Mosaic Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 12 speakers on the call.

Operator

Good morning, and welcome to The Mosaic Company's 4th Quarter and Full Year 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. As a reminder, today's call is being recorded. Your host for today's call is Jason Tremblay.

Operator

Jason, you may begin.

Speaker 1

Thank you, and welcome to our Q4 and full year 2023 earnings call. Opening comments will be provided by Bruce Bodine, President and Chief Executive Officer followed by a fireside chat then open Q and A. Brent Freeland, Executive Vice President and Chief Financial Officer and Jenny Wang, Executive Vice President, Commercial will also be available to answer your questions. We will be making forward looking statements during this conference call. The 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 press release published yesterday and 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.

Speaker 1

Now, I'd like to turn the call over to Bruce.

Speaker 2

Good morning. Thank you for joining our call today. This is my first earnings call as Mosaic's CEO, and I'd like to begin by acknowledging Joc O'Rourke for his many contributions to the company. Joc held this role for nearly a decade and the company is much stronger today thanks to his leadership. Under Joc, Mosaic expanded its footprint in Brazil with the successful Vale Fertilizantes acquisition.

Speaker 2

We completed development of the world's largest potash mine. We transformed our cost structures and we deleveraged and optimized our balance sheet. We have opportunities to improve returns and drive shareholder value by building on the current position of strength that Joc helped create. I look forward to evolving Mosaic's strategy and to helping all of you understand just how we will do that. So for today, there are a few key messages that we would like you to take away from this call.

Speaker 2

1st, phosphate markets are very strong. We expect dynamics to remain constructive foreseeable future and we are working to optimize our production so we can benefit fully. 2nd, we expect demand recovery in potash. In fact, we are seeing early signs of demand emerging in Brazil. That said, given current potash economics, we will be curtailing production from our Calansei mine.

Speaker 2

3rd, we are taking these actions as well as reducing costs and capital expenditures to improve through cycle returns. Finally, with our strong financial foundation in place, we remain committed to prudent capital allocation, selectively investing when risk adjusted returns are compelling and returning excess cash through share repurchases and dividends. For full year 2023, Mosaic generated revenue of $13,700,000,000 adjusted EBITDA of $2,800,000,000 and adjusted earnings per share of $3.57 We invested $1,400,000,000 in the business, refinanced $900,000,000 in long term debt and returned $1,100,000,000 to shareholders, including over $750,000,000 in share repurchases. Let's start by looking at the market. 2022 brought extreme volatility to fertilizer markets.

Speaker 2

High prices driven by supply disruption eventually reduced demand. In 2023, as prices retreated, customers returned in many key markets. The long term global grain and oilseed supply and demand picture remains encouraging with secular demand growth outpacing supply. In addition to population and income growth, demand for agricultural commodities is being driven by renewable fuel adoption, which we expect will continue to ramp over the next several years. Recent policy mandates have been announced in California, the European Union and in Singapore and additional mandates are expected in the future.

Speaker 2

This emerging source of demand has the potential to require tens of millions of additional acres of production. Short term fundamentals also look positive. We believe that ongoing weather challenges in key growing regions, including Brazil, will result in grain production lower than what the market is anticipating. This suggests that already low stock to use ratios will remain under pressure and support a healthy grain price environment. On the stock to use ratios for corn and soybeans.

Speaker 2

As you can see in the presentation materials we posted, these two commodities represent approximately 30% of the global potash and phosphate consumption. This means that 70% of consumption is tied to other crops, many of which are experiencing continued tightening in their ratios. We believe the result is that growers around the world continue to be incentivized to maximize yield and crop production through strong fertilizer applications. In North America, a long fall application season drove strong demand well into the 4th quarter. Solid winter fill activity tells us bins are near empty and channel inventories are low.

Speaker 2

We are seeing demand strength continue into the spring planting season and sales volumes are mostly committed through March. In Brazil, barter ratios for both soybeans and corn are favorable. And while weather impacts have delayed fertilizer purchases, our outlook for full year 2024 is very positive with expectations of fertilizer shipments at or near an all time record as growers need to replenish soil nutrients. Favorable ag commodity and fertilizer demand drivers are especially promising for phosphate markets. We expect global supply will remain tight due in part to China's fertilizer export restrictions as the government prioritizes domestic food security.

