Mosaic Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2023

There are 15 speakers on the call.

Operator

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. Masood, you may begin.

Speaker 1

Thank you, and welcome to our Q4 and full year 2022 earnings call. In the

Speaker 2

press release. In the

Speaker 3

press release. Clint Freeland,

Speaker 1

Senior Vice President and Chief Financial Officer and Jenny Wong, Senior Vice President, Global Strategic Marketing will also be available to answer your questions. We will be making forward looking statements during this conference call. The statements include, but are not limited to, statements about future financial and operating results. 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.

Speaker 1

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. On 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

In the call. Good morning. Thank you for joining our full year 2022 earnings call. Mosaic had a record year in 2022, delivering revenues of $19,000,000,000 adjusted EBITDA of $6,200,000,000 and adjusted earnings per share of $11.01 in 2020 2, we reached several operational milestones that allowed us to benefit from strong prices. K3 reached its initial capacity of 5,500,000 tons.

Speaker 2

In Brazil, we grew our distribution market share from 16% to 18%. In North America and Phosphates, Performance Products represented 43% of total sales volumes. And now we've begun to look at expanding our MicroEssentials on the balance sheet further, which we will discuss later. These efforts are driving strong free cash flow generation, on a quarterly basis, which allowed us to return significant capital to shareholders in 2022, while also strengthening our balance sheet. Over the last 12 months, we've repurchased $1,700,000,000 worth of shares outstanding.

Speaker 2

In the Q4 of 2021, we've bought back more than 10% of the shares outstanding or roughly 40,000,000 shares. In addition to share repurchases, we've also paid investors nearly $200,000,000 in dividends. Our regular dividend now stands at $0.80 $1,000,000,000 per share, up from $0.60 per share the prior year. And on the balance sheet, we met our long term debt reduction target on a quarterly basis of $1,000,000,000 with the retirement of $550,000,000 of long term debt in November. Before diving into our business further, I'd like to briefly discuss broader agriculture and fertilizer markets.

Speaker 2

On the ag market fundamentals remain very constructive with December corn near $6 per bushel and November beans near $14 a bushel. This reflects ongoing global food security concerns at a time of disappointing production. On a constant currency basis. Global stocks to use ratios are at 25 year lows and remain under pressure because of elevated risks that threaten output in 2023. The world continues to watch the war in Ukraine.

Speaker 2

We have consulted with top military and foreign policy leaders who share our concern that the conflict in the near term and will have long lasting impacts, particularly in the production of key crops in place like wheat and sunflowers, which is a source of significant amount of the world's edible oils. Outside of Europe, in place. We believe the USDA's latest estimate for Argentinian production appears optimistic as drought conditions during the growing season suggest yields will disappoint. In Brazil, weather has delayed the planting of safrinacorn, which could pressure the record crop that many are forecasting. Around the world, we still see fertilizer shortages in many key agricultural markets, despite some major markets being well supplied.

Speaker 2

However, the overall shortage still threatens total production and this will underpin global crop prices for some time. On the fertilizer markets. The sharp spike in nutrient prices in the first half of last year resulted in growers aggressively mining their soils. As we enter 2023, phosphate and potash prices are now half of what they were at the peak. With crop prices still very strong, farmer affordability for nutrients has improved significantly and is now back to the levels seen in 2020 2021.

Speaker 2

This suggests a strong rebound in demand as growers seek to twice yields with sufficient fertilization. The world is still short of potash. Certain markets are seeing more readily available supply, but this means other markets are not able to get what they need. Belarusian supply remains constrained because of the ongoing sanctions. We believe Belarus Gali's exports were down about 8,000,000 tonnes in 2022 and we expect only modest recovery in 2023 with total exports of around 6000000 to 7000000 tonnes or half of their pre sanctioned export volumes.

Speaker 2

On the line with the company.

Speaker 1

The limited product Belarus has

Speaker 2

been able to get out of the country has been aggressively marketed over the seasonally slow winter, and we've seen similar actions from some Russian producers. This is driving recent weakness in prices, but we believe the phenomena in the press release. In phosphates, China remains committed to the structural shift in the past, impacting where it sends its phosphoric acid. In addition to shutting down production for environmental reasons, a significant portion of phosphoric acid is now being directed to industrial uses, including the battery market. Roughly 1,000,000 tons of finished fertilizer equivalent in the last quarter, was diverted to the battery market in 2022, and we think that will continue to grow rapidly over the next few years as additional battery capacity is added.

