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Mosaic Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Paul Massoud
    Vice President Investor Relations
  • Joc O'Rourke
    President and Chief Executive Officer
  • Jenny Wang
    Senior Vice President - Global Strategic Marketing
  • Clint Freeland
    Senior Vice President and Chief Financial Officer

Analysts

Presentation

Operator

Good morning and welcome to the Mosaic Company's Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. After the company completes their prepared remarks, the lines will be open to take your questions.

Your host for today's call is Paul Massoud, Vice-President of Investor Relations and FP&A of the Mosaic Company.

Mr. Massoud, you may begin.

Paul Massoud
Vice President Investor Relations at Mosaic

Thank you and welcome to our second quarter 2023 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat and then open Q&A. Clint Freeland, Senior Vice-President and Chief Financial Officer; and Jenny Wang, Senior Vice-President, Global Strategic Marketing will also be available to answer your questions.

We will be making forward-looking statements during this conference call. 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. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release published yesterday and in our reports filed with the Securities and Exchange Commission.

We will also be presenting certain non-GAAP financial measures. Our press release and performance data also contain important information on these non-GAAP measures.

Now I'd like to turn the call over to Joc.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Good morning, thank you for joining our second quarter 2023 earnings call. Mosaic delivered revenues of $3.4 billion, adjusted EBITDA of $744 million, and adjusted earnings per share of $1.4.

First, I'd like to discuss the broader agricultural market where fundamentals remain constructive, global demand for crops is very strong and supply is struggling to keep up. Geopolitical events are having a major impact, the war in Ukraine continues to restrict supply from one of the world's most important agricultural regions. Last month, the Black Sea Grain Initiative collapsed and was followed by the bombing of several grain terminals. As a result, we expect to create exports of corn and wheat to be down by as much as 30% versus last year, which wasn't itself a down year but conflict is only one part of the supply problem.

Around the world, weather extremes are having a profound effect on crop production. North American yields this year could be negatively impacted by dry conditions and El Nino is hurting production across Southeast Asia and Australia. This situation is exacerbated by under application of nutrients especially potash, which is crucial for drought resistance and crop resilience. To maximize yields and meet global consumption needs growers need to increase cropping intensity which will mean increasing fertilizer applications.

The world counter forward multiple years of under-fertilization and crop production shortfalls. Today, China is importing record levels of soybean, wheat, and beef, roughly 5 million tonnes of China's corn imports over the last 12 months were sourced from the Black Sea Green deal. This is a supply that must be replaced by other regions. The shortfall extends beyond China countries across Europe, Africa, and Asia will need to replace lost Ukrainian supply. In India, the focus remains on food security on affordability. Recently the government responded by banning the export of non-Basmati white rice to ensure adequate domestic supply. Constrained supply and strong demand will continue to put pressure on global stock to use ratios which are already at multi-year lows. All these dynamics together continue to support the constructive ag market. The strong ag fundamentals should lead to strong fertilizer demand for the next several years and we're already seeing robust demand in several of our key markets.

Since the spring improved affordability channel inventory destocking and sustained demand for grain and oilseeds have brought customers back to the market. In North America, a strong spring application season depleted fertilizer inventories which customers are now looking to replenish. Logistical constraints associated with low water levels on the Mississippi River and limited trucking capacity persist, but favorable grower economics are leading retailers to secure supplies early to avoid any backups.

In Brazil, the market is beginning to move as we expected, like we saw in North America, demand was deferred late into the typical window, but customers have returned to the market. In-country inventories are well below the levels seen earlier this year and growers are trying to secure tonnes ahead of the fast-approaching sorghum season. In India, monsoon rains have been strong enough to drive grower demand for fertilizer. Phosphate imports are expected to be strong throughout the rest of the year.

Switching to potash supply sanctions continue to restrict Belarusian exports. After a surge earlier in the year, rail volumes to China started to level off. We continue to expect Belarusian Potash exports to be in the range of seven million tonnes to eight million tonnes, which is well below the historic 13 million tonnes.

In North America, port terminal capacity has been constrained by multiple events. Repairs at Canpotex's Portland terminal are ongoing and should be completed by the end of the year. In Vancouver, a 13-day strike resulted in a temporary curtailment of the Neptune Terminal but work continues to finalize a new labor deal and we hope this will be resolved shortly. Canpotex is making use of alternative ports in Canada and in the Southern and Eastern United States to mitigate some, but likely not all of the impact on international shipments. We expect a constrained phosphate supply as well.