Speaker 2

Tighter environmental oversight has also had an impact with the reduction of domestic DAP production. China also continues to direct more to direct more asset to industrial markets. Lithium iron phosphate production has more than tripled in the last 2 years and we expect growth to continue at a rapid pace. The competition for phosphate molecules is intensifying and it will continue to do so for quite some time. This together with limited capacity additions in the near future suggests phosphate market fundamentals will remain constructive.

Speaker 2

For potash, supply is adequate to meet demand in the near term and economics have not yet improved, which is why we intend to curtail production at Calanze. We will continue to monitor market developments and customer demand and when needed, Calantse will be prepared to return to service in short order. Overall, ag and fertilizer market dynamics remain solid. At Mosaic, we continue to focus on meeting customer needs, executing on our business strategy, optimizing our operations and delivering value to shareholders. Turning now to 4th quarter results and our Q1 outlook.

Speaker 2

For the Q4 of 2023, Mosaic delivered revenue of $3,100,000,000 adjusted EBITDA of 646,000,000 dollars and adjusted earnings per share of $0.71 Our potash business generated $322,000,000 of adjusted EBITDA on sales volumes of roughly 2,600,000 tons. With the port at Portland, Oregon back up and running, the team at Canpotex had a strong finish to the year, enabling us to deliver sales volumes well within the range of our initial guidance. We expect sales volumes for the Q1 of 2024 in the range of $2,000,000 to 2,200,000 tons and potash prices at the mine in the range of $2.25 to $2.50 per ton. In phosphates, we generated $259,000,000 in adjusted EBITDA on sales volumes of 1,600,000 tons. Realized stripping margins remained strong for the quarter, but were offset by lower cost absorption from lower production levels.

Speaker 2

For the Q1, we expect phosphate sales volume in the range of 1,600,000 to 1,800,000 tons and DAP realized prices at the mine in the range of $5.80 to $605 per ton. Moving to our business in South America. Despite the weather driven fertilizer demand headwind in the 4th quarter, we delivered strong operating results with adjusted EBITDA of $111,000,000 Distribution business margins came in well above the historical normal annual range of $30 to $40 per ton. In the Q1 this year, we expect margins to recede from the Q4 as part of the normal seasonality of the business. The Q1 of each year typically has a higher amount of fertilizer volume going to Brazil's corn crop, which demands a higher percentage of nitrogen products, which historically generate lower and less consistent margins and lower volumes of MicroEssentials which generates higher margins.

Speaker 2

As a result, margins are generally lower during the quarter, but improved from there resulting in annual margins in line with our historic norm of $30 to $40 per ton. We executed well against our capital allocation strategy in 2023 and our balance sheet remains optimized. We spent $1,400,000,000 in CapEx and made significant progress on our investment projects. We refinanced $900,000,000 in debt and returned $1,100,000,000 to shareholders through an increased dividend and share repurchases. Our returns included not only free cash flow, but also proceeds from asset sales such as the sale of Streamsong Resort.

Speaker 2

Finally, I want to discuss our top strategic initiatives for 2024. First, we're focused on driving down costs. Over time, we expect to achieve at least $150,000,000 in annual run rate savings off of a 2023 baseline, driven in part by savings from our global digital acceleration program, which will go live later this year. Next, we'll continue to transform our operations to increase resilience and flexibility. Our top priority in phosphate is to improve our production volumes.

Speaker 2

We're working toward an annual run rate of 8,000,000 tons over the next few quarters by enhancing the overall reliability and efficiency of our operations. To this end, we have a busy turnaround schedule at our Florida facilities in the first half of this year as we target areas that have caused us the most significant maintenance issues. Next, we will further expand our presence in Brazil, one of the most dynamic agricultural regions in the world by completing a 1,000,000 ton distribution facility at Pomerante to serve the fast growing northern region of the country. We'll also further strengthen our product portfolio by growing non commodity products. We're expanding micro essentials capacity at our Riverview plant here in Florida and we expect those additional tons later this spring.

Speaker 2

We anticipate that more than half of our phosphate sales will be value added products, which clearly is a differentiator for us. In addition, we are planning for the next generation MicroEssentials Pro, which is delivering significant yield improvements in field testing. MicroEssentials Pro will also extend our patent protection until 2,000 and 38. Finally, we'll remain true to our disciplined capital allocation strategy. In 2024, we expect to reduce total capital spending by about $200,000,000 and we'll continue to return excess cash to shareholders.