Speaker 2

This suggests China's exports of phosphate fertilizers will continue to be down significantly in the past as restrictions extend into 2023. Inventory levels in our key markets for both phosphates and potash on the slide. Have declined considerably from the elevated levels observed in the second half of last year. Grower demand across the Americas has been very strong because of favorable affordability, but retailers have been hesitant to replenish inventories because of the volatility in global prices, especially in potash with the aggressive off season marketing from the Russians and the Belarusians. U.

Speaker 2

S. Spring demand is ramping up over the next coming weeks, and we believe we have reached a bottom in potash prices. In Brazil, sentiment has improved. Inventories have worked their way down to much more normalized level for both potash and phosphates as growers take advantage of much more attractive barter ratios. In the past.

Speaker 2

We estimate fertilizer shipments will total 46,000,000 tons in 2023, up more than 10% from last year and roughly 35% of those expected shipments have already been contracted. In India, in the past. Phosphate inventories remain very low even after a year of elevated imports as most of the product went straight to the ground. In the past. Government subsidies for the coming fertilizer year will determine whether India will be able to attract the nutrients it needs to meet its food security concerns.

Speaker 2

In Southeast Asia, potash has become much more affordable for palm oil producers as well, which should drive demand recovery. Globally, we're seeing very good farmer economics and depleted inventories that suggest strong demand for phosphates in Potash in 2023. Given this landscape, we believe our business is well positioned to benefit from the market's recovery. In phosphates lingering issues from Hurricane Ian impacted our operations during the Q4 for longer than originally expected, but Florida operations returned to normal operating levels earlier this month. We now believe we've moved past the operational issues that impacted output and are dedicating resources to fixing key components in our production.

Speaker 2

At Bartow, we are upgrading our sulfuric acid production facilities following the recent production stops we saw after Hurricane Ian. And at Festina, we've improved operations at our ammonia plant and saw a significant increase in the amount of ammonia produced from our plant during the Q4. Florida production has returned to normal operating rates. During the Q1, we expect total shipments of 1,700,000 to 1,900,000 tons with realized pricing of 6.25 to $6.75 per ton. We expect stripping margins will remain relatively stable quarter over quarter as lower raw material prices offset lower finished product prices.

Speaker 2

In our potash business, slower demand led us to temporarily stop production at our Calanze mine, but we think the current market situation is temporary and expect to restart operations at Calanze within the first half of twenty twenty three. At Esterhazy, the 12th miner is being commissioned and the 13th miner is expected to be in service before the end of the year. When that's done, it will add at least 1,000,000 tons of additional annual capacity at 1 of the most efficient mines in the world. In the Q1, we expect sales of 1.8 to 2,000,000 tons with realized MOP prices at the mine of $4.25 to $4.75 per ton. On the call.

Speaker 2

Mosaic Fertilizantes had its best year since we purchased the business in 2018, with adjusted EBITDA on a quarterly basis of $1,000,000,000 in 2022, despite volatility in the second half of the year. 4th quarter results reflect the sharp reversal of commodity prices from the highs of the first half of the year, which negatively impacted both the production and the distribution margins. But for the full year, our distribution margins averaged $36 per tonne, a number of items which are right in the range of $30 to $40 per ton that we'd expect. 1st quarter distribution margins will be similar to Q4 as higher inventory is worked through, but for the full year, we do expect distribution margins to be back within our normal range. As we think about the evolution of our business, we continue to execute our high returning investments, on the call to shareholders.

Speaker 2

In phosphates, we've begun expansion of our MicroEssentials offering by adding capacity at our Riverview facility. On the call. The project is expected to be completed by the end of the year. Upon completion, about 50% of our North American phosphate business will be sales of value added performance products. This is not an expensive project.

Speaker 2

Total budget is less than $40,000,000 with a payback period in place of less than 2 years. We're also building a test plant for purified phosphoric acid production in North America to verify final design plans for commercial operation. This is the next step in our shift away from commodity fertilizers and opens up new markets like food production and batteries. We're also exploring using the plant's byproducts to produce NPKs. In Brazil, we continue to grow our distribution business.

Speaker 2

While our footprint is already large, there are still areas where we see opportunities to expand. We've begun construction of a 1,000,000 ton blending and distribution facility at Pomeranchi in the fast growing north with access to very attractive rail infrastructure. Returns of about 20% on an expected $80,000,000 budget make this another example of highly attractive modest investments. We're also monetizing past investments. In January, we sold our Streamsong Resort for $160,000,000 because we could realize appealing value for a non core asset.