Over the last several years, changes to China's environmental policy led to the permanent closure of 25% of their domestic capacity. China is also focusing on food security by ensuring adequate domestic supply, while also meeting rising industrial demand, both of which are expected to limit exports for the foreseeable future. Industrial demand, particularly in China's lithium iron phosphate production is expected to grow dramatically over the next several years. Last year LFT production more than doubled to 1.1 million tonnes of finished fertilizer equivalent and production is expected to grow by an additional 500,000 tonnes in 2023. This new market will continue to take phosphate volumes away from fertilizer production. We expect China's exports to be in the range of seven million tonnes to eight million tonnes this year or roughly 35% below 2021 export levels.

Overall, the fertilizer market recovery is playing out as we expected. In a tight market, volumes are moving and prices are following. Phosphate prices have risen over the last month, while potash prices have stabilized and are now beginning to move higher. This sets the stage for a constructive second half of the year and into 2024.

We believe our business is well-positioned to capitalize on this recovery. Over the last several years, we've invested in our business to maintain our position as a reliable supplier to customers. In addition to the work, we've done on our production assets, we've also invested in the infrastructure necessary to deliver that product. A few examples include the overhauling of our rail fleet, revitalizing our in-country distribution facilities, and our purchase of the remaining share of Gulf Sulphur Services to secure logistics around our sulphur supply. These investments are integral to our results.

In potash sales volumes for the second quarter reflected the benefit of a strong North American spring planting season. While prices reflected the bottoming of the global market. Markets are improving, a trend we expect to continue throughout the second half of 2023. Over the last year, Mosaic is met demand by carefully managing production and inventory, we have built a flexible, low-cost system that's able to capture market opportunities as they become available.

Last month, we temporarily restarted our Colonsay mine to replace Esterhazy production, which is currently undergoing its summer turnaround. In the third quarter, we expect total potash sales volumes of 2.1 million tonnes to 2.3 million tonnes. This guidance reflects the results of a very successful summer fill program in North America, which was oversubscribed by 30%. We currently expect MOP prices at the mine in the range of $250 to $300 per ton.

In phosphates, we reported strong sales volumes in the second quarter. Our average realized price was at the high end of our guidance range and our stripping margin benefited from lower raw materials costs. As we discussed last quarter, we are pushing ahead with increased investments in our phosphate business targeted at improving reliability. This may require short-term increases in maintenance like we experienced during the second quarter.

Looking ahead to the third quarter, we have a solid order book with 70% committed and priced today. We anticipate total sales to be in the range of 1.7 million tonnes to 1.9 million tonnes and DAP prices at the plant in the range of $475 to $525 per ton. In Brazil, we reported sequential improvements in our operating results, our distribution margins are recovering and we expect that trend to continue in the third quarter as Brazil demand moves higher, 90% of our third quarter volume is already committed and priced.

Finally, I'd like to spend some time on our capital allocation strategy. Our approach has not changed. We remain committed to investing in our business, maintaining a strong balance sheet, and returning capital to shareholders. In Potash, an independent audit of the K3 mine and K2 mill expansion was recently completed, which verified a total nameplate capacity of 7.8 million tonnes at our Esterhazy Potash complex. Esterhazy is now the largest potash operation in the world and certainly one of the most efficient. In addition to the underground optimization, we've also begun debottlenecking the K2 mill at Esterhazy by installing a new Hydroflow flotation process. This will add up to 400,000 tons of incremental production capacity with minimal additional operating costs. We're investing $55 million in this project, which has an unlevered after tax IRR in excess of 75%.

In phosphates, we continue to move production away from commodity products and towards differentiated value-added products through the expansion of MicroEssentials capacity at our River View facility. Following the expansion which is expected to be complete by the end of the year, about half of our North American phosphate sales volumes will be higher-value specialty products. This is a $34 million investment with an after-tax unlevered IRR in excess of 50%. This expansion comes just ahead of next year's launch of MicroEssentials Pro, which is the next generation of MicroEssentials. Our field trials in Brazil indicate the growers will see a yield bump on soybean acres of 3% or roughly two bushels per acre versus current generation of MicroEssentials.

Against traditional MOP solutions, MicroEssentials Pro provides an 8% yield advantage or nearly five bushels an acre. The patent on the new formulation extends through 2038. We are very excited about the launch of MicroEssentials Pro, which builds on an already-strong foundation of value-creation for the growers, our customers, and for our shareholders.

In addition to higher-grade phosphate fertilizer, we're also exploring entry into purified phosphoric acid for the lithium iron phosphate battery market. Our initial work has validated this opportunity and together with constructive and developing discussions with OEMs and battery manufacturers, our Board of Directors has approved an additional $60 million to commence engineering work on a commercial plant.

