Mosaic Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 8, 2022

Key Takeaways

  • Record Q3 results: Revenues of $5.3 billion drove net income of $842 million ($2.42 per share), adjusted EPS of $3.22 and EBITDA of $1.7 billion, generating cash to return $670 million to shareholders.
  • Tight agricultural markets: Global grain and oilseed stock-to-use ratios are at 20-year lows, with weather-related yield risks and the Ukraine shortfall underpinning strong fertilizer demand into 2023.
  • Supply constraints persist: Belarusian potash exports are down ~8 million tonnes in 2022 with little recovery expected, while China is cutting phosphate production and exports by up to 5 million tonnes, keeping channel inventories below historic norms.
  • Q4 outlook: Phosphate sales are forecast at 1.7–2.0 million tonnes—benefiting from a $40–45/tonne raw-material cost tailwind—and potash volumes of 2.0–2.2 million tonnes from higher Esterhazy and Colonsay runs despite planned turnarounds.
  • Digital transformation: A $200–250 million global data and systems upgrade over the next few years aims to boost efficiency in sales, production planning, supply chain and capital management, with a 3–4 year expected payback.
AI Generated. May Contain Errors.
Earnings Conference Call
Mosaic Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, and welcome to The Mosaic Company's 3rd Quarter 2022 Earnings 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 Mr. Paul Massoud, Vice President of Investor Relations and Financial Planning and Analysis of The Mosaic Company.

Operator

Mr. Masood, you may begin.

Speaker 1

Thank you, and welcome to our Q3 2022 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat then open Q and A. Clint Freeland, Senior Vice President and Chief Financial Officer and Jenny Wong, Senior Vice President, Global 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. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties.

Speaker 1

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

Speaker 2

turn the call over to Joc. Good morning. Thank you for joining our Q3 2022 earnings call. Mosaic delivered record 3rd quarter revenues of $5,300,000,000 which resulted in net income of $842,000,000 or earnings per share of $2.42 Adjusted earnings per share was $3.22 and adjusted EBITDA was $1,700,000,000 These results are driving significant cash flow generation, which is allowing us to return significant capital to shareholders, while also continuing to invest in the business and strengthen the balance sheet. During the quarter, we returned roughly $670,000,000 to shareholders, including $600,000,000 of share buybacks.

Speaker 2

Now before diving into our operations, I'd like to address current market dynamics. Food security remains a concern around the world. Global grain and oilseed stock to use ratios remain at 20 year lows and early data continues to suggest there may be further downside to total production once the fall harvest is complete. It is important to remember that the market was tight when the year began, well before the start of the war and issues over the last several months have further exacerbated the situation. Ukraine's production shortfall is significant, but weather issues like high temperatures and drought conditions in other major growing regions are having an even bigger impact on an already tight market.

Speaker 2

In the U. S, weather delayed spring planting and the compressed planting window reduced nutrient applications. The growing season was further impacted by high temperatures and drought in some areas. Weather tends to be a significant factor in yield, but under fertilization doesn't help, and you can only mine the soil for so long. Both are contributing to an expectation of weaker than normal North American harvest, and this was reflected in the most recent USDA yield forecast.

Speaker 2

In Brazil, fertilizer shipments appear poised to have dropped around 10% year over year, and La Nina remains a threat despite the market counting on record breaking corn and soybean production. Beyond grains and oilseeds, We're seeing food security issues play out in other crops as well. Staples like rice are also seeing significant production shortages, driving some countries like India to restrict exports. Because of this, we see a tight market for global grains and oilseeds continuing into 2023 and beyond. The global fertilizer market remains tight with supply constraints in both potash and phosphate still unresolved.

Speaker 2

Global potash supply remains impacted by the significant reduction in Belarusian exports, which we think will be down 8,000,000 tons in 2022. Of the 4,000,000 tons they will export this year, We estimate about 2,000,000 tonnes were shipped in the Q1 before the sanctions and Lithuania's decision to prevent Belarus from using its ports. Belarus exports are down significantly from the Q1 and we do not expect much recovery through the rest of the year or for most of 2023. This means the market will continue to be short of potash in 2023. The phosphate market is also impacted by supply constraints.

Speaker 2

China production is down because of environmental concerns and exports are being restricted to ensure domestic availability and affordability. This year, we expect China's phosphate exports will be down by up to 5,000,000 tonnes. Those restrictions could extend through at least the first half of twenty twenty three and possibly beyond as China prioritizes securing domestic food supply and meeting growing industrial demand. While global channel inventories of phosphate and potash remain below historic norms, certain regions, especially in the areas where we do most of our business, so inventories build in the first half of the year. But prices have retreated back to levels low enough to entice growers to step back into the market.

