil margin question or Fertilizantes margin question. Obviously, margins have been all over the place the last bunch of quarters in a rising per leisure price environment. I mean, how should we see margins there? I'm assuming some of the peak margins we're seeing right now have to go down, you guys see inventory gains, commodity prices can't stay here forever.

Speaker 5

So how do you see the next couple of quarters? And then what would be kind of the mid cycle margin guidance to think about?

Speaker 2

That's a pretty detailed question here, Joel, and one which I'd be making some pretty big forward looking statements. Look, I think our the one thing to say is where we're expanding mostly has been in our distribution business. Those margins have been Pretty stable for a long time. And again, without getting into too many details of Exactly where those sit. But I don't think those are going to change mid cycle a whole lot from where they are today.

Speaker 2

Obviously, we've had some positioning gains that have helped us, But and those come and go a little bit. But I think our overall strategy of how we buy raw materials, including Ammonia or sorry, UAN and others for our business, because we buy those fairly carefully, I think we're going to continue Being well positioned in that market. In terms of mid cycle though, in our original Prospectus to buy the business, we talked about a $350,000,000 a year. And I would say between the benefits of our integration and then the benefits of Our changes since then, I would argue that we've probably added at least $400,000,000 to that business, and we would be Likely more likely in the $700,000,000 to $800,000,000 per year range mid cycle.

Operator

We can take our next question now. Caller, your line is open. Please go ahead.

Speaker 6

Hi. It's Vincent Andrews from Morgan Stanley. Good morning, everyone. Chuck, just maybe just give us your latest thoughts On capital allocation, obviously, the $2,000,000,000 buyback, but you did also mention potentially doing special dividends. And so maybe you could just layer on how you're thinking about The common dividend from here and what might cause you to do a special dividend and how large it could potentially be?

Speaker 2

Sorry, I guess I got my mic backwards. Thanks, Vincent. Yes. As we think about capital allocation, really our thoughts on that have been reasonably consistent, which we've made a commitment a long I'm going to pay the $550,000,000 down to make the $1,000,000,000 of payments. But once that's done, we believe that's done.

Speaker 2

We've got A very strong balance sheet. We're comfortable. Obviously, we have to do our capital. And that brings us down to the question you're asking, which is, How are we going to distribute the rest? And I said just earlier, we expect to give that all back to shareholders.

Speaker 2

We don't see anything More enticing than our own business right now. So we expect that certainly at these types of share prices and our types of EBITDA to enterprise value ratios, we think our shares are very compelling and we'll continue to buy those. Now if That if the price of our shares changes or the business changes, then we may make a decision to move towards some level of special dividends, but recognize that just says that we originally intended to have more of a balance. The special dividend would Support or be in favor of the long term holders who don't intend to sell their shares. So in some respects, I want to Serve all of our shareholders and so that might be something they would like.

Speaker 2

So that would be the reason for that. In terms of Regular dividends, we've made the decision that we would look at the regular dividend basically annually. And so our thought was we would leave that till the end of the year. But look, our share count is lower. Our debt level is lower.

Speaker 2

So we have Less money going out for on a total on a dividend basis today than we had a year ago. And obviously, we have less debt repayment to make, so or less interest payments to make. So I think all of that would go into Our dividend increases on our regular dividend plus to make sure that we're paying out what we think is reasonable for the long term shareholder.

Operator

We can take our next question. Caller, your line is open. Please go ahead.

Speaker 7

Hi. This is Lucas Beaumont from UBS. I

Speaker 3

also had

Speaker 7

a question on Fertilizantes. So I just wanted to talk about the Purchased nutrient volumes there. So it was up kind of modestly in the second quarter, but down a bit over 10% in the first half From last year. So just given how strong demand has been in Brazil, I was just wondering if you could sort of tell me why the Purchased nutrient volumes there were in fire. And if you could give us your thoughts on how the second half is likely to shape up from a volume perspective?

Speaker 2

Sorry, can you repeat that last bit of that? I missed

Speaker 7

the purchase volumes. Purchase nutrient volumes in the second half Ian, please.

Speaker 2

Now we've lost you completely. Lucas, are you still there?