In our Mosaic Fertilizantes business, we're building a one million-ton blending and distribution facilities in Palmer Ranchi in the State of Tocantins in Northern Brazil. We currently don't have much presence in this region. So, the facility will extend our distribution footprint into an attractive high-growth area. This is an $80 million investment with an after-tax unlevered IRR in excess of 20%.

In total, our capital spending expectations this year remains unchanged at $1.3 billion to $1.4 billion. Our balance sheet is strong. During the quarter, we entered into a $700 million credit facility, which gives us additional flexibility to manage our capital. Our final focus is on capital return to shareholders. All excess cash will be returned to shareholders through dividends and share buybacks. Year-to-date, we're ahead of our target over the last 18 months, we've repurchased 50% of our float, and believe our share still represented good value. Our regular dividend today is $0.80 per share and our business positions us to consider further increases over time.

To sum up, Mosaic continues to demonstrate the earnings power and resilience we have created over the last several years. Our second quarter results were strong despite deferred fertilizer demand in many markets and our outlook for the remainder of the year and beyond is quite positive. The world's farmers have strong incentive to maximize crop production and meet global food demand. Fertilizer is critical to their success and Mosaic will continue to meet that need.

Questions and Answers

Paul Massoud
Vice President Investor Relations at Mosaic

Thanks, Joc. Before we open the lines for a live Q&A, we'd like to address some of the most common questions that came in last night. Our first question is on our guidance. With fertilizer markets turning higher in the last few weeks is there conservatism in our outlook, what are we assuming in our volume and price ranges for phosphates and potash?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Thank you, Paul. In Potash, our volume will be dependent on the ability to ship internationally. With the continued labor unrest, following the 13-day strike in Vancouver and the ongoing repairs of Portland, our export capability may be limited but the midpoint of our guidance range is in line with our historic average, which tells you how strong the North American demand has been this summer. Demand has been very strong with our summer fill program oversubscribed by 30%.

Phosphate volumes could also see some upside given the strong global demand, but we're limited on inventory. We expect production to be higher sequentially. So there is some opportunity to exceed our current guidance range. On pricing. 70% of our Q3 order book is committed and priced depending on how the rest of the quarter plays out there is an opportunity for price upside but much of that would get realized in the fourth quarter when we have more unpriced tons.

Paul Massoud
Vice President Investor Relations at Mosaic

Joc, our next question is on Brazil. Fertilizantes recovery appears to be slower than some had expected. Were there any major surprises in the second quarter? And how should investors think about that business in the second half of the year?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Thank you, Paul. Weaker pricing affecting our production business and demand deferral for grower liquidity issues extended longer into the second quarter than we had been anticipating but the market did eventually turn and at today's prices, the barter ratio for beans is very attractive, which is driving farmers to secure supply for their sorghum season. Our distribution business posted a sequential improvement in quarter two and we see that trend continuing into the second half of the year. Second half distribution margins are expected to be at the high end of our targeted range of $30 to $40 per ton. In production, second quarter results were impacted by unplanned outages at Uberaba and Aracaju. Those issues are behind us. So we expect higher volumes in the third quarter.

The other issue in our production business was working through higher-cost inventories of sulphur and ammonia, which we now expect to be lower in the third quarter. Overall, with high-cost finished product destocking and distribution now complete and Brazilian operational issues behind us, the business is very well set up for Brazil's busiest quarter of the year.

Paul Massoud
Vice President Investor Relations at Mosaic

Joc, our next question is on Colonsay. What was the rationale for Colonsay's restart? Is market demand now strong enough to keep it running after Esterhazy's turnaround is complete?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Thank you, Paul. Yes, Colonsay will be needed for the foreseeable future. Over the last year, we have met potash demand by carefully managing production and inventories. In quarter two, strong demand in North America resulted in approximately 300,000 tonnes of inventory drawdown with Esterhazy's planned summer turnaround and a very successful summer fill program, Colonsay tonnage is required to meet our customer expectations and needs.

At present rates, Colonsay must run approximately five months to replace the one-month Esterhazy maintenance turnaround. With strong demand in North America and a rebounding international market, the main determinant to future volumes will only be limited by export logistics capabilities.

Paul Massoud
Vice President Investor Relations at Mosaic

Joc, the last question that we want to address is on capital allocation. Is Mosaic is still committed to returning all free cash flow to shareholders?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Our commitment to return all of our free cash flow has not changed, though, to reiterate, that is a commitment to return cash flow over time not a quarterly commitment. Returns will vary from quarter to quarter based on the seasonality of our business and internal capital needs. However, keep in mind year-to-date, we have returned in excess of 100% of our free cash flow to shareholders.