Speaker 2

We expect inventories to continue working lower through the end of the year and into early 2023. U. S. Fall application has been trending back towards normal levels. We believe we could end the season with inventory significantly depleted, especially for phosphates.

Speaker 2

The U. S. Is also experiencing low water levels on the Mississippi River, which is delaying supply coming through New Orleans. In Brazil, the higher priced inventory built during the first half of the year has slowed 3rd quarter shipments, but sentiment is improving. Prices have retreated enough to incur sales, and we expect inventories We'll end the year much the same as where they started.

Speaker 2

The barter ratio suggests we're approaching a much more constructive environment for demand. In India, importers are taking advantage of the price pullback in phosphates. India's phosphates inventory is still low, While farmer demand remains strong, government subsidies remain at a level that is supportive of phosphate imports, but are likely to leave the country short of adequate supply of potash. To summarize, the strength of crop prices and more affordable fertilizer prices suggest Nutrient demand will recover from the summer lull we experienced during the Q3. Given the constructive ag backdrop, We believe our business is well positioned to benefit.

Speaker 2

In our phosphates business, Hurricane Ian forced us to shut down operations late in Q3, which delayed shipments at the end of September. Our team performed admirably and was able to get our Florida operations back up and running quickly following the hurricane. We estimate the shortfall in production to be in the range of 200,000 tons. Looking forward, we now Expect 4th quarter sales to be in the range of 1,700,000 to 2,000,000 tonnes. Our phosphate business is expected to benefit from lower raw material prices in the Q4, particularly as low sulfur prices start flowing through our costs.

Speaker 2

We expect A 4th quarter benefit of $40 to $45 per tonne from lower raw materials in our North American phosphate business over the cost in the 3rd quarter. In our potash business, we are realizing the benefits of improved volumes from Esterhazy and from the addition of Calanze. 11 of the 13 planned miners are now running at Esterhazy and improved operating rates at Clonze together are driving higher volumes. We anticipate some turnarounds during the Q4 that will impact total production, but expect sales volumes to be 2,000,000 to 2,200,000 tons. Mosaic Fertilizantes continues to be a very good business, having earned $1,200,000,000 in EBITDA over the last 12 months.

Speaker 2

High inventories built during the Q2 led to slower than initially expected demand during the Q3 as shipments typically seen during quarter 3 didn't materialize, but pricing trends towards the end of the third quarter reached a level that is beginning to drive shipments, and we've begun seeing that in our business. Some of the 3rd quarter buyer hesitancy is impacting the 4th quarter, but we expect trends to begin normalizing as we finish out the year. Before moving on, I'd like to address the next iteration of our Over the last three years, we've extracted significant cost efficiencies in Brazil, lowered our cost profile in the potash business with transition to Esterhazy K3 and benefited from the combination of support functions across North America. Our next area of focus is the realization of efficiencies through a digital transformation of How we manage our business. In our release last night, we introduced our global digital acceleration project, an initiative that will transform how we use data to manage a complex business across our global footprint.

Speaker 2

This effort will upgrade our core systems and allow for more seamless integration across sales, production, supply chain and global support functions. Over the next several years, the total cost will be about $200,000,000 to $250,000,000 split roughly evenly between SG and A And capital expenditures. As a result of this transformation, we expect to realize significant benefits in our sales and production planning and our cost and capital management. Similar to our early transformation efforts, this initiative will continue the trend of adding shareholder value. We expect this investment will have a payback in the range of 3 to 4 years.

Speaker 2

Finally, I want to reiterate but we remain committed to our capital allocation strategy. Later this month, we expect to retire the remaining $550,000,000 of long term debt that completes our goal of $1,000,000,000 of long term debt reduction. Our CapEx expenditures expectation this year remains unchanged at $1,300,000,000 and all remaining free cash flow after these commitments will be returned to shareholders through dividends and share buybacks. During the quarter, we returned roughly $670,000,000 to shareholders, which included $600,000,000 of share repurchases. Over the last year, we've reduced our share count from approximately 380,000,000 shares to 340,000,000 shares.

Speaker 2

Putting all of this together, our outlook is quite strong. The global agriculture market continues to point to tight supply and demand for grains and oilseeds. We strengthened our balance sheet. Our team has recovered from Hurricane Ian in Florida. Our potash business continues to benefit from our low cost position at and the flexibility gained from restarting Calonzo.