Speaker 2

To summarize, our outlook for agriculture and fertilizer markets remains positive. At Mosaic, we have a strategic roadmap to optimize returns through the business cycle to grow and to decommoditize our product offerings. And we have a very strong financial foundation from which to operate. I'm looking forward to updating you on our progress as the year proceeds. Now, let's move to Q and A.

Speaker 1

Before we move on to the live Q and A, as we've done in the past quarters, we would like to address some of the most common questions that we received after we published our earnings materials last night. For our first question, Bruce, a number of analysts have asked questions about potash and phosphates. Market dynamics of these 2 crop nutrients seem to be diverging with phosphates being strong or potash is finding its way. Can you tell us how you see these markets developing as the year progresses?

Speaker 2

I think this is a good way to characterize current market conditions. Phosphate markets are very positive due to strong demand, low inventories and a tight supply situation globally leading to some of the strongest stripping margins in the last decade. We believe stripping margins will remain elevated for the remainder of the year. Looking at the key regions. In North America, channel inventories are low and we are seeing strong demand for spring planting.

Speaker 2

For Mosaic specifically, we continue to operate at minimum inventory levels and our first quarter sales are almost fully committed. In Brazil, inventories are well below the 5 year range and our outlook for the year remains positive as growers need to replenish soil nutrients. India's proposed subsidy rates announced earlier this month showed an increase for phosphate fertilizers from the prevailing rates in the Q4 of last year, but importer margins remain negative. With very strong grower demand and low inventories, which are at the low end of the 5 year range, subsidies should move higher. In China, we are seeing an increased focus on food security.

Speaker 2

The government is limiting exports to ensure adequate domestic supply while also meeting rising industrial demand. We expect these dynamics to continue to limit exports for the foreseeable future. Industrial demand, particularly China's lithium iron phosphate market has been very strong with production more than tripled in the last 2 years to 1,700,000 tons of finished fertilizer product equivalent in 2023. We expect additional production growth in the future as demand continues to soar. Overall, this leads us to conclude that phosphate markets will remain constructive for the rest of the year.

Speaker 2

In potash, the supply constraints from Belarus and Russia seen in the past few years will continue to abate in 2024. On the demand side, we see stability in North America. In fact, our winter fill program was fully sold and similar to phosphates, we are almost fully committed for Q1. In Southeast Asia, particularly Malaysia and Indonesia, high priced inventories were worked down in 2023. 2 years of under application in those markets will put further strain on crop yields if nutrients are not replenished.

Speaker 2

We are seeing significant pent up demand in that region. In China, while potash inventories are higher than historical periods, the fertilizer stock to use ratio is normal due to increasing on farm demand as a result of favorable pricing. It's been reported that China intends to increase its strategic reserves, meaning that inventories will have to remain higher than historical periods to meet this objective. We also expect lower Chinese domestic production as a result of the recent news capping production in its key potash basin due to environmental concerns. The combination of these factors should drive a need for continued high import volumes to meet the demand.

Speaker 2

The weather in Brazil has slowed demand in the near term, but we are seeing early signs of demand emerging and potash prices moving up slightly. In fact, when you look at the entire fertilizer market, we expect shipments to be at or near peak levels in 2024. Putting these factors together, we expect the pace of global potash shipments to improve as 2024 progresses.

Speaker 1

Thanks, Bruce. As a follow-up question, given the market backdrop you just described, what actions are you planning to take?

Speaker 2

Given the strength of phosphate markets, Mosaic's focus is on increasing our phosphate production volumes and further improving our margins by increasing our MicroEssentials volumes. MicroEssentials generates significant yield improvements and as a result generates superior margins for farmers, retailers and Mosaic. For Mosaic, not only do we earn a premium margin in our phosphate segment, but we also command a premium margin in Brazil as we capture the retail premium for these products. In potash, Mosaic is focusing on flexibility and cost management. The curtailment of production at our Calense site demonstrates our commitment to flexibly managing our network to ensure our low cost sites at Belle Point and Esterhazy operate at capacity while Calansei is only used when market conditions dictate.