Speaker 7

Yes, I can hear you. Can you guys hear me?

Speaker 2

Okay. We can hear you again. We lost you completely there. You were breaking up and then we lost you completely. I apologize profusely, but if you could ask again, I'm sorry.

Speaker 2

We're struggling with the online.

Speaker 7

Probably my accent. So Infernalizantes with the purchased nutrient volumes, they were down about 10% year on year in the first half. So I was just wondering why it wasn't stronger given how strong Brazil has been and what you're thinking for an outlook in the second half on purchased nutrient volumes. Thanks.

Speaker 2

Yes. Lucas, I think that actually has a fairly simple explanation, which is As we have integrated our B2B business and our B2C business, we've tried to Focus on selling our B2B product through our own distribution sales system. And so because of that, That is an intercompany transfer and doesn't count towards we don't we try not to double count the volume. So I suspect what you're looking at there is although purchased Nutrien volumes were down, that's because they were replaced by internal volumes From our own B2B business, if you will, or our production business.

Operator

And our next question now, caller, your line is open. Please go ahead.

Speaker 3

Hi. Chuck, nutrients are supposed to be applied in optimal ratios, something called the Liebig's Law of the minimum. So with potash and nitrogen more constrained than phosphate, does that reduce demand for Even though phosphate is less constrained, people aren't going to apply as much because they can't get the nitrogen in potash.

Speaker 2

Yes, thanks. Sorry, I didn't pick up the name. Well, your No, I'm not sorry. Sorry. Hi, John.

Speaker 2

Hi, John. Okay, I think I got your question. Yes, So I think there's no question there will be a big deficit in some markets, particularly Like you say, potash will be underutilized in a lot of markets, including Asia, West Africa, Europe, probably, etcetera. And likewise, so will nitrogen. I don't know if that would stop people from using or make people use less phosphate.

Speaker 2

I suspect you would still try to use the right amount of the fertilizers. I know that obviously the optimum ratio is best, But, so I guess it's like vitamins. Not having enough vitamin D wouldn't mean you wouldn't want to have enough vitamin C, if you will. So It's probably beyond my agronomic understanding to know if that would have a thing, but we're not looking at any kind of Restricted sales because of others. The one thing I will acknowledge on that though is if the price of Nitrogen gets so high that it takes up a lot of the budget.

Speaker 2

That has historically been a problem for the other nutrients in countries like India, where They tend to over apply nitrogen. And if it takes up a disproportionate amount of their budget, they could restrict other uses.

Speaker 8

It's Adam Samuelson with Goldman Sachs. Joc, I was hoping to maybe come back to the I know you talked a bit earlier about kind of the volumes improving in the back half. But more holistically, can we just what Would it take for your the operating rates in your U. S. Phosphate business to get back over 85%?

Speaker 8

They haven't been there In some time, just trying to is it just demand? Is it logistics issues in Florida? I'm just trying to get a sense of Seems like there's a lot of under absorb overhead and idled and turnaround costs that you're absorbing here that are maybe leading to cost and margins not as Robust as

Speaker 9

they could be.

Speaker 2

Yes. Thanks, Adam. Look, I saw that you had asked that question in your pre Stefan, I was thinking about it a little bit. If I look back the last couple of years, we've had a freeze in Texas that Restricted sulfur use, which actually restricted our ability to run. We had Hurricane Ida, which knocked out power In Louisiana for, I think, 3 or 4 weeks, etcetera.

Speaker 2

And if I look at and then Q1 of this year, so we went into the Q1 of this year with low inventory in phosphates. Then we had rail restrictions, Unbelievable rail restrictions. And so while we've built up inventory, it's been very difficult to move The product and hard to we've been low on sulfur. Now we're high on sulfur, but it's our turnaround quarter come That we've just gone through. And so now as we get there, I am hoping that there's no external factors that continue to Push against our Southern U.

Speaker 2

S. Location, if you will, and that should be what it takes There hasn't been any big internal things that have slowed us down. There's been more of this Damage from the hurricane, damage from the ice storms and then or not damage, sorry, restrictions from the ice storms, Logistics and actually earlier at the start of the 18, 24 months you've talked about actually constrained because of inventory. So we had to shut down plants, but we are looking to more normal as we go forward.