Speaker 2

Our Brazil distribution business has a significant and growing footprint in an important agricultural market. We have positioned ourselves to maximize value across our business, and this has allowed us to return significant capital to shareholders. With that, let's move on to the fireside chat portion of our call. Paul?

Speaker 1

Thanks, Chuck. Similar to last quarter, before we open the lines for live Q and A, we're going to address some of the most common questions that came in last night. First, we received several questions on our general view of both the potash and phosphate markets. Where are we most optimistic and where do we continue to see risk as we move into 2023?

Speaker 2

Thanks, Paul. I'm going to hand this over to Jenny for some detail here, But let me summarize by saying we're very positive on both markets as both remain supply constrained. Ag fundamentals remain strong And fertilizer prices have moderated from the previous peaks seen earlier this year, which is driving a return to more historic levels. So Jenny, can you give us some detail?

Speaker 3

Thanks, Chuck. I'd like to start from North America. The warm and dry weather has allowed farmers to go to the field for full application with a wide open window. And as of today, we are still saying products are going to the ground. This improved farm economics and affordability as they encouraged farmers to put down their phosphate and potash in the fall.

Speaker 3

In fact, we started to get customers' inquiries and the request For the spring season demand, we sold a block of phosphate to one of our major customers yesterday as their customers, the farmers have come to the table to buy product with the concern of the potential logistic issues for the spring supply and very strong cash flow the farmers are having to manage before end of the year. So a good and normal fall expectation are setting a good stage for the inventory drawdown in North America and set good stage for spring season in 2023. Moving over to Brazil. The butter ratios have improved significantly with the moderation of fertilizer prices and elevated at commodity prices. We are saying the Brazilian customers are reengaging in the purchases in order to prepare the coming safrinha seasons and the inventories are coming down.

Speaker 3

Moving over to India. The farm economics has been very strong this year with the support from their government. The milestone has also been helpful as we see demand increases, especially for phosphate. The recently announced subsidy program from the Indian government has been very supportive to their phosphate input and also consumption. We are seeing steady buy ins from Indian customers on DAP recently at $7.50 per tonne level.

Speaker 3

With the strong demand in Q4 and getting into 2023, we continue to see the supply constraints for both phosphate and Farfetch. On phosphate, we expect that Chinese export control will continue as we get into 2023 as the Chinese government to ensure the domestic supply availability and that their farmers to be able to Get fertilizers for their food production. And there's very little new capacities coming online in phosphate production in 2023. Similarly to potash, we envision Belarus and Russia's supply will remain constrained in 2023 and the alternatives elsewhere will not be able to ramp up quickly to offset with continued constraints from that part of the world. To summarize, as you mentioned, Jacques, we are very positive to both phosphate and potash as we move into 2023.

Speaker 1

The next question is on channel inventories for both potash and phosphates. Can you provide some detail on recent channel inventory levels and what we expect for the balance of the year and early 2023? Thanks, Paul.

Speaker 2

I'm going to hand this one straight over to Jenny. Jenny?

Speaker 3

Sure, Jack. The inventory level in most parts of the world are pretty low. In some of the regions like in Europe, The inventory level is really, really low given the supply situation in 2022. I probably want to provide some color On the inventory situation in North America and Brazil, where we believe most of the questions about. In North America, For both phosphate and potash, the current channel inventory are about average relative to historical norm at the same time of this year.

Speaker 3

As of yesterday, our upper country warehouse capacity for phosphate has come down to 30% used And for potash, that has come down to 50% used. This level of the inventory are right at the same level as We see historically at this point of time. As we are seeing good known fall application, The channel inventories are expected to come down further. I will also want to remind ourselves, logistics remain very challenging in North America, particularly on the river, which highlights the unique strength of Mosaic's asset, which can serve North America by both rail and barges. Move over to Brazil.

Speaker 3

Since the war started In the Q1, a lot of Brazilian customers rushed to buy products from all around the world in order to ensure their supply. As a result of this rush buying, we are seeing a very high inventory building at the port in Brazil started in July. That inventory at port has gradually cooled down over the last few months. By end of October, We are saying that inventory export has come down by 35% versus the peak in the end of July. The other thing that I want to mention is the import shipments to Brazil.

Speaker 3

In the mid of the year, the vessels coming to Brazil had to wait for over 8 weeks to unload product because the ports warehouses are so full. Now the waiting time has come down to less than 2 weeks. That's a signal. And in the meantime, we are seeing reexport Vessels for both potash and phosphate. With that, we believe the market reached to the bottom in Brazil.

Speaker 1

Joc, the next question is on the status of our potash production increases, especially given what we've seen with recent demand and price trends. Are we committed to continuing to increase production in 2023?