Paul Massoud
Vice President Investor Relations at Mosaic

That concludes the fireside portion of our call. Operator, could you please open the lines for the live Q&A?

Operator

We'll begin the question-and-answer session. [Operator Instructions] We ask that you please limit yourself to one question. If you have further questions, you may re-enter the question queue [Operator Instructions] And our first question will come from Steve Byrne of Bank of America. Please go ahead.

Steve Byrne
Analyst at Bank of America-Merrill Lynch

Yes, thank you. Joc, I'd like to hear your view on what you think is an appropriate potash price in the market right now given, as you highlighted, the reduced production at Belarus, we got tight inventory levels in most of the world, lower nutrient levels in much of the soil, and yet you're expecting pricing in the high 200s mine gate is that seem appropriate to you or is there something that's causing potash pricing to be weaker than maybe we would have thought, some second-tier pricing out there that's coming from perhaps, Russia or Belarus, is there some of that that's causing this.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Good morning, Steve. It's a really good question and I think you have to start with the after-effects of last year were I think in some key markets there was panic and then overpricing and then the reflection or the shadow of that was a complete walk away from the market by farmers. We talked about a potash holiday or whatever. I think as we move into particularly this third quarter, I would say that we have probably over-corrected significantly to the downside now based on the basic facts, the market is not going to be demand-limited, the market is definitely going to be supply limited in potash. Our expectations from the former Soviet Union Belarus, we're expecting it to still be in the range of seven million tonnes down from seven million tonnes to eight million tonnes down from 13 million tonnes. The Russian producers themselves are down as much as four million tonnes to five million tonnes this year.

So, I definitely think that mine-gate prices are probably, arguably at least $100 below what they could easily move to in probably the near-term. So do I believe the prices are appropriate for where we are today, no. But at the same time I will reiterate that from a first perspective, the volumes have to move, those volumes are now moving and they're moving strongly. Brazil is moving strongly as we move into Safra. Our North American fill -- fill program, extremely successful, we're starting to see not only volume move but price move in China. India still has its problems, but I think that they need product, so I think all of those things lead to a very strong rebound and I'm hoping it doesn't create too much of a rebound that it can't happen in a more orderly way. So overall. I would say the fundamentals point to something that should be quite bullish.

Operator

Your next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson
Analyst at BMO Capital Markets

Good morning, Joc and team. On phosphates, could you talk a little bit about in your release, your comment, that's say for phosphate. in the third quarter you expect margins will benefit from lower raw material costs in the third quarter? So does that imply that you think third quarter phosphate margins will be up sequentially? And then just in general, phosphate rock costs have been higher for several quarters, should we expect that to continue, when would phosphate rock costs go back down to a more normalized range or is this the new normal?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Okay, thanks, Joel. So, assuming the phosphate prices hold, clearly lower raw materials prices will result in a better margin and we see actually a divergence. We're still seeing the -- at least the sulfur prices as remained low and has gone even lower. Ammonia on the other hand is starting to tighten up a little bit. So we might expect ammonia to be flat or even up a little bit over -- over the rest of the year, depending obviously on markets, but overall we think that raw material costs will help our margins this year or this next six months and what we're seeing is we're seeing price movement. Jenny, do you just want to clarify price movement on phosphates, particularly, I guess, Brazil right now?

Jenny Wang
Senior Vice President - Global Strategic Marketing at Mosaic

Yes, Joc. Phosphate prices changed well -- moved upwards since the beginning of July. In North America, DAP and MAP prices have moved up over $50 per ton and Brazil followed over the last few weeks as well and we should see the price upward impact not only in Q3 but also into Q4.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

And the second half of your question, or the second part of your question was the rock cost in mining and I guess there's a couple of issues within mining that are relevant, are new area we're mining in four corners. We have run into, which isn't surprising as we start a new area, we run into variations in the rock quality and the rock and what we're running into as we mine. And then in South Fort Meade, we're running it into, we're in a new area in the eastern extension of that mine, in both those cases, we in the second quarter, we were moving into new areas. So as we get into the new areas and we're in the main -- main ore bodies, we expect those costs will come down as the grade and the ease of mining increases.

Operator

The next question comes from Richard Garchitorena of Wells Fargo. Please go ahead.