Speaker 2

On our joint venture in Saudi Arabia is also performing well. In 2022, Mosaic's equity earnings from the joint venture totaled $195,000,000 which is about a quarter of our initial investment. This year, they plan to reduce debt by $800,000,000 they've also distributed $100,000,000 in dividends to investors. Our proportional share of $25,000,000 was received this month. On the call.

Speaker 2

Finally, I want to reiterate that we remain committed to our approach to balance sheet management and shareholder capital returns. Long term debt by $1,000,000,000 As we look at our balance sheet today, we believe we are well positioned for the long term. Similar to last year, we plan to return substantially all of our free cash flow to shareholders in 2023 through a combination of share repurchases and dividends. Since September of 2021, we bought back $2,200,000,000 in shares and we continue to see great value in our shares. To emphasize that point, we plan to proceed with a $300,000,000 accelerated share repurchase program in the Q1.

Speaker 2

We've also grown our regular dividend to $0.80 per share, and we're well positioned to consider further growth, especially with our reduced share count. In addition to the regular common dividend, our Board of Directors has approved a special dividend of $0.25 per share to be paid out on March 30 to shareholders of record on March 15. Given our strong cash flow combined with the proceeds of asset sales, our Board approved this payout as a supplement to our ongoing share repurchases. Before we go on to Q and A, allow me to summarize. Mosaic delivered record results in 2022, and we expect favorable dynamics to continue in 2023.

Speaker 2

The world is short global grains and oilseeds, so farmers are incented to maximize yields. We expect this to drive strong fertilizer demand and our business is well positioned to meet that demand through our existing assets and exciting new growth opportunities. With the strong cash flows that these provide, in place. We're returning significant capital to shareholders through dividends and share repurchases. With that, I'd like to now move on to the Q and A portion of the call.

Speaker 1

Thanks, Jacques. Before we move on to the live portion of this call, 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 on the last night. Joc, could you provide a little more color on the potash market and why we expect Calanze will need to be restarted in the first half of twenty twenty three?

Speaker 2

Thanks, Paul. Let me start by saying we've had a year of low potash usage, which means soil levels are depleted and on the ground. Farmers will need to add potash to the soil to ensure reasonable yields this year. So growers are seeing very attractive economics and they're acting on it. We're seeing things like our largest channel customer in North America has already got 60% of their farmers' demand is committed for spring, which is higher than most normal years.

Speaker 2

So as we move into during our expectation is farmer demand is going to be good, but everybody is waiting for the last moment. They don't want to live with the price risk. So while we expect a very good season in North America and we're already seeing a good season in Brazil, we do expect people to wait as long as they feel they can. But once it moves, we expect it to move fairly well. Overall, we do see the potash market as being limited by production.

Speaker 2

So while demand will be normal, We expect Russia will be exporting less than what they have in the past, probably 1,500,000 to plus 1,000,000 tonnes and Belarus will probably export 6,000,000 to 7,000,000 tons, which is half of what they did pre sanction. So We think the situation today of the standoff is temporary and it will start moving. And when it starts moving, we expect we will have to run hard to supply the market. Jenny, do you want to

Speaker 1

just give us a little bit

Speaker 2

of a highlight of where the overall S and D is for potash right now?

Speaker 4

Sure, John. As you mentioned, the potash market last year declined by 16%. That was driven by the supply constraint. And this year was very constructive of farm economics in the markets like North America and South America. We believe farmers have all the incentive to go back to apply potash on the field to maximize their yield.

Speaker 4

For the markets like China and India, the government, they are concerned to the food security. Therefore, there are a lot of local policies to support the farmers to maximize their production. For that, we actually have seen potash demand increased last year in China. We believe this trend is going to continue. So overall in 2023, we expect the demand to rebound globally, but there's no way to have the full recovery back to 2021 just because of the supply is constrained.

Speaker 4

With our same 5,000,000 to 6,000,000 tons of supply shortage in this market.

Speaker 1

Joc, Mosaic Fertilizantes gross margin dropped significantly in the 4th quarter. In the past. What drove that margin compression and how should investors think about margins for the business in 2023?

Speaker 2

On the call. Now if we look at the second half of twenty twenty two, it reflects a reversal in prices from the first half of the year. This impacted both our distribution and our production business. In our production business, we are now working our way through high cost on the same store as the company's operating expenses. As we move through the system, we expect our margins to get more normalized after the Q1.

Speaker 2

In distribution, high cost inventory is now working its way through the system. Now none of this should have come as much of a surprise because prices were moving up in the first half and coming back down in the second half of the year. So in the first half of the year, we made higher distribution margins and in the second half of the year, those reversed as we were selling higher priced inventory into the market. If we look at it over a whole year, both our production business and our distribution business and did very well. And overall, 2022 was a very successful year and a record year for the Fertilizantes business.