Speaker 2

Thank you, Paul. And let me start by talking about Esterhazy. Esterhazy has been a 10 year plan. And in that plan, we not only brought out a new mine at K3, But fully intended to bring on an extra 1,000,000 tonnes of production, which was aligned with the capacity of the K1 and K2 Mills. So as we talk about that, we've always looked at Esterhazy as being our most efficient, lowest cost operation.

Speaker 2

So yes, we absolutely will span the capacity of Esterhazy's K3 minutee to meet the capacity of the mill. In terms of Colonsay, We see an immediate need for those tonnes as the gap in supply from Belarus Has meant there's been an opportunity for us and through Canpotex exporting more product. That near term need, we expect, will continue into 2023. So we certainly see a need for Calanze in the near term. Bringing that production on has been relatively inexpensive, likely in the range of $50 per capacity ton.

Speaker 2

So on that basis, that's paid off over a matter of months. So how will we look at it as we go forward? We will always be focused

Speaker 1

The 4th question we should cover is on Fertilizantes gross margins in the Q4. How should investors think about the impact of cost inflation in Brazil across our production and distribution businesses? And What are the key takeaways on costs?

Speaker 2

Thank you, Paul. Yes, inflation is showing up in our cost structure through the increased price of commodities, labor and inputs as well as our raw materials. We expect overall the impact on our cost structure to be around 15%. Our distribution business in Brazil benefited by matching low cost inventory with high priced sales in Q2. We saw a reversal of that in the 3rd quarter.

Speaker 2

For distribution business, due to the timing of purchases, a step down in gross margin per ton is expected. However, even with that, we are still seeing gross margins above our historic norms. With that, operator, can we open the call to questions from the audience?

Operator

We will now begin the question and answer session. And the first question will come from Steve Byrne with Bank of America. Please go ahead.

Speaker 4

Yes. Thank you. Joc, you were talking about lower pricing kind of incentivizing farmers to start to purchase Again, is that what was delaying it or were they just simply deferring purchases because prices were falling And now that it's showing some stabilization, there could be a bit of a Flood of purchasing going on from here going forward. Is that reasonable?

Speaker 2

Yes. Thank you, Steve, and good morning. Certainly, as prices are declining, nobody wants to step into a market. There's necessary caution. I would argue probably when the prices were higher, there was also a Psychological or sentimental response.

Speaker 2

The economics of Planting and using fertilizer never went negative. So it isn't a matter of the fundamentals. It was a matter of the Sentiment, I would think at some point. And then as the prices declined, as you suggest, The buyers take a step back and wait. If they think the price is going to be lower tomorrow, they'll wait and Start buying when they absolutely need to.

Speaker 2

I think the indication now is the price has in fact stabilized. It's stabilized at a price where they can see easy value, if you will. And so they're stepping back in. And Absolutely. We expect there will be a pretty steady buying.

Speaker 2

Remember, at least in North America though, We are in the fall season, so they are taking a price risk for next spring. So there might be a little more caution in terms of coming all in, but we're seeing good movement And that indicates that they believe that this is good value and that will continue.

Speaker 4

Thank you.

Operator

The next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Speaker 5

Yes, thanks. Good morning, everyone. I guess my question is thinking about your market outlook into 2023 with the increases that you're forecasting in potash and phosphate shipments. How should we think about Mosaic's ability To grow shipments in excess of the market, lapping some of the production issues This year, increased capacity at Esterhazy. I mean, what's a rough framework, Joc, for how much production or you can be up in

Speaker 6

a market that has higher shipments next year.

Speaker 2

Yes. Thanks, Adam, and good morning. If I think about 2023, starting with potash, and we've been saying this and With the lack of product or the lack of sales coming out of Belarus, we do see But the market is going to have to ration supply, which does, as you mentioned, Bring up an opportunity for us to potentially move more product. I will say that North America, we expect to stay relatively flat. It's not a high growth market.

Speaker 2

So this is all an export opportunity, if you will. The challenge there are Twofold. One is, do we get to the right markets that really need it? And then the other question is, can we even move it? So those are the first points.

Speaker 2

The supply chain is at its limit right now and we struggle to get the tonnes out, particularly, say, in the Q1, which I think everyone sees problems getting product out of Canada in the Q1 with winter and all the rest. And then it comes down to what's the production capacity. We have, I think, Developed real great flexibility there with Esterhazy now reaching what I would call its full capacity, Bringing on Calanze to augment that capacity and give us some flexibility So that we can hit the seasonality as well as the increased demand. So I think we're well positioned there. I can't give you a specific number at this stage of what we think the year is going to bring for Demand, but I mean we're looking at a global market of 64,000,000 tons next year in potash, Probably a little bit off this year.