Speaker 2

We have a couple of projects that will increase our product mix flexibility before the end of the year. This will enhance our ability to adjust our end product mix to respond to changes in the market conditions more effectively in order to optimize our cost structure and margins. In addition to cost reductions in our operations, we are focused on driving SG and A reductions and optimizing our investments in CapEx and working capital. These initiatives will ensure our customer demand is met, our through cycle financial performance will continue to advance and shareholder value is maximized.

Speaker 1

Okay. Our next question is related to Mosaic for Losantes. Brazil remains a problematic region for many ag input companies. What is your outlook for 2024?

Speaker 2

This is a fair observation. A lot of these companies are still in the process of destocking excess high cost inventories or writing off their assets given the challenging market conditions. At Mosaic, we took early action to complete the destocking of high priced inventory in the first half of 2023 without any significant write offs. As a result, we entered the second half of the year in a great position and it shows in our margins. The margin per ton in our distribution business returned to the $30 to $40 range in the Q3 and came in above that range in the 4th quarter.

Speaker 2

In 2024, we expect record or near record fertilizer shipments despite lower fertilizer demand in quarter 1 due to weather conditions as growers continue to be incentivized by constructive barter ratios and the need to replenish soil nutrients. From a distribution margin perspective, we expect normal seasonality on a per ton basis, lower than the normalized annual range in the Q1, but within the range

Speaker 1

for the full year. Changing topics.

Speaker 3

There's a

Speaker 1

question about CapEx. You're indicating that spending will decline by $200,000,000 this year. How do you see that CapEx evolving longer term?

Speaker 2

We're coming out of a period of elevated CapEx due to an unusual number of high returning opportunity projects from across the business. We're coming to the end of these projects and as a result, our spending is declining. In addition to the $200,000,000 reduction in 2024, we anticipate a further reduction in 2025 with a longer term run rate to be at or below $1,000,000,000

Speaker 1

Thanks Bruce. And with that, we will now move to the open question and answer session. Operator, please open the line for follow-up questions.

Operator

Absolutely. Today's first question comes from Steve Byrne with Bank of America. Please go ahead.

Speaker 4

Bruce, you mentioned a couple of times about the cropland needing to replenish soil nutrients. When I look at your forecast for global shipments of phosphate and potash, this is Slide 8, it doesn't really support that thesis. There's this what looks like potentially a massive deficit of consumption in the last 2 years of both nutrients, close to 10,000,000 tons on each. And yet your forecast for 2024 on both is just kind of like where it was in 2021. Is that a conservative view or was that is that based on view that those nutrient levels were maybe above normal in the world and therefore it's not needed to be replenished?

Speaker 2

Hey, Steve, good talking to you. Thanks. We share your view that there's been under application of fertilizer for the last couple of years for sure and nutrients have been depleted from the soil. I think that's why we're pretty bullish on where things return from a supply standpoint or demand standpoint on both P and K atornearrecord shipments in those markets. And maybe I'll turn it over to Jenny a little bit to talk maybe a little bit about the specifics in each individual market to better answer, I think, what you're getting at.

Speaker 5

Steve, I think we definitely don't believe that there was sufficient P and K in the soil where would allow farmers to mine without replenish the fertilizers. We have seen the evidence over the last 2 years. And as you may recall, we shared one slide last call that will show the yield impact due to under applications, especially on potash. So, why we're projecting a higher demand for 2024? Partially, it is related to the supply situation.

Speaker 5

We believe that the global shipment this year and beyond is that we will continue to see a very strong demand tailwind as the growers need to replenish these nutrients in order to pursue their yield aspiration. And in particular this year, as we forecast the demand growth or recovery on potash, we are going to see some broad recovery in the market where we usually don't talk about the smaller market in Asia, the smaller market in Latin America. After 2 years under application, the farmers have realized that they need to put down, fertilizers P and K into the field. And that just actually has been built into our demand forecast in this year. Thanks.

Operator

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

Speaker 3

Great. Thanks for taking my question. Just wanted to ask, now that you have decided to curtail Calynce, what are you expecting in terms of operational capacity for Mosaic in 2024? What levels of demand or price would you need to see to make the decision to restart Calense? And then maybe some color in terms of the cash cost differences this year versus last year with Esterhazy up and running and Calanthe down?