Richard Garchitorena
Analyst at Wells Fargo & Company

Great, thanks for taking my question. Looking at the slides, when you look at global shipments, it looks like you took your potash shipments down as well as phosphate assumptions for the year. I was just wondering is that a function of the limitations, you're seeing up on the port level, demand still remains from talking about just trying to add in North America as well as in Brazil. And then just what's driving the reduction on the phosphate side as well. Thanks.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Hi, Richard, mic problems there. Thanks, Richard. In terms of our phosphate volumes, if we look at the first half, they've probably been a little lower than what we might have expected, the markets have been good, the limitation has probably been in general starting inventory at the start of the year was low and then we're running, I would say hand-to-mouth, would be the way to say it. So every time that we make is going straight to market. And that means if you're, if anything, any hiccups you have, you get delays, so it puts the risk on the timing for particularly the end of the year. So on that, in that case, I think the market is strong we will be -- whatever we can produce we'll be able to sell in potash is exactly what I said earlier, which is the logistics constraints, particularly for our exports will be the main limitation.

Operator

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

Christopher Parkinson
Analyst at Mizuho Securities

Great. Thank you so much. Just on the potash rock costs just given the shift in mine mix at least temporarily towards Colonsay versus Esterhazy. How should we be thinking about the cash -- cash costs during the second half of 2023 based on your projected operations? And then any preliminary views once Esterhazy backs up and presumably Colonsay is also back online, just what will be kind of the normalized run-rate that we should be considering into 2024? Thank you so much.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yeah, thanks, Chris. Look, if I think about this from a macro-level if you will, which is probably the easiest. I think the costs at Colonsay -- cash costs at Colonsay, so we'll look at those with the way we're running are probably coming in $30 higher than Esterhazy. So for the one month of Esterhazy downtime that we're replacing in the say the next five months of Colonsay running that incremental 100,000 tonnes a month will be at a $30 increase in costs. Again, highly profitable still and again part of our thinking is always, we want to be selling a highly profitable tonne but once Esterhazy is up and running and again Esterhazy will be up and running, probably in a month after we finish the maintenance turnaround and then we'll be looking at continuing to run Colonsay because we will need to make up that tonne plus the sorry, the tonnes from a month of downtime in the Esterhazy complex plus the 300,000 tonnes that, we didn't start-up Colonsay until we absolutely had to do, and now is the time we absolutely had to, so we will run it for a while and during that time 100,000 tonnes a month will come out at a $30 higher cost than probably what our average would have been prior to that.

Operator

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

Edlain Rodriquez
Analyst at Credit Suisse Group

Thank you. Good morning, everyone. Quick questions on potash shipments again, you have it at 60 million tonnes to 65 million tonnes. Like do you see it going back to that 70 million ranches over the next year or two? And part two of that same question, part of the reduction was due to fewer tonnes out of Belarus and Russia, then why can't the other producers ramp up to replace those lost tonnes in Eastern Europe, if the issue is not lower demand?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yeah, thanks, Edlain. Again, I just want to reiterate the 62 million tonnes to 65 million tonnes is not demand-driven this year, it is supply-driven. I'm going to give it over to Jenny to just walk through the details, but let me say the market was slow to start at the start of the year. So there were constraints in terms of a slow start to Brazil, a little bit later, China contract, or whatever. And so it took some time to get the product really moving this year but as we go through that like we said earlier, the limitation is going to be logistics and I think what will allow the other producers to make up the gap is going to depend on if you can actually move it. I would imagine that most of the other producers or most of the other sources other than maybe Canpotex are actually supply-limited and Canpotex is likely going to be logistics-limited, but Jenny do you want to just go through the supply-and-demand balance?

Jenny Wang
Senior Vice President - Global Strategic Marketing at Mosaic

Yeah, I think you covered that well on the supply side of the limitations from Belarus -- Belarus, and Russia earlier and also the limitation on the logistics side for the Canadian producers. On the supply side, we are seeing a wide range of the recovery in the global market. Firstly in light by the North America market, we are saying not potash demand are growing backed by 20% or more this year versus last year. So this is -- so this has been proven from a strong spring application and the very strong summer field programs. We're seeing the rebounding of the demand in Brazil as well and also similarly to the other Latin-American market. How this demand is going to recover this year even greater than our current estimation which is 64 million tonnes, it is really supply-driven.

So back to your question, when we will see this number, a shipment number to go back to 70 million tonnes, probably next year the supplies unlikely going to go back to 70 million tonnes. We are forecasting in 2025 when the FSU producer's shipment could be recovered back to pre-sanctioned that number might be achieved. So once again, the shipment for potash at a global level is really constrained by supply.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Just to reiterate, I think everyone this also answers part of where Steve Burns was coming from earlier. Until there is resolution of the Ukraine war and until there's resolution of the Belarus sanctions, this is going to be a supply-constrained market, and I don't think any of us can really say one either of those issues are going to get resolved.