Speaker 2

On the line. Once we get past the Q1, distribution margins should be in line with our historical expectations of $30 to $40 per tonne, and our production margins will revert to normal stripping margins as well once we work through the high cost raw materials.

Speaker 1

Joc, how should investors think about our production volumes over the next year? And what types of capital projects is Mosaic initiating to support reliability?

Speaker 2

On the call. Thank you. First of all, let me say the last couple of years have been some extraordinary circumstances that have impacted our production, on the call, particularly in our phosphate business and our Brazil businesses. 1st, sulfur shortages coming out of the Gulf of Mexico has heard us at the start of last year, refinery shutdowns, COVID, transportation limitations at the start of last year, and then of course a couple of big hurricanes, one that hit Louisiana and the other one last year, which hit directly onto our operations here in Florida. Now what we saw from those was damage that probably lingered longer than we would have liked because of the condition of some of our plants.

Speaker 2

So what are we doing to improve that? We're looking at how do we fortify our plants to make them more resilient to this type of on the current and some of that means we've replaced a bunch of our converters in sulfuric acid, our boilers, our in the past, economies, etcetera. In Brazil, we're building a new sulfur tank, new phosphoric acid tanks are being overhauled. So where do we expect these to go? What we've seen already is, for instance, where we've done the repair work at Faustina in Louisiana, more than 40% of our ammonia last quarter was supplied from Faustina, which is the highest it's been in over a couple of years.

Speaker 2

So we think we're getting ahead of all of that. Now if I look forward, what do I expect? I expect that we will be running in that 85 to 90% of our 10 ks value. So that would probably indicate somewhere in the range of 7,500,000 to 8,000,000 tons in phosphates and 3,500,000 tons in our Brazilian business.

Speaker 1

This concludes the prerecorded portion of our call. Let's now move on to the live Q and A. Operator?

Operator

Thank you. We will now begin the live question and answer session. The first question today comes from Steve Byrne with Bank of America. Please go ahead.

Speaker 5

Yes, thank you. Just kind of following up on that statistic that you provided, Jenny, where Global consumption of potash down 16% in 2022 and your estimates for Russia and Belarus sound like down another 10% or down 10% from 2021 in this year. My question for you is, does the world really not need in the past year as a result of this and or do you think there could be maybe a bit of a panic to meet farmer demand this spring, given the just in time purchasing mentality.

Speaker 2

Thanks, Steve. This is Joc. I'll start here and hand it over to Jenny as you requested. But let me say the world does need 70 +1000000 tons of potash. We believe there is a real need and what we expect to see happen and what we have seen happen is continents like Africa actually going without a product that they really need.

Speaker 2

So we're actually shorting some regions, Africa and parts of Asia, because they can't afford it and even some of Central America. So the reality is, if there was more potash, it would certainly find a home and obviously the price sensitivity would be different. As it is today, we expect the major markets that can afford will bid up the potash price and that will be what drives that. So I'm going to hand it over to Jenny to just talk a little bit about that balance.

Speaker 4

Yes, sure. Thanks, Jacques. Steve, to your question on what is the impact with significant demand of shipment reduction last year. We believe that was over 11,000,000 tons versus the previous year. We believe the impact to the yield in some of the market might be reflected on the yield for that year.

Speaker 4

In some markets like North America and Brazil, where the farmers probably they have invested in the potash application in the previous year. They probably they were able to afford for reducing rate for a year, in 2 years in a row to cut application rate, it is not really a good decision for the farmers to maximize their yield and production. Therefore, we believe the demand recovery or the demand for potash in this market are there. It's just the farmers have the incentive to maximize their production. There are certain market, as I mentioned in the prerecorded answer, the government are really supporting the farmers to use Potash in order to secure their food security and we believe that government support are going to continue as we are getting into 2023.

Speaker 4

Lastly, on the spring demand, what we heard from our customers and also the growers on the ground, Steve, in North America, in particular. There's a very clear desire based on the affordability and the farm economics that farmers could go back to apply potash, especially for those who skipped a season last year or cut rate last year. We are at the stage that the farmers needs to engage with their retailers and then the retailers to cover the last part of the buying from us and we see that is happening. In fact, this week, we are seeing increasing inquiries in the south part of the U. S.

Speaker 4

As the season started. So we feel confident that demand is going to recover for potash and we still believe with significant constraint on supply and that the price will stay at a healthy level, although it is much more moderated from last year.