Speaker 3

Thanks.

Speaker 2

Thanks, Richard. For sure, in the short term here, potash supply is adequate to meet demand. And we made the decision to curtail Calantay's production, not based on one factor. So as we continue to evaluate the flexibility within our network, we're looking at not only the market and customer demands, but also really how do we consider shareholder value as well. And I think that's getting to your point.

Speaker 2

And we'll continue to do that. And at the current time, the economics just didn't make sense. But if you look at the broader 2024 for the whole year, we're very optimistic about demand recovery, particularly on potash. And I'll let Jenny talk about some areas in a minute. But in the meantime, we're going to shut Calansei down.

Speaker 2

We've done this before. We've demonstrated our resolve to flexibly moving that mine up and down. We can do that very quickly and we can restore things very quickly as well. And as we expect when market demand returns, we'll in short order return production at Calanci. Again, if the market demand is there and if we determine shareholder value is there as well.

Speaker 2

And some of the complexities are what's going on with the rest of our network and turnaround schedules and things like that. Those things have to come into the analysis as well. But all of this is designed, as we've said earlier, to really let Belleplain and Esterhazy, our 2 low cost production facilities, run at full rate and continue to extract maximum value out of those two facilities. So Jenny, maybe you want to talk about a little bit of the market dynamics and why we expect pricing to be pretty good

Speaker 6

for the rest

Speaker 2

of the year?

Speaker 5

Sure, Bruce. I think I probably just want to build on the earlier comment on the potash demand recovery. In 2023 last year, the recovery of the demand was over 13% and added 8,000,000,000 tons. The biggest recovery in the market was North America. We saw 27% of the demand increases over the previous year and we are seeing very strong consumption increases in growth in China.

Speaker 5

And apart from these 2 major markets, in India, in Brazil, we have all seen over 18% of the demand increases last year on potash. So as we get into 2024, we continue to expect the growth of potash demand in Brazil, in India, And we are going to see a much broader demand recovery from the other market, as I mentioned earlier, smaller market in Asia, smaller market in Latin America and all this demand projection will need to have the supply to meet the demand. When we look at the supply side of the equation, in late 2023, we've seen some recovery of the shipment out of Belarus and Russia and also some incremental tons from Laos. As we get into 2024, the season itself, we are in the typical low season time and we are watching the market dynamics. And we believe we are at or close to the price bottom in the market.

Speaker 5

In fact, we have seen some major price recovery over the last 2 weeks in Brazil. So as Bruce mentioned earlier, we run our business, our potash operation to meet our customers' demand. And in the meantime, we want to maximize value creation for the shareholders as well. So that's the economic decision.

Operator

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

Speaker 7

Hi, good morning. Thanks for taking the call. Two questions. Bruce, congrats on

Speaker 2

the promotion here at first call.

Speaker 7

You said that phosphate margin should be being elevated. You talked about how strong phosphate is. Can you comment on that a bit more? Do you expect in Q1 that phosphate margins would be better, the same or lower than Q4 margins? And would that be an EBITDA or gross margin basis

Speaker 2

or some other basis? Thanks. Hey, Joel, thanks for your kind words. On phosphates, Liz, the bottom line is supply is extremely tight. And we've talked about that balance and even as much as demand, if you theoretically could go higher, it is going to be tough to reach supply with the restrictions out of China and the things that we talked about in one of the fireside chat questions.

Speaker 2

So that is driving pretty good stripping margins in this business, some of the best we've seen over the last decade. And we do expect that to continue. We may see pricing bobble a little bit just due to seasonality throughout the year. But we do believe our realized stripping margins given raw material pricing on sulfur and ammonia and what we have projected for the year will continue to stay relatively flat and strong for the remainder of the year.

Operator

Thank you. And our next question today comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 2

Thank you and good morning everyone. Can I just ask about on the phosphate production side, what you're anticipating coming out of Morocco this year? It seems like they ran at lower rates last year. Are you expecting that to continue into this year? And what are you expecting in terms of imports into the U.

Speaker 2

S. Market year over year given, I guess, there's still some uncertainty over countervailing duties, but an update on those issues would be helpful? Thank you. Yes, Vincent. Thanks.