Operator

We'll take our next question now. Caller, your line is open. Please go ahead.

Speaker 7

Yes, good morning. This is

Speaker 5

Michael Piken from Cleveland Research. And just wanted to talk a little bit about Ma'aden and Your investment there and when we might see the trajectory of profitability increase, are there any issues with Getting ammonia there and just overall your outlook for ammonia costs across the business in light of some of the European and Asian curtailments. Thanks.

Speaker 2

Yes. Thanks, Michael. In terms of Moden, Our second quarter equity earnings were about $34,000,000 Our sales Attributed to the business was 413,000 tons. So while not quite up to what it is ultimately going to hit, is actually making a positive contribution to us, which is good, And helping us supply our Indian customers, which is also a good thing. We want to see that going to our Customers around the world.

Speaker 2

So overall, I mean, they continue to have a ramp up plan. It's certainly been slower than we would have loved to see, but That is what it is. Having said all that though, our modern continues in this market, particularly modern continues to be highly advantaged With natural gas price and they're paying in the kingdom of $1.2 That represents an unbelievable sort of structural advantage to that operation. And then the other one is Very low sulfur costs. So one would expect that Moden right now would have a very low actual cost per ton compared to the rest of the world and probably is now taking its places as the low cost producer.

Speaker 2

In terms of ammonia availability, Our ammonia availability, I think that was the second part of your question, has been actually unrestricted. We have Basically, 2 thirds to 75 percent produced between ourselves and our contract with CF And then the rest that we're buying on the open market, which we have long term agreements and contracts that tend to make that Work quite well. And I think if I look back to it, our price for ammonia was in the high 500 range compared to a 1200 plus on the market. So we're not only getting the ammonia we need, but we're getting it at a very advantaged price.

Operator

We can now take our next question. Cole, your line is open. Please go ahead.

Speaker 5

Hi. Andrew Wong from RBC. So a similar question to Adam's, but on Fertilizantes phosphate production, I recall the business was impacted by some extended turnarounds last year, but it looks like in Q2 Production was down versus Q1. And are there still any constraints in that part of the business? And Are we setting up for a Q3 seasonal strength, which is typically what happens in Brazil?

Speaker 5

And then just one follow-up on some of the corporate line items. There was a negative charge there in Q2. Can you talk about that? Was it mostly inter segment sales? And does that reverse in subsequent quarters?

Speaker 5

Thanks.

Speaker 2

I'll leave that one to Clint the last piece to Clint, but I might need you might need to specify a little more which one you're talking about. But let's talk about phosphate production in Brazil. I think Brazil probably more than anywhere, We've got out of sync with our turnarounds and some of our maintenance because of COVID. Bruce, and again, these things take time to play out, but we had to delay and minimize A number of turnarounds and particularly the plants that were impacted the most were probably our Shaw plant where we had a couple of failures of equipment that was we had the parts sitting there, but because of restrictions that the Communities put on us and others, we put off the shutdown till I think it was supposed to be the Q3 of this year and then we've had breakdowns of that equipment. And in TAPIRO, we had a couple of issues with respect to the conveying systems and stuff, and it's just been harder to get them fixed and longer to get them fixed, Particularly in Brazil.

Speaker 2

And so there's been a bit of a hangover there in Brazil from that. But again, we look like we're all ready for Strong third quarter and like you say, that's when we're going to need the production to meet market demands that are out in that country.

Speaker 3

And Andrew, this is Quinn. I think to the second part of your question about what you're seeing in the corporate segment. I think The driver of that is intercompany sales. It's profit and inventory, and that typically happens When one business unit makes sales to another business unit, but the final tons haven't gone to a third party yet. And we had about 300,000 tons Move in June, move from phosphates down to fertilizantes.

Speaker 3

And so I think that's what you're seeing in the corporate segment. We do that So that as the results of the individual segments come together for the consolidated number, we need that Offset to get all the numbers right. So I think what you're seeing is an internal shipment that occurred in June. And again, that should Clear out as Fertilizantes makes that sale.

Operator

And we can now take our next question. Caller, your line is open. Please go ahead.