Speaker 2

Yes. Okay. And Just let me add this, Steve, as well, because you asked the question of Calanze. One of the reasons we believe Calanze will likely be needed in the first half of the year as that demand comes back. We think there's a good case for the restart of Clonze.

Speaker 2

So It is in hot standby. The labor is there. Everybody is ready. Now if we don't need it, it won't come up. But if we do need it, it will come and we expect that might be the that is the likely case as we see it.

Operator

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

Speaker 6

Yes. Joc, I think you mentioned that 1,000,000 a ton equivalent of fertilizer is going into the battery market. Is that DAP equivalent that you're talking about, is that as the LFP battery grows in China and maybe in the future other parts of the world, what are your expectations there? And do you have any product that goes into that market?

Speaker 2

Yes. Thanks, P. J. Just checking my numbers to make sure I have this right. But so yes, your equivalency is correct.

Speaker 2

We are seeing or we saw last year about 500,000 tons of purified phosphoric acid be redirected from fertilizers to batteries. Now that is equivalent to about 1,000,000 tons on the line of DAP. And what we're seeing in that market, it was last year at least, a growth of virtually doubling over 1 year. So we've gone from 500,000 equivalents to 1,000,000 equivalents. And even if that goes to 1,500,000 equivalent to 2,000,000 equivalent, we're going to see a heck of a lot of displaced phosphates not getting out of China.

Speaker 2

So that's the reason we feel fairly confident that our expectation for exports is reasonable. In terms of our own, we are not supplying any of that market at this stage. We are in the process of doing a a pilot study now. We've done the tabletop work and we're now doing a pilot plant to get the design criteria and the costing for our own purified phosphoric acid, and I would expect to be saying more about that in the next 6 months too or so and we'll be talking about making an economic decision after that.

Operator

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

Speaker 7

Great. Thank you so much. You have a helpful outline on Slide 10, just given the sensitivities to DAP, MLP, so on and so forth. Can you speak to the potential year on year benefits from all three of your sources of ammonia as well as the average sulfur price, the way you see that trend in the first half. Just any color on that as it pertains to DAPTRA margins.

Speaker 7

Thank you so much.

Speaker 2

Sorry. Thanks, Chris. I think what you're asking is, if I've got this right, is how is the stripping margin sensitivity to input prices, if you will. On the call. And what we expect for the year is, I think what we're seeing is we're seeing an increase in refinery activity, which is leading to a better supply of sulfur and probably making the sulfur market a little looser.

Speaker 2

But if DAP demand goes up a lot, that could tightened again, but again that sort of sets itself out with price. And then on ammonia, what we're seeing is a a big decline in the price of natural gas in Europe. And that price of natural gas, of course, is driving down the price of natural gas here in the U. S. And also driving down the price of our nitrogen inputs.

Speaker 2

So Our expectation is that, that will continue and then flatten. So we'll continue to decrease for a while and then it's probably getting close to flattening now where you've got I think urea prices are down in that $300 range and it can't really go that much lower than that or You'll start seeing production slow down again. So we expect that to happen and we expect that over the year, stripping margins are actually going to be quite flat for us. In other words, the any drop in price will be met because of a drop in Raw materials and vice versa.

Operator

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

Speaker 3

Yes, thank you. Good morning, everyone. Maybe, Jacques, just to clarify that last point on phosphate stripping margins. So is the implication then that if you're able to ship, I think I heard 7,500,000 to 8,000,000 tons a product in 2023 or that would be the current kind of plan, as you would sit here today with flat stripping margins that the EBIT that you think your EBITDA is growing in phosphate. And then, the second question I had was just in fertilizantes again, a bit more of a clarification on the drivers in the Q4 and the Q1.

Speaker 3

How just the weakness in margins between the distribution and the whole and the upstream phosphate production, just both businesses will look similar from a margin perspective in the Q1 before normalizing thereafter. I just want to make sure I heard that right.

Speaker 2

Yes. Okay. So I'll answer the first one here, which was sorry, I just got to re Yes, our volume, yes, our volume, I think, is that's not an unreasonable expectation for volume. The question was in respect to what our production capabilities were. So I will qualify that and say that our we always are driven by what is the on the ground demand for our product and not necessarily what our production capabilities are.

Speaker 2

So There could be a gap between what our production capabilities are and our sales, but that will depend. Likely, this year, we expect for both potash and phosphate demand will be good, so we expect to sell most of what we make. So that's not an unreasonable assumption. In terms of the pricing, yes, our expectation is that as the season gets moving, both phosphates and potash prices should move up at least somewhat. And I think in the case of potash, it could move up a lot, but certainly in phosphates, but we expect that phosphates will kind of balance off with a relatively flat stripping margin, if you will.