Speaker 2

Good talking to you today. It's something we watch pretty closely is what's going on in that part of the world as you can imagine. Jenny and her team and our market analysis team and economic team are really looking at that. So I'm going to turn it over to her to provide a little more detail on the commentary.

Speaker 5

Hi, Vincent. Yes, I think we've been watching very closely on OCP's shipment. Last year, we've seen some major recovery of their phosphate fertilizer export, especially in the second half of the year. This is basically bringing their export towards to their record level over the last few years. In the meantime, we're seeing some major reduction on their phosphate rock export last year.

Speaker 5

And that was actually less than half of the tons they exported in the record year back in 2021. And their fast asset export were basically very flat. So to think about OCP's supply into 2024, our forecast is that they're going to continue to keep their normal way of operation and that they might add a little bit into their new granulation capacity, but not really in the big deal. So even with this recovered OCP supply and increased a small amount of fertilizer production, we believe 2024 phosphate supply will stay as tight.

Operator

Thank you. And our next question today comes from Idiom Rodriguez with Mizuho. Please go ahead.

Speaker 8

Thank you and good morning everyone. I mean, Bruce, you've talked about like the strength of faucet prices, which is clearly the case. But any concerns that if prices stay way above the other nutrients, this could incentivize farmers to cut back in phosphate if they start thinking about their expenses and so forth given the decline in crop prices?

Speaker 2

Edlain, the economic on the farm topic is a great one and something again we're paying a lot of attention to. Where soybeans and corn prices are right now, we do see still pretty affordable economics overall when you look at the portfolio of nutrients, right? And that's NPNK. And even though phosphate because of the tight supply that Ginnie has outlined before and we talked about in one of the fireside questions, prices are elevated, but we have seen potash come down significantly and nitrogen at a more moderate level as well. So combined, I think fertilizer affordability from a percentage of on farm revenue is actually pretty reasonable compared to the last 2 years.

Speaker 2

So we're not anticipating any demand destruction due to pricing of the total nutrient package for farmers depending on their crops. And the other one that we talked about and it's in some of our materials is we've made a lot about corn and soybean prices, but corn and soybean demand is really only 30% of the global fertilizer demand. The rest 70% is in other grain and oilseeds and non grain and oilseeds markets. And we're seeing a lot of tightness in some of those markets and actually quite favorable economics when it comes to nutrient affordability. So overall, I think the competitiveness of nutrients and demand is there, the incentive is there, again driven by lack of fertilization in the last couple of years, good affordability.

Speaker 2

The head the tailwinds that are being provided on some of the biofuel stuff as well, I think it's very constructive that hopefully ag commodity prices continue to moderate up and then continue to drive good demand to maximize yields on the farm. Jenny has got one more point she wants to make.

Speaker 5

Yes. Bruce, just want to provide one more data point. As we are watching corn, soybean prices and all the tension were on corn, soybean. And if you look at other major commodities like rice, the price is very, very supportive. And today actually in fact today, India export price for rice is setting a new record.

Speaker 5

So that tells you actually if you go beyond corn soybean, the other commodities are very constructive in terms of the prices and also the farm economics.

Operator

Thank you. And our next question today comes from Andrew Wong with RBC Capital Markets. Please go ahead.

Speaker 9

Thank you for taking my questions. So on the phosphate production, what's your expectation on when you could return to an 8,000,000 tonne annual run rate? And when that happens, what's your expectation on phosphate rock costs and conversion costs?

Speaker 2

Andrew, thanks. We've been talking about this for a few quarters and it's a big focus area for us strategically, particularly given the strong margins that are in the market today, given the high demand limited supply. We have stated and continue to state that we're on our path over the next few quarters to get to an 8,000,000 ton annual run rate. We're confident in that. Last year, second half of the year, we had some impacts with 2 of our large sulfuric plants in Louisiana went down.

Speaker 2

Both of those have now returned to service. We had a major turnaround at the end of last year and another sulfuric plant down at Bartow. Again, both of those are done and back to service. So we are starting to see gradually a return to that. But as mentioned in some of the fireside chat comments, we do have heavy turnaround schedule baked into the first half of this year.