Speaker 10

Hi, this is Jeff Zekauskas from JPMorgan. Two questions. I didn't fully understand your phosphate price guidance for the 3rd quarter. You gave an explicit number for Potash. And secondly, In your cash flows from financing activities, if you exclude what you did in terms of debt pay down and share repurchase And dividends, you had a negative EUR 672,000,000 outflow And the number isn't as negative for the year.

Speaker 10

But I was wondering when you net out all of those numbers For 2022, what should they be? And why aren't those numbers in Cash flow from operations. So I guess those are the two questions.

Speaker 2

Okay. Thanks, Vincent. I'm sorry, Jeff. Sorry, Jeff. I'm One name off.

Speaker 2

Jeff, I'm going to let Clint give the first one

Speaker 3

or is he still trying

Speaker 2

to figure out what exactly you're No, he's ready. I'm going to get let Clint and then I'm going to come back and talk to you about the price forecast for phosphates.

Speaker 7

Yes.

Speaker 3

Yes, Jeff, I think what you're seeing Are some of the entries associated with some of the short term financings that we have, We have not only inventory financing facilities that we use seasonally To finance some of our working capital, but I think some of the other entries that you may be seeing are related to some of the accounts receivable securitization facilities. And those are, some of our working capital funding mechanisms that we use, again, through the seasons. And one of the things, in particular, in the second quarter is, as we look at the increase in customer prepayments, particularly down in Bill, year to date, as I mentioned a little bit earlier, year to date that's up about $830,000,000 And when we look at that, that is a source of working capital financing to us. And so as that cash comes in and that typically lands in your cash from operations line, We use that cash to actually replace other sources of working capital financing like our inventory financing and our AR financing. And so as we use that basically cost the interest free Working capital financing from customer prepays to pay off some of those lines that were drawn earlier in the year, what you'll see is a disconnect The prepayments are in cash from operations, paying down some of those short term lines are down in financing.

Speaker 3

And so what you'll see also though in the back half of the year as those prepayments reverse out, I think you'll probably start to see a draw up of some of those lines and Probably see a reversal of what you're seeing through the Q2. So happy to spend some more time with you and go through that in more detail offline. But I think that's what you're seeing Some of the replacing external third party financing with customer prepays as those dollars come in And then I would expect kind of those dynamics to reverse out in

Speaker 5

the back half of the year.

Speaker 2

Okay. So Jeff, let me talk a little bit about the phosphate price forecast. And we didn't mean to Confused in any way. I think the challenge is, again, same thing. It depends a little bit on when sales come in.

Speaker 2

And At this stage, I think we're only about 25% sold and priced for the quarter. Pretty early in the piece in terms of what we expect. So I guess the way you could look at it is prices have retreated from where we were in the Q2 slightly moderated. And I think we're now at a stable range, so you can almost look at today's price. If you take The cost of freight from today's published price, you'd be pretty close to where we're what we're going to see for the quarter.

Speaker 2

So I think that would be the easiest way to look at it. Certainly, I think pricing has come down a bit from quarter 2, moderated a little bit, But we expect it to stabilize about where we are and probably stay at about where Spot is right now for the quarter.

Operator

We can take our next question. Caller, your line is open. Please go ahead.

Speaker 9

It's Chris Parkinson from Mizuho. Just a quick question, just given the outlook for cash flow and certainly appreciate all of your comments about returning to shareholders. But just a quick question outside of some of the modest growth CapEx Sure planning. Are there any other meaningful projects at Faustina, Uncle Sam or anywhere that you're Currently assessing to further improve our liability or things you've been kind of looking at for years that are now of interest? Or should we just stick with the Buyback and the potential for special dividends?

Speaker 9

Thank you.

Speaker 2

Yes. Thanks, Chris. Certainly, we're Making sure in this stage that we're looking at those reliability projects, I mean, I think we just put in a new Reformer in Louisiana for the ammonia plant, those over Time will make a big difference in terms of the reliability capacity of that plant. We've mentioned in Calanze, we're going to start up the 2nd mill, which has been idled for a couple of years, but these are all $50,000,000 projects. I think in potash, we've got a Well, as part of our K3, the final part of our K3, we'll be building a finishing off A compaction unit for that plant, which aligns the production with the needs for compacted product.