Speaker 2

I think this year, we might have been as low as 62. So we do see an improvement in the market. We see The rush of tons that came in the Q1 from Russia and Belarus are probably not coming, though a good opportunity for us in that 1st and second quarter certainly of next year and then throughout the year. In terms of phosphates, we're probably a little more Production limited in phosphates. I mean, we're running those assets, but Between the limitations of the resource base, whatnot, we don't have an expansion Opportunity really there.

Speaker 2

So we expect that to stay similar in that sort of 8,000,000 to maybe 8,500,000, 9,000,000 tons of Capacity, how well we utilize those will depend on the market. And so our expectation is our utilization will be quite high next year. And in both those cases, we're looking forward to being very well sold, if you will, and having high utilization of all our assets. And that would include our production assets in Brazil, of course, as well.

Operator

The next question will come from Josh Spector with UBS. Please go ahead.

Speaker 7

Yes. Hi. Thanks for taking my question. I guess just given consensus seems to be that the market will be short something like 5000000 to 8000000 tons of potash next year. Curious where you think support level is for pricing for potash in that environment.

Speaker 7

Just given your 4Q expectations of around $600 per ton, Do you think pricing moves up from here as inventories come down? Or is there a support level you would think about? Thanks.

Speaker 2

Yes. Thanks, Josh. If I think about prices, I think there's really at this stage, It's going to be sentiment that will really sentiment and fundamentals that are really going to Be the limitation to prices. I would argue that what we saw particularly in Brazil when the price of potash went to say $1200 The economics was still okay, but it was starting to get pretty Difficult for the Brazilian farmer. And the one that they probably work off more is their barter ratio, which became quite Elevated.

Speaker 2

So in other words, it was costing them a lot more of their production to buy the inputs than it had in previous years. So I think there's A risk if you go too high in price that you will actually start really destroying demand. So Look, I think there is a great opportunity for a at the same reasonable barter ratios as we've had With elevated crop prices, we can have very good margins and that the market should be Able to move up from here. I don't believe it's going to move to 1200, but I think there's probably some good room to move from where we are today.

Operator

The next question will come from John Roberts with Credit Suisse. Please go ahead.

Speaker 8

Thank you, actually. It's Edwin Rodriguez. Jenny did an excellent job highlighting the strength of both Potash and phosphate. Granted, it's always difficult to choose between your children. But if you have to differentiate between potash and phosphate, Which one do you believe will prove more resilient price wise over the next 3 to 6 months?

Speaker 2

Yes. Thanks, Edlain. So yes, we don't we love all our children As you highlight, if I look at the market fundamentals and they're both strong, but clearly Today, potash has a very good position in that as the slightly smaller of the 2 markets And it has the bigger supply disruption. The supply disruption In China, while we believe will continue through 2023 or the export restrictions out of China, We expect those to continue, but that's 5,000,000 ish tons on a 70 something 1000000 ton market, where in potash, you're talking about a 8,000,000 ton decline on a 70,000,000 ton market. So as you think about it from that perspective, The problems in Belarus in terms of exports are, A, less likely to be resolved And be more significant to the overall market.

Speaker 2

So if I had to be asked, which of the 2 had higher resilience, you'd probably say at this stage, it would be The potash market.

Speaker 8

Thank you.

Operator

The next question will come from Christopher Parkinson with Mizuho. Please go ahead.

Speaker 9

Great. Thank you so much. Jack, just taking a step back and looking at the various costs in both of your businesses. In potash, it seems like esterase is running well and Collins is getting back on track. And on the phosphate side, You have relative stability right now in NH3, Faustina ops and then a decline in the sulfur price.

Speaker 9

So just On any just preliminary basis, how should we be thinking about the margins or the strip margins in phosphates as we hit on 23? What are the big

Speaker 2

Thanks, Chris. So if I'm thinking about potash, I'll just hit potash real quick I think you've touched on that. In potash, it's 2 things that matter. 1 is where the product comes So obviously running Calanze at a little higher cost. The other thing that we have to take into account is Belle Plaine is highly dependent on the Price of natural gas.

Speaker 2

It uses arguably some 30,000,000 MMBtus per year of natural gas. So if you add A couple of dollars to the natural gas price. It has a pretty big impact on that operation. So Other than that though, as you mentioned, the potash pricing or the potash cost is pretty stable. If we then look at Phosphates, and quite frankly, we are seeing some inflation in both mining costs And processing, mining, the distances are getting longer.