Speaker 2

So getting to that 2,000,000 ton level more towards the end of the year, Part of that is with this turnaround schedule to continue to focus on some of those actors that have caused us some maintenance, unplanned maintenance issues over the last couple of years. So again, confident we're going to get there by the end of the year. It's needed and that's what we're going to continue to do is focus on our asset health and we've been infusing a lot of our sustaining CapEx by the way to actually do that over the last 2 years as well. So look forward to that near the end of the year. And Clint has something to add, I think on the economics piece.

Speaker 6

Yes. No, thanks Bruce. Andrew, when we look at the impact of moving our production back up to that target level, I think on a cost per ton basis, and I think that was part of your question, you would likely see something on the order of magnitude of call it $20 to $25 a ton improvement in that per unit cost. So it's material as we begin to ramp up to those target levels.

Speaker 2

And even on top of that, Andrew, we've talked about our cost reduction initiatives just in addition to that, but we expect to layer in $150,000,000 of cost reductions through the enterprise. Looking at G and A spending, some of the operations benefits of getting back to full production, working capital management and then just overall CapEx reduction. So add into the absorption benefits that Clint talked about plus some of these other initiatives to really ring out costs from the enterprise through cycle economics should be much more favorable.

Operator

Thank you. And our next question today comes from Jeff Zekauskas with JPMorgan. Please go ahead.

Speaker 9

Thanks very much. I was wondering if you can clarify some issues around your relationship with Maarten. Is that a joint venture that you wish to invest in over time further in through capacity expansion? And it's also the case that historically the cash that's to come from the equity income has been much lower. Is there a cash benefit that you get in the future that catches you up from the equity income that you've made?

Speaker 9

Or does it turn out that you don't catch up?

Speaker 2

Hey, Jeff, no thanks. As you point out that joint venture for us is important part of our portfolio of assets for sure. Not only do we gain market access in the markets like India with some of the tons that we have there, we get a lot of market intelligence through that joint venture as well. As far as do we have interest in future investment, I don't think that's in the top of our priority list. I never want to say never depending on what the return on economics could be in such an investment.

Speaker 2

But I think we've got better focus areas for any of our cash and liquidity that we may put to something else. But at the end of the day, the Ma'aden joint venture at Saudi Arabia has been a great partnership and we've seen that really mature over the course of this relationship. And it got to continue to earn a spot in our portfolio for sure on a long term basis. But right now, we're fairly happy with the results and where that is running. They just came off a record year at MWSPC on a production standpoint as well.

Speaker 2

So we're really starting to extract value out of that in a way that we hadn't previously. But I'm going to turn it over to Clint to talk about a little bit more of the economic questions that you had.

Speaker 6

Hi, Jeff. I think, and you noted the differential between the equity earnings over time and cash. I think our first cash dividend was actually paid out last year. I think total equity income last year for us was roughly $57,000,000 So we did get part of that in the form of a dividend. But one of the things that has been the focus of Moden over the past say, 2 to 3 years has been on debt reduction.

Speaker 6

So a lot of the earnings and the cash generation of the joint venture has actually gone to paying down some of the debt load. And I think overall order of magnitude debt has been paid down by about $1,500,000,000 so firming up the capital structure of the project. And so I think that's one of the main reasons why you see that differential between equity earnings and actually cash being paid out to us and the partners. One thing to also note and again it's relatively modest, but we also do get marketing fees and earn some level of income on some of the tons that we do sell. But again, that's one of the reasons why you've seen that differential between equity earnings and cash because a lot of the cash has actually been going to managing the balance sheet and paying down debt.

Operator

Thank you. And our next question comes from Rickan Patel with BNP Paribas. Please go ahead.

Speaker 10

Hi, good morning. Thanks for taking my questions. You covered the guidance CapEx quite well earlier. I was wondering if you could provide some outlook on the working capital requirement for 2024. I suppose just given the context of the significant release you had last year, would you expect to see working capital investment next year?

Speaker 10

Thank you.

Speaker 2

Hey, Rick. Thanks for joining us and appreciate the question. Working capital has been if I understood your question right, broke up a little bit in the beginning for me, it has been a focus for us across all of our major markets. I think we've done a pretty good job of managing that risk compared to others in the space. But I'm going to turn it over to Clint to maybe talk a little bit more about how we think about working capital.