Speaker 2

But Beyond that, so that's sort of where our needs have stayed basically constant despite the K3 number coming down is because we are taking the opportunity to do some of these high return projects, particularly when At these kind of margins, the payback is so short. So whether you look at the CTV project where we're going to Extend the life of the or intending to spend extend the life and increase the production of our potash unit down there Or increasing production at Calonne, improving reliability at Louisiana, all of those things we're doing, but we With these prices, they'll have a very good payback and it doesn't compromise our intention to give back 100% of what remains to the shareholders.

Operator

We can take our next question. Caller, your line is open. Please go ahead.

Speaker 5

Hey, it's Joel from BMO again. Maybe a bit of a tricky sensitive question, but I found interesting with the UAN duties Excuse me, investigation the other week, indicating that there was any damage to the U. S. In the U. A.

Speaker 5

And industry From subsidized Russian gas, but that wasn't what the determination was in your own GAP map phosphate case. Could there be any future ramifications on your own Phosphate duty situation in the States, from that?

Speaker 2

Well, yes, thanks, Joel. We have definitely looked at that. We have had a We have had a second hearing or another hearing from the a judge on this case, and We'll probably know in a month or so if he will refer that back to the ITC. But one has to look at this from the perspective of what are the difference. So the appeal has gone To the U.

Speaker 2

S. Court of International Trade and then that goes back to the International Trade Commission to say Was there original ruling? Was there any they have to have an actual error in the ruling or something like that. And so They might refer back to the ITC to look. We actually think that the ruling in ours was fairly Substantive and there's not that much question that the there was damage to our industry.

Speaker 2

From our perspective, we still think there's not too much risk in that in the whole thing, and We'll have to see, but our expectation that might get referred back to the ITC in the next 2 to 4 months, let's say. And then from what I've understood is the ITC takes quite a while to even look at that. So we won't really know any more on that for a number of months. But Our belief is that the facts of each case is quite different. The timing is also quite different.

Speaker 2

If you remember, we were in 2019, which was very, very they pushed the phosphate industry to the brink of negative Margins, so a very different case, if you will. So we're quite confident.

Operator

There are no further questions. I would like to turn the call back to Jack O'Rourke for closing remarks.

Speaker 2

Okay. Thank you, folks. I know it's been a long couple of hours of listening to companies for you analysts. So I appreciate your time and your attention. To conclude our call, I'd just like to reiterate just a couple of quick messages.

Speaker 2

First of all, we delivered excellent results in the Q2, and we expect these strong business conditions to continue well into 2023. We remain committed to meeting our customers' needs and Meeting our mission of helping the world grow the food it needs. And at the same time, we think we can do that and be a great Provider for our shareholders and return significant capital to our shareholders even as we invest in our business and continue to strengthen our balance sheet. So with that, thank you for joining our call, and have a great safe day.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Mosaic reported $1 billion net income in Q2, $3.64 adjusted EPS, and $2 billion adjusted EBITDA, generating $794 million free cash flow and returning $667 million to shareholders before securing a new $2 billion buyback authorization.
  • Global food security is under pressure from the Ukraine war, extreme weather, and reduced nutrient applications, driving tight grain and oilseed stocks and tight potash and phosphate markets through at least 2023.
  • Despite a ~10% year-over-year drop in H1 2022 fertilizer demand, constrained supply has kept prices and margins well above historical levels, with normal fall demand expected in North America and a farmer-driven inventory draw in Brazil.
  • The 2018 Fertilizantes acquisition has created nearly $1.2 billion in annual EBITDA versus under $70 million pro forma in 2017, while the K3 potash mine has hit its 5.5 million-ton run rate and phosphate operations benefit from low-cost ammonia and easing sulfur expenses.
  • 2022 capital allocation includes $1.3 billion of capex, $550 million debt retirement, and a commitment to return essentially 100% of free cash flow to shareholders via dividends and buybacks, with potential for special dividends if conditions warrant.
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Earnings Conference Call
Mosaic Q2 2022
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