Speaker 2

The grades Probably over the years is declining slightly. So you've got some costs in there that come up, but They pale in comparison to when you look at the raw materials. If we think about $1,000 Ammonia, that represents $200 on the cost of a ton of phosphates. If you think about a $400 Sulfur, that represents about $180 cost on top. So you could have at the peak, It was probably $4.20 a ton in our or sorry, dollars 3.80 a ton in our Phosphate costs just on those two raw materials.

Speaker 2

Now they've retracted back to $100 For sulfur and our average I think our average ammonia cost is now in the range of $600,000,000 if you take into account our own production and And all the rest. So, that's stable. And I think we talked about a $40 or $50 decline in Raw materials cost and that will fall straight to the margin. So assuming flat prices, you could expect the margin to increase by About $40 to $50 And so we'll see where the price goes in the next quarter, but that's kind of how that plays out.

Operator

The next question will come from Jeff Zekauskas with JPMorgan. Please go ahead.

Speaker 10

Thanks very much. It's a 2 part question. In your slide deck, you said that you were contemplating a special dividend. Why is it that you're contemplating a special dividend given your very low valuation and your high free cash flow generation? Wouldn't Continuing share repurchases via a higher return for your shareholder.

Speaker 10

And second, I was hoping you would comment on the possibility of Chinese phosphate rock capacity expansions or dapper map expansions in 2024?

Speaker 2

Okay. So first one for special dividend. I think we've been consistent in saying that we would be look at both dividends, Regular dividends, share buybacks and special dividends. So far, we have definitely focused on The share buybacks and one of the reasons for that is or one of the main reasons for that is exactly as you say, we believe our shares Offer as good of value as anything we can think of, and so that's a good place to return money to shareholders. At the same time, we have to consider all of our shareholders.

Speaker 2

Some of the long term shareholders would like to see income. I would say as a shareholder myself, I don't mind the idea of seeing some of it come back as stable income. And quite frankly, If I decide as I think I would that the value of that meant I could buy more shares, I'm free to do that as well. So I don't think the idea of a combination is bad. We certainly are focused more on share buybacks, but I think we want to make sure we Look at all of our shareholders and if a small portion of our return to shareholders is through a special dividend when we're Doing well.

Speaker 2

I think that's fair too. And obviously, on a yearly basis, we'll look at our overall dividend and make sure that we give a fair but affordable Dividend there too. So second question, PROC, I'm not sure I 100% understood The question, Jeff, but there's no question from in general That phosphate rock mining in China has been restricted greatly because of its Proximity to the Yangtze River. And so for environmental reasons, they've done a lot of restrictions on Mining in China. So if anything, I would argue that China is probably somewhat resource constrained from a Phosphate rock process.

Speaker 2

And so, we don't expect expansion there. And what we've seen as well in terms of Finished fertilizers is they have dropped their capacity significantly and shut down plants A lot particularly again along the Yangtze River and have not rebuilt them. So I think their capacity is down about 25 Percent now. And in terms of their exports, 2 things are going on there. More product is going to industrial And particularly, purified phosphoric acid.

Speaker 2

I can't help but mention for the again, The growth of lithium iron phosphate batteries in China is just incredible. And It seems like that may well be the future of batteries is the more economic lithium iron phosphate rather than Nickel, iron or nickel, lithium, cobalt. So, putting all that together, we see a Chinese government needing to Make sure fertilizer stays affordable in China, and they're doing that by restricting exports. And so we think that will continue. I hope that answers the question you were asking.

Speaker 2

If you're asking about potash, I think what we've seen is Qinghai Lake has actually Decreased in capacity over time. And, I suspect that's just the quality of the resource And what they can extract on a year by year basis.

Operator

The next question will come from P. J. Juvekar with Citi. Please go ahead.

Speaker 11

Yes. Hi. Good morning, Joc and team. Just a couple of quick questions. One, you kind of partially answered earlier.

Speaker 11

I had a question on raw materials, particularly sulfur impact on phosphates. I guess my question there would be, You expect to keep that benefit, you said straight to the bottom line. What gives you confidence that It falls to the bottom line and you don't have to share that with your customers. And secondly, just on this LFP batteries that you just mentioned. My understanding is that the use of phosphate in LFP, it's a very small part of phosphate that goes into LFP.

Speaker 11

Do you really think that LFP is going to have an impact on the faucet markets? Thank you.

Speaker 2

Thanks, P. J. Okay. So raw materials first, lithium iron phosphate second. So when I say that the benefit of the raw materials will fall to the bottom line, Look, in general, that's a flow through to the customer.