Speaker 6

Yeah. Thanks Bruce and thanks for the question, Rick. As you noted over the last couple of years, we've seen pretty significant changes in working capital And a lot of that has been driven by the price environment. So you saw a significant increase in working capital and use of cash in 2022. And then you've seen a pretty material release of cash in 2023 as the pricing environment changed.

Speaker 6

A lot of times or one of the things that is also a significant contributor to that is our distribution business in Brazil as they manage inventory levels and so forth around some of those price changes. But as we look out, I think it's going to be driven by the price environment. I think we are putting some renewed focus on things like inventory turns and days of payables and receivables and really trying to work even harder to manage those, to again manage the level of working capital that's needed. The other thing that I would note is over the last couple of years, we've tried to set up some funding alternatives to assist us in managing through some of those seasonal particularly seasonal elements of working capital needs. So we've had a number of things like an inventory line, some receivable securitization facilities put in place when we got our rating debt rating upgrade to BBB Flat BAA2, we also set up a commercial paper facility.

Speaker 6

And what we try to do is to maintain a certain level of funding, to again take away some of those seasonal moves and to reduce some of the cash drag on the company throughout the year. So again, focusing on those two areas, one is just the absolute level of working capital and again that will be dictated by price environment, but then also being trying to be pretty thoughtful on how we fund that through the year and not just be using cash for that purpose.

Operator

Thank you. And our next question comes from Josh Spector with UBS. Please go ahead.

Speaker 11

Yes. Hi, good morning. So I want to follow-up on phosphate margins specifically. I think versus most models out there, pricing came in higher, but gross margins were lower in the Q4. So I'm just trying to square the sequential gross margin move if we think about it in gross margin per ton in the Q4 sorry, Q1 here.

Speaker 11

So you're saying the stripping margin stays high, but pricing you're guiding up $40 We talked about more volume leverage in the Q1. So is there a way to square all these moving parts between what you did in 4th quarter versus what you're expecting from a gross margin per ton perspective in the Q1? Thanks.

Speaker 2

Yes, Josh. Thanks. We are seeing a little bit of expansion there for sure. The other part is our costs aren't going to necessarily come down as fast given the turnaround schedule I talked about earlier. So that's still going to be a little bit of a drag.

Speaker 2

But overall, we still see those healthy realized stripping margins. You got to think about and I'm going to turn over to Clint in a minute, maybe talk a little bit more about it. But our advantage position on ammonia and our access to low cost sulfur really kind of differentiates us a little bit from the industry stripping margin, what we get out of realized stripping margin, given that a good portion of our ammonia consumption comes from our Faustina facility in house and of course our advantage contract with CF. So we do still think stripping margins are going to be good, gross margins realized will be good, but maybe given the cost pressures, we're still going to see a little bit of a slowness and full recovery of that. And Clint, maybe you can talk a little bit more about that.

Speaker 6

Yes. The only thing that I would add on that around our in house ammonia is we made we had I guess a turnaround about 18 months ago in Louisiana around and made some investments in our converter at the facility and it's as a result has had much higher reliability. And again as we've seen the level of production that we've had we've been able to lean on that a little bit more as a proportion of our ammonia sourcing as well as the CF contracts. So we've been less dependent on some of the market purchases. And as a result, as an example, in the Q4, about 35% of our ammonia was actually sourced in house.

Speaker 6

And again, so that's helpful from a comparative cost standpoint. So, as we go forward, as production ramps back up, overall finished product production ramps back up, we'll need to access a little bit more on the market. But again, in this environment at this point in time, we're getting more benefit maybe than we naturally historically have from our in house production of ammonia.

Operator

Thank you. This concludes today's question and answer session. I'd like to turn the conference back over to Bruce Brodean for any closing remarks.

Speaker 2

Well, thank you, operator. To conclude our call, I'd like to reiterate our key messages for today. First, the global phosphate market, as we've discussed, is very strong and we expect favorable dynamics to continue throughout the remainder of the year. And second, potash demand is emerging and we talked about that and we expect a strong rebound in global demand this year. And third, we're executing plans to optimize our operations so that we can benefit fully from strong markets while improving Mosaic's resilience.

Speaker 2

And finally, our capital allocation strategy is not changing. We will invest in pursuit of compelling returns and return excess cash to shareholders. So thanks everyone for joining our call today and I hope that you have a great and safe day.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Mosaic Q4 2023
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