Speaker 2

So That's our basic prediction of where that would go. In terms of Brazil, on the call. I would say that both the production business and the distribution business have been equally impacted, 1, by rising raw material cost and the other by just the timing of sales versus purchases of third party material. So with that in mind, you can think of it as returning back to more normalized level after quarter 1.

Operator

The next question comes from Richard Garchitecturena with Wells Fargo. Please go ahead.

Speaker 8

Great. Thank you. Just wanted to touch on the plans to restart Las Vegas. When you look at the outlook and where we were a year ago when you were planning to expand further. When you start up, I I guess how

Speaker 9

long will it take you to get back to

Speaker 8

that, I guess, $1,300,000 run rate initially when it was shut? And then, how are you thinking about moving forward in terms of expanding that capacity, is it probably going to be more of a 2024 event, assuming we have demand recover or is that on hold indefinitely till the market recovers?

Speaker 2

Yes. Thanks, Richard. Look, the way I'd look at Calanze is, So when we expected the volumes would continue at the rate they were in, let's call it, the middle of the year to the first half of the year. That slowed down significantly in the 3rd Q4, which was less than what we would expect. So reasonably, we shutdown for Lonza.

Speaker 2

Now like I said earlier, we shut it down. We still have the employees. We still have everything ready to go. So it doesn't take much to restart. But what's happened in the meantime that has to be considered is we've added since that time and because of the slowdown, we've been able to add 2 new miners at Esterhazy.

Speaker 2

So very soon Esterhazy will have an incremental capacity of 1,000,000 tons. So if you add the 1.3 ish 1000000 ton run rate of Calonze plus 1,000,000 tons on the call for Esterhazy. It doesn't seem to me that we're going to need the 2nd mill at Calanze. So I would say that generally that would be on hold. And as a matter of fact, I think the longer the demand waits, the later that Calanze would need could be down because of Esther Hazy taking up the slack.

Operator

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 10

Thank you and good morning everyone. Jacques, could you just talk about how you sort of view the shape of the year volumetrically, in terms of seasonality and whether as we get after the U. S. Spring season, which presumably is going to be quite strong, do you anticipate the supply chain sort of Entering a restocking phase or do you think they're going to want to have empty bins and there's going to have to be summer fill and all that. And I'm just curious because it seems like everybody's running hand to mouth right now and I just can't tell whether you're sort of assuming that this is the end of hand to mouth as we get into spring and then we go back to maybe sort of the supply chain having normal levels of inventory through the year.

Speaker 10

So what are your thoughts there?

Speaker 2

Yes. Thanks, Vincent. Look, I think that right now with the volatility in front of people, people are very concerned with waiting very long, if you will. So everything is always just in time. But of course, the dealers and our customers have to balance that with the need to make sure they get the product they need in time for season.

Speaker 2

So that's always the balance. My expectation and what we Jenny and I were at the Fertilizer Institute meeting a week or 2 ago. And almost to every customer, we're still hearing we would like to have our product in position for the start of the season. We're not going to refill until we need it, and then we want to end the season empty. So that's our expectation.

Speaker 2

That's what they'll do. But that also means that the summer fill program should be strong here in North America. In Brazil, I think the because of the long lead time for everything, it will be a little different than that. And I think the Brazil market will be more stable throughout the year and we'll see the normal pattern of Q3 being our strongest quarter. And like We've said here, even the safrinha season, we're starting to see some pretty strong demand signals at least.

Speaker 2

So we think that will continue. We think 3rd quarter will be pretty normal with the U. S. Fill. And then the one you've got to consider is at some point, we need to see and we expect to see Central America, China, India, Asia, the potash going to the Indonesia, Malaysia.

Speaker 2

We expect all that has to ramp up because they've got a year where they just haven't used the products they need. So even if they're not refilling, they're going to have to buy.

Operator

On. The next question comes from Edlain Rodriguez with Credit Suisse. Please go ahead.

Speaker 6

Thank you. Good morning, guys. So quick question on farmers' affordability. It has improved quite a bit as fertilizer prices declined over the past several months. So that's good for the farmers.

Speaker 6

But what's good for you is for fertilizer prices to start moving higher. But if they do, doesn't that bring back the affordability issue again? So my question is like how do you right to balance that delicate life.