Operator

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

Andrew Wong
Analyst at RBC Capital Markets (Canada)

Hey, thanks for taking my questions. A question on Esterhazy capacity figure. What does that mean for your normal operating capacity? Does that mean that the market just can produce a lot more than what it was doing previously and what does that mean for the Canpotex allocation?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Thanks, Andrew. Well, first of all, let me say the way that the nameplate capacity, if you will is determined is an independent audit with a short-run to demonstrate that the unit operations are capable of the design. So that is complete. We are now working with Canpotex to figure out what that means from an allocation perspective and we will update you on that one, when that is complete.

In terms of the actual operating rate, you have to remember that, that is the -- I'm going to call it a peak capacity, there would be a probably a further, you're not going to run that every day and then you're going to have your yearly downtimes and stuff like that. So it's a theoretical number where we will run Esterhazy probably, reasonably hard, but I wouldn't expect it to run at those rates, I would downrate it from that. Although once we put the new Hydrofloat process in place, it may well run over seven million tonnes.

Operator

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

Vincent Andrews
Analyst at Morgan Stanley

Thank you and good morning, everyone. Just a quick clarifying question, would be one. Joc, did you say that Colonsay you anticipate just sort of running for until you make up for the -- what you've losing having Esterhazy down then you intend to probably turn it back offer, is your intention to keep it running perpetually. And then my real question is whether you could talk about the MicroEssentials Pro products a little bit more and just help us understand how you're going to price it versus that incremental yield value you talked about and then over what period of time do you think MicroEssentials 2 to replace MicroEssentials 1 and how we should be thinking about all that.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yeah, thanks, Vincent. Yeah, let me start with Colonsay. For now, Colonsay needs to run to reestablish our inventory levels to where they would have been previous to the Esterhazy shutdown. As you're well aware these operations shut down pretty much every summer in Canada. So we've managed our inventories such that where we don't have a bunch of excess coming into the summer. And so now we'll run Colonsay first to fill that then to make up the gap of what we had in -- extra we had in Q2 and what we're seeing for the summer fill-in Q3. So, I would say for the foreseeable future, we could see Colonsay running, but again, I'm not going to run an operation for the sake of running it. We are going to -- we're going to manage our inventories, managing our working capital carefully and part of that means using the production capacity at Colonsay to manage that -- that function.

In terms of MicroEssentials Pro. And as I said earlier, this is a pretty exciting piece of progress. First of all, the very fact that it takes the patent level out to 2038 gives us a nice -- a nice protection for a long-time, but equally exciting is, it appears that what we're seeing is real agronomic benefit and we don't have a pricing strategy or an implementation strategy, a launch strategy quite finished out yet, but I will say our philosophy has always been that we would share the benefit from the -- from the new products basically equally between the grower, i.e., the farmer, the retailer who is selling it, and ourselves, so our pricing strategy will be such that we can do that. And again, the economics should be fairly strong, because the gain is fairly strong as it was for MicroEssentials.

Operator

Your next question comes from Josh Spector of UBS. Please go ahead.

Joshua Spector
Analyst at UBS Securities

Yeah. Hi. Thanks for taking my question. So I just wanted to ask it within Potash, when you're talking about making up most of the disruption within the logistics in Canada to get material out, I assume that's going to have a higher shipment costs so, one, I am wondering can you quantify roughly how you're thinking about what that could be and two, is that a cost that you would have to or is it something that you can get potentially buyers to kind of back-in on? I assume that's going to impact your cost structure, but want to clarify that. Thank you.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yeah, Josh. Thank you. We are using both New Brunswick and Thunder Bay and looking at even some Southern US Gulf to move the product and obviously, those come with higher prices. I can't give you the exact as we would, those flow-through Canpotex which is a marketing organization that we use, and it doesn't, what we talk about when we talk about our at mine-site return, it incorporates those extra logistics costs, so it's very much dependent on which -- which country or which market these are going to, it depends on whether it flows through like I say, New Brunswick, but yes, you can assume there will be some extra costs whether the buyer will absorb those costs or ours is really a supply-and-demand issue rather than a, we don't price per se, we follow our global market and we have to take what the global market gives us. So in a sense, we're a price-taker, so if the market is tight and supply-and-demand drives price up, we will absorb -- those will absorb the expenses if the supply-and-demand is not, then probably it will come to the suppliers, but we think the market is tight, so we think that probably gets absorbed by the end-user.