Speaker 2

But what we find, of course, is always supply and demand Impacts. So in the case of a tight market, more of that sticks with us. And in the case Of a sloppy market, if you will, that goes the customer takes all of that benefit. Today, we see the market is relatively tight. So we think we can maintain our margins and Potentially benefit from that falling price falling cost.

Speaker 2

In terms of Is LFP battery a significant use of Phosphates, what we're seeing today, I think is I think we've gone from 100,000 tons of purified phosphoric acid. This is China alone moving up in a couple of years to about 400,000 tons of purified phosphoric acid. And even year to date, The LFPs has gone up to 670,000, and we expect 2022 will be 1,000,000 tons total. So what we're seeing is an extremely quick increase in consumption, Which, we think over time definitely will have an impact On the supply and demand balance for the product. It is a big industrial use for, phosphates.

Operator

The next question will come from Joel Jackson with BMO Capital Markets. Please go ahead.

Speaker 12

Hi, good morning. I have 2 questions. Maybe I'll ask someone after the other, if that's okay. So Sorry. So Mosaic had a relatively

Speaker 2

lower That's a question rule. You know that. That's 3

Operator

in a row. What's that?

Speaker 2

Sorry, Joel. I'm just kidding. Go ahead.

Speaker 12

Sorry, I missed that. Sorry. Mosaic had a relatively lower potash sales volume decline in Q3 than your Keptex parts and Nutrien. You're also guiding to flat volumes in Q4 versus Nutrien guiding lower. So I mean, you're just sponsored for yourself, but you're linked on the offshore at Campitex.

Speaker 12

So Are you like

Operator

you just said that

Speaker 12

you think that potash volumes in the channel in North America are normal. But did you think that the pause in purchases in North American channel is a longer period than the offshore market?

Speaker 2

Yes. Look, first of all, I can't comment Anyone other than Mosaic, obviously. And I also don't know the differences in Selling strategies or rev rec and all that. So like making any kind of comparison, what I will say is what we Saw in North America in the Q3 was a pretty good slowdown. What we did also see though was a reduction of imports.

Speaker 2

I mean, imports year to date are probably down by 50% or Close to 1,000,000 tons. I suspect we had a pretty good uptake of our Summer fill program or considering how the markets played out, we had a pretty good uptake of our summer fill program. So we think Our customers came to the table and again saw good value and saw that they were willing to price and that was A good thing. So we rev rec'd what we think was reasonable considering the market. In terms of going forward, Again, there's just a high level of uncertainty of where that market is going to be.

Speaker 2

And I would argue that that It pertains both to Canpotex and to the North American market. In the North American market, we That a decent fall season. If we do better than that, hey, all the better. But the Expectation is a decent or normal fall season, and that's exactly what we're seeing. We expect to see the inventory work its way down throughout the season, which is good.

Speaker 2

I think Jenny said earlier, we're down to 50% of our In market inventory, so that's been run down significantly to where a normal level for middle of November. Yes, we're seeing a very normal sort of play out and that is what we would expect. Now, No, we had a summer fill program. We didn't discount or anything. So I think that just says the fundamentals are there and No, people are ready to buy.

Operator

The next question will come from Andrew Wong with RBC Capital Markets. Please go ahead.

Speaker 6

Hey, good morning. So I just had actually a few questions on Fertilizantes. I find it a little bit difficult sometimes for us to get some good visibility there. In phosphate production, it looks like it's kind of trended a little bit lower in the past few quarters now. Can you maybe shed some light on what's going on there and what your Expectations are on production going forward.

Speaker 6

And then on gross margins going into Q4, if I'm understanding the commentary correctly, Sounds like it will still be relatively quite high, but maybe sequentially down into Q3 even if you include the wholesale margins. Is that correct? And then just the last

Speaker 2

one Can you repeat the second piece, Andrew? I just I didn't quite get the Q4 question.

Speaker 6

Well, just wondering like margins going to Q4, the commentary sounded like it will still be very strong historically, but maybe down sequentially versus Q3, sounds like there's some pressure on distribution. And then just wondering If you include the wholesale sales, which are typically higher margin, would the margin still be down sequentially? And then just on costs,

Speaker 1

yes. Yes. Go ahead.

Speaker 2

Cost. And then just on Costs, margin and distribution.

Speaker 6

Sure, sure. And just like what you expect going forward, like Should these costs this year that we're seeing in Fertilizantes, is that what we should expect going forward? Thanks.

Speaker 2

Okay. Okay, that's a brainful. Let me try and hit these one at a time. First of all, phosphate production, I guess, we have over The last couple of years up and down a little bit on phosphate production. Some of that obviously is from time to time reliability, From time to time, moving in different areas of the mining, etcetera, which will happen.