Speaker 2

Yes. Edwin, This is a big challenge for us and that we sit in a global commodity market. And while we try to make sure that the spikes and the troughs are reasonable and that farmer economics stay good. What you see and what we saw last year in the start of the year was panic buying, if you will. So everybody was buying.

Speaker 2

They were very worried about getting their product. And then the farmer said, well, that's awfully expensive. And recognize last year the farmer economics weren't bad. So the psychological piece took a toll. Back rush to get your product and suddenly there's another price spike that does hurt product hurt farmer affordability to the point where they're resistant to buying fertilizer again.

Speaker 2

But I will say, 1 year you get away with it. The 2nd year, we're going to start to see yield drops. And if you start to see yield drops, you're going to see for the underlying agricultural commodities. So I think it's really self correcting this year, which is on these will go up, which is going to drive the demand. So I think you can't control it.

Speaker 2

Hopefully, people buy early enough and we get through in a fairly rational way and pharma affordability stays reasonable.

Operator

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

Speaker 9

Yes. Hi. Thanks for taking my question. I just wanted to follow-up on an earlier point around,

Speaker 2

I mean,

Speaker 9

kind of similar to Brad's question in terms of potash affordability, But maybe specifically with the markets that you said were more price sensitive, when you're talking about Africa, Asia, etcetera, Are we at a point where that's not an issue today and you're going to see or expect buying to return? And is there a range of prices move up $50,000,000 $100 a ton, that's still going to be a point where it's attractive for that region to buy? Or are we still at the point where that's still questionable?

Speaker 2

Yes. Thanks, Josh. I think where as we look around the world, it really depends on where you're looking. Look, if you're buying fertilizers for and the vast majority of fertilizer is used for big crops and export crops. So if you're selling your crop into an international market where you can get the international price, Then you're fine and the demand will be there.

Speaker 2

So if you think about North America, most of South America, Europe, etcetera, yes, that's all fine. If you think about Africa, the a problem in Africa and the reason I would say no, it's not the case, they still can't afford it in Africa is because they're buying for selling into an international market. They're buying for subsistence farming to feed themselves. So across the belt and that's where the supply gap ends up being most acute. And we've heard it from, for instance, the U.

Speaker 2

S. State Department, which says that parts of Africa are now moving from So in Asia, yes, they'll be able to afford it, I think. But if you get to the poorest parts of the world, no. Now does that affect the overall market? Not really, because those are not big users in the first place, but that's probably the most tragic part of this whole thing.

Operator

The next question is from Jacob Bout with CIBC. Please go ahead.

Speaker 11

Good morning.

Speaker 6

I wanted to go back to

Speaker 11

that discussion on Collins and Esterhazy. If I'm not mistaken, Esterhazy is your lowest cost potash mine by far. Just why wouldn't the next incremental ton be coming from Esterhazy? Is there anything that we should be thinking about from a mill or hoist perspective for bringing on incremental capacity.

Speaker 2

Yes. Thanks, Jacob, and good to have you back on the call. Yes, your comments are exactly correct. Esterhazy is by far our cheapest or least expensive to operate mine. And you can think about this as each new miner that comes in, it gives us approximately 400 ish 1,000 tons of new capacity and there is no limit.

Speaker 2

As we see it, we expect no limit on the hoist and we will be plant limited at about the 1,000,000 tons of incremental capacity that we've talked about bringing on. So will be plant limited by, let's call it, the middle to the end of this year. And at that stage, customized tons from Esterhazy first and only use and then Bell Plain and then use Calanze as required.

Operator

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

Speaker 12

Hey, good morning. Thanks for taking the question. Just want to go back to LFP. We've seen a couple of LFP projects announced recently in the U. S.

Speaker 12

And kind of curious what's Mosaic's view on the domestic LFP opportunity and maybe this is a little bit early given you're doing some pilot testing here, but I appreciate any initial thoughts. Like if you were to produce a purified phosphacid for batteries, like what would be required for that to happen? Can Will they do that with the current rock that they have or do you need a different type of rock or what kind of upgrades would you need due to your processing plans today and what kind of

Speaker 3

cost would that involve? Thanks.

Speaker 2

So thanks, Andrew. Let me say we've been in the testing phase, and I can tell you fairly definitively that we are capable of making the grades of on a purified phosphoric acid required for batteries. And as you said, there's a number of LFP, lithium on the ground. Iron phosphate plants being talked about in the U. S.

Speaker 2

Here. And we're in discussion with some of those and obviously there's non disclosures for each of those sets of discussions. So I won't talk about specifics, but I can tell you there is a huge desire amongst those battery manufacturers to have 1, a shorter supply chain, I. E, a more stable supply chain out of the U. S.