Operator

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

Adam Samuelson
Analyst at Goldman Sachs & Company

Yes, thank you. Good morning, everyone. I was hoping to maybe dig in a little bit more on Brazil and Fertilizantes. And maybe just trying to calibrate on the production side. Certainly, you gave some, a clear view on the distribution business, but as I think about profitability and improvement in the second half on production, can you just help maybe dimensionalize the benefits that come from the lower-end that you've been buying that can finally flow through the P&L size, maybe the conversion cost-improvement or rock cost-improvement that comes from operations running more efficiently? And is there -- is there anything to think about from a product mix perspective, this competition on TSP and SSP has maybe been marked kind of intense from the map that might be influencing your realized price and sales mix. Thanks.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

There's a lot to digest in there and what I might just throw to Jenny and ask her to talk a little bit about raw materials pricing and some pricing strategies and what we see with competition, particularly on the different investment grades in Brazil. Yes.

Jenny Wang
Senior Vice President - Global Strategic Marketing at Mosaic

Yeah. Yes so, you're right that in Brazil, we sell our phosphate product. We do have two competitions on TSP and SSP and similarly to MOP. Over the last few weeks, we are seeing the price rebound across the whole portfolio of phosphate. So, therefore, the price increases that which is much more visible for MOP on that is actually the same for TSP and SSP. So we are going to see a higher price for all ranges of the phosphate products that we're going to sell in Q3.

On raw material prices, similarly to the raw -- raw material prices lagging in terms of the reflection in our margin. The lower priced-sulfur and lower-priced ammonia is going to take time to really be reflected in Q3, we will see a lower cost of sulfur and ammonia, but in comparison with the market benchmark probably, the speed of that comparison is probably going to be a little bit lagging.

Adam Samuelson
Analyst at Goldman Sachs & Company

Yeah, thanks, Jennie.

Operator

The next question comes from Aron Ceccarelli of Berenberg. Please go ahead.

Aron Ceccarelli
Analyst at Berenberg Bank

Hello. Hi, good morning. I have one on Potash imports in Brazil. First-half industry figures suggest that inputs in Brazil were down 10% year-over-year after being down in '22 to around 10% again. So this would, if this trend continues, would put proceed Brazil's potash imports at around 10 million tonnes which should be a reasonably lower -- low-level. So maybe you can -- your comments on the behavior now you see from farmers in Brazil and how you see demand picking up with that, please. Thank you.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Thanks, Aaron. Yes, in fact, Brazil, imports have been lower this year and what we end last year, for that matter. If you look overall. there was a buildup of inventory in Brazil because the actual application last year was -- particularly in the second half of the year was quite low as prices probably drove -- drove that but potash imports have been lower, we've actually lowered our expectation for overall Brazil fertilizer use to, I think it's 42 million tonnes now, Jenny. Thank you. 42 million tonnes from what was probably peaked at about 46 million tonnes a couple of years ago. So you are down a good 10% on overall fertilization.

The one thing, I want to highlight what that means though is, it doesn't, I don't think that's indicative of a decreasing market per se because Brazil has had very good harvest, and Brazil as a tropical depleted soil needs to fertilize every year. So Brazil double crops. In other words, it takes two crops a year off that land every year. So the carry-out of fertilizer in the crops is high and they have to add that fertilizer back every year, they have not been doing that for the last two years, that will not continue without having some sort of agronomic impact on yields. Jenny do you want to just talk about that a little bit of the Brazil market?

Jenny Wang
Senior Vice President - Global Strategic Marketing at Mosaic

Yeah, I think you covered it well, Joc. I just want to say for Potash overall shipments last year reduced by 10%, you're right and this year we are actually saying that out of the shipment -- total shipment in-country is probably going to be flat and we do see the potential upside in the rest of the year. So, I just wanted to reiterate on if the potash or other nutrients are under-applied in that kind of market, you will see that yield impact, and the Brazilian farmers, they know that very well and that has been reflected in the very recent buying activities.

Operator

The next question comes from Jeffrey Zekauskas of JPMorgan. Please go ahead.

Jeffrey Zekauskas
Analyst at JP Morgan Securities

Thanks very much. As your potash prices have come down, your Canadian resource taxes have also come down. Is there a way to gauge what Canadian resource taxes are going to be over the next couple of quarters or into next year?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yeah, thanks, Jeff. I'm looking curiously at my partners here to see if anybody has a good answer to that. That's probably a little more detail than I have off the top of my head. I mean, I'm not -- I'm not, I don't have a forecast details enough to kind of give you an answer to that, we can get back to you probably that's probably the easiest. But you're right, it definitely does come down as well. It's been quite significantly down from where the prices were earlier, so. But, I apologize, I can't give you much more than that. Clint. If you're going to give in any detail that you put out.