Speaker 2

But the other piece is the market Started moving pretty slow and we ran into where our sales out of production haven't really been Up to where we might have loved them. And as such, you've got to match your production to your sales. We've had a situation, particularly if you look at Single super phosphate SSP, where we're actually pretty loaded up on our inventory. And so continuing to run against A full inventory doesn't make a whole lot of sense. So, and from a cost perspective, that hurts your unit costs.

Speaker 2

So there's a couple of things in play there. In terms of our when I was talking about margin, I just want to highlight, we take positions And normally, we try and keep our positions fairly balanced, but you tend to take a position as much as a couple of months ahead of when you sell. So if you are in a declining market and you buy in July and you sell in September, You tend to take that price risk for those 2 months. If the prices are going up, you have Extraordinary or you have gains in that positioning. And if it's if the prices are going down, You have losses in that positioning.

Speaker 2

So if we look at Brazil right now, You are seeing that. We had very good margins in quarter 2. That reversed to some extent in quarter 3, although As I said in the earlier comments, the margins are still looking pretty strong. And I think I would Credit that with our product management teams, not only globally, but in Brazil specifically, Who are able to understand the market dynamic, decide how far ahead or how late they want To address the pricing and how much inventory they're holding. So I mean there's a great art to that As a production company, however, there's limitations on how much of that you can really do.

Speaker 2

So I think that answers most of what you asked there, Andrew.

Operator

The next question is a follow-up from Joel Jackson with BMO Capital Markets. Please go ahead.

Speaker 12

Sorry, I want to follow-up that question. It's a tough one, but Joc, So Nutrien is going to add some tons going forward here. And obviously, their Capitec allocation is set because that capacity, I assume proving them is already done. So for them to place those extra tons has to be all in North America. And then you said that demand might be 64,000,000 times next year based on your preliminary gas, up only a couple million from 2022.

Speaker 12

Assuming Bethune has a little bit more, if that's K plus S, assuming Israeli chemicals a little bit more, assuming ICL a little bit more, Assuming Belarus can maybe get a little bit out more, who knows what happens with EuroChem. It would seem that Nutrien can't place all those tons. So I guess I'm trying to figure out, I don't have an answer, but how do you think about all this? And if Quanta is a swing mine, Are you cautious to want to run it at the beginning of the year full out if it looks like based on your own numbers, it may not be needed?

Speaker 2

Yes. So as you aptly mentioned, I can't and won't contemplate Either my competitor or comp, partner or whatever and what their plans are. I think you have to ask their new CEO. However, let me say how we view the market. Like I said, we see next year That 8,000,000 tonnes won't come back, yes.

Speaker 2

I'm sure ICL will try and push out what they can. I'm sure EuroChem seems to be reasonably effective in getting to market. I will say that Your Cali seems to be not as active in the market this year as previous, and there's been a couple of Rumors and whatnot about why, but I can't tell you that that would be again a question for them. What and the Belarusians, as long as they can't get product through the Lithuanian ports, they're going to be restricted to either a long rail haul to St. Petersburg, assuming they can get port capacity there or a long and complicated rail haul to China, which they have done relatively successfully.

Speaker 2

I think they've probably been able to move 1,500,000 ish tonnes to China through that rail link. So But with all of that together, we see a supply side even with Extra tons from Canpotex, we see a supply side of in the range of 64,000,000 tons. And from our perspective, if the market will have to find a way to be at that 64,000,000 tonnes. So in other words, we think there's good need or there's need for all the Calanze tonnes next year. What happens beyond that, who knows?

Speaker 2

Again, I will emphasize with Calanze, it cost us virtually A couple of months production to restart it. So we're making A good margin at Calanze right now and the downside risk of restarting it was virtually 0 and the upside opportunity It was large. So to us, that's a perfect value adding decision.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Joc O'Rourke for any closing remarks. Please go ahead, sir.

Speaker 2

Thank you. Well, to conclude our call, I would like to emphasize the strength of Mosaic's financial performance. We delivered excellent results and our outlook remains strong. Global agricultural market conditions remain constructive and tight supply of grain and oilseeds is very likely to continue for the foreseeable future. As a result, Fertilizer demand remains strong and supply constraints persist.

Speaker 2

We're using this opportunity to return significant capital to shareholders, to invest in our business and to strengthen our balance sheet. Mosaic is in an excellent position to continue to benefit from compelling business conditions throughout 2023 beyond. Thank you for joining the call. Have a good and safe day and go out and vote. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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