Speaker 2

And secondly, a lot of these subsidies and stuff require that the U. S. Content to be there. So there's a number of reasons why the market at least is very interested in that. And what we're doing now in conjunction with doing the pilot work on this, which is going to give us the design criteria, tell us help us define what the costs of both capital and operating will be.

Speaker 2

But at the same time, we're doing market studies to understand on what the final size of this market could be here in North America in particular. But remember, as we think about purified phosphoric acid, there's also the other industrial uses and food and everything else. So this could be a quite a useful branch for us to, decommoditize to some extent.

Operator

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

Speaker 13

Thanks very much. With fertilizer prices coming in, should working capital to be roughly a source of $700,000,000 in cash in 2023. And secondly, with all of the different ammonia facilities that are being proposed for the Gulf Coast, does it make sense in the future to buy more cost plus ammonia? Or are you happy with what you've got?

Speaker 2

Yes. Thanks, Jeff. Let me hit these 2 in terms of I missed your first question. Sorry, I got to Working capital. Oh, working capital.

Speaker 2

Yes. You're depending on your assumptions, Clearly, we are going to work our way through some product that is pretty high priced right now. And depending on what you assume for the final pricing, there's definitely going to be some cash coming into the system from working capital. So in other words, our working capital needs should go down with price, obviously. If I look at this year, I think our working capital has been almost all due to the price of third party product.

Speaker 2

So the volumes of our inventory hasn't changed, but the value of that inventory has changed significantly. And that's not for produced product, that's for 3rd party purchased product. In terms of the ammonia, I think you've I hit that exactly on the head in terms of where we're going with our CF contract, which is we've said that this was an 8 year contract with CF. CF has given us notice. They want to renegotiate it.

Speaker 2

But if they had not done that, we probably would have as well. Now I think it's worth hedging part of our needs for ammonia with a cost plus type contract, but maybe it won't be as high a volume as we've done in the past or it might be a different formula. But I think there's ways is in both ours and CF's interest to relook at that contract and look at how we price our ammonia going forward. So and there's others like OCI and whatnot that have nicely come into that market. So, we see ourselves in a pretty good bargaining position for what we do going forward.

Operator

The last question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Speaker 14

Hi, Josh. Good morning. We'll see you next week. I wanted to ask a bit more about Brazil to understand some of your color around margins. Obviously, there was a big margin reduction on Q4.

Speaker 14

I think you said you expect margins in Fertilizantes to improve by the end of the year. Can you give a bit more color? Should we expect similar margins in Q1 and improving across the year. And when you say back to, you used the word, I think historical or average margin, but I don't really know what that is anymore because obviously you bought the Vale asset, so the mix changed, margins went up with the higher commodity prices, you did a lot of work to improve the assets you had there, some optimizations and synergies. What is historical margins in Fridozantin?

Speaker 2

Yes. Thanks, Joel. So let me say, historically, We were talking specifically about the distribution margins. And if we look at the distribution margins over time, They've really ended up somewhere in that $30 to $40 per ton. Now the production business, obviously, much more price of phosphate and potash dependent.

Speaker 2

But if I look at the distribution business, that's not a bad place to start. In terms of how we expect this to play out, we're now buying product at today's price, But that product won't be sold until the end of quarter 1 and into quarter 2. So the product we're working our way through Is the higher priced product from quarter 4 that we were purchasing at that stage because there's that big, big lag in Brazil of, let's call it, 3 months. So we do expect margins, particularly distribution margins to be similar to what they were in quarter 4. But I may have been misunderstood when I said they were going to build over the year.

Speaker 2

Over the average of the year, we still expect them to be in that same range of $30 to $40 So that means they have to rebound fairly quickly and we fully expect they will.

Operator

On. This concludes our question and answer session. I would like to turn the conference back over to Jacques O'Rourke for any closing remarks.

Speaker 2

So thank you everyone for all your questions and your interest in us. To conclude our call, I'd just like to reiterate our key messages. On the call. Mosaic delivered record results in 2022, and we expect strong business conditions throughout 2023. Farmers around the globe on the

Speaker 3

line with the

Speaker 2

operator and the operator to maximize their yield and fertilizer is in short supply in many parts of the world. So we expect strong demand and Mosaic is well positioned to deliver this for our customers. We are also delivering for our shareholders by returning essentially all of our free cash flow through dividends and share repurchases. So with that, thank you for joining our call, and please have a safe and happy day.

Operator

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

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Earnings Conference Call
Mosaic Q4 2022
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