Clint Freeland
Senior Vice President and Chief Financial Officer at Mosaic

Yes. I would just say one of the factors, and one of the key factors in that is around price. So I think it's going to -- it's going to track or follow kind of what's your price expectations are. Yeah, I think from a percentage or margin standpoint, it should remain fairly, fairly similar, but -- but again I think it will follow your price expectations as you go forward.

Operator

The next question is a follow-up from Steve Byrne of Bank of America. Please go ahead.

Steve Byrne
Analyst at Bank of America-Merrill Lynch

Yes, thank you for letting me back in here. I was just curious about the difference between those two versions of MicroEssentials and did the yield benefit demonstrated both in land grant universities that you can -- you can back it up with and when do you think you might have versions three and four, and so forth that might have some biologics in there for your collaboration with BioConsortia.

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Well, Steve, I was going to say, welcome back. We missed you. Yeah, there is, so the big thing we're talking about really in the new generation of MicroEssentials is what we're calling a swellable granule, which means the granules actually able to kind of control the release and increase the release of the key components and so it's a coding and how we actually make the product, but the key issue there is it's making both the sulfur and the phosphate more bio-available and the micronutrients more bio-available to the plant at the plant root. So that's kind of the layman's which is probably as good as I'm going to get for you, but the layman's terms for what this product is designed to do.

Now the field trials we're doing, we're working again on our own. We normally do field trials with groups like the University of Illinois at their Champaign campus and -- and on our own and with our customers and in Brazil. So we do them over a number of places. Again as a -- as a producer and a -- we can't afford to introduce a product that isn't well-proven and doesn't give good results to the -- to the grower. So we're pretty conservative on how we do that and how we introduce these new products, but it has been in the works for a few years and now with the patent in place, we feel comfortable we can start introducing it. It is well-trialed and we'll continue, I think there's another season of trials that will go next year, etc, etc.

In terms of the biologics. Yeah, we've been working on trying to see what the biologics might be. I think that's a little further off in in the future. It is an exciting new area again, but we really don't want to stick our neck out too far until things are really proven. So watch this space, and I think there'll be new stuff in the future.

Operator

Your next question is also a follow-up from Edlain Rodriguez of Credit Suisse. Please go ahead.

Edlain Rodriquez
Analyst at Credit Suisse Group

Thank you. I mean, yes, so just to follow-up on the potash shipments question here. I mean you've made it clear that the market is supply limited. No, that's fine, but what you want to say for a fact is that Colonsay will remain operational for good. Like, doesn't the market need that supply?

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Yes, thanks, Edlain. Yeah, for clarification from an actual supply and demand perspective, I agree with you 100%. All of our production is likely to be required in the market, like I say, at least for the near term we have to do two things, we have to be able to move it out, which right now has been a little bit restricted. If you think there was a 13-day strike in -- at the Vancouver port saw all of the dock workers were off, and I think there's a new ratification vote on Friday, but they are right now in labor negotiations but even as you come out of this, the time it takes to make the system fluid again, will probably be over a month. Our main carrier to the West Coast Canadian Pacific has said, it will take at least a month to get that system fluid again. Remember, it's not just potash, it's not just fertilizers, it's there's coal, grain, and everything else that moves through that port, and then there is a big intermodal as well. So the pressure on the port and the rail system if it's shutdown is pretty, pretty substantial and pretty substantial to overall the Canadian economy, but in terms of us, we need that, and if the market comes back and says strong, no question in my mind, we would love to see Colonsay run for a long, long-time.

Operator

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

Joc O'Rourke
President and Chief Executive Officer at Mosaic

Well, thank you, everyone, for your attention. To conclude the call, I just want to reiterate our key messages. Mosaic delivered solid earnings in the second corner and we have a positive outlook for the remainder of this year. Agricultural markets are strong, farmers around the world have a strong incentive to maximize their crop production, as a result, global fertilizer demand is also robust and we expect that demand to remain strong. Mosaic today is well-positioned to capitalize on the ongoing fertilizer market recovery. The transformation of our cost structure, along with the investments we've made over the past decade are delivering earnings power and cross-cycle resilience.

So thank you for joining our call. Have a great and safe day.

Operator

[Operator Closing Remarks]

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