The Mosaic Company — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, everyone, and welcome to The Mosaic Company's First Quarter 2024 Earnings Conference Call. [Operator Instructions] At this time, I'll turn the floor over to your host for today's call, Jason Tremblay. Jason, you may begin.
Thank you, and welcome to our first quarter 2024 earnings call. Opening comments will be provided by Bruce Bodine, President and Chief Executive Officer; followed by a fireside chat, then open Q&A. Clint Freeland, Executive Vice President and Chief Financial Officer; and Jenny Wang, Executive Vice President of Commercial, who will also be available to answer your questions.
Good morning. Thank you for joining our call. In addition to reviewing Mosaic's performance for the quarter, there are 3 key topics we'll discuss today. First, the transaction we announced with Ma'aden highlights our commitment to unlocking shareholder value. Exchanging our 25% stake in the MWSPC joint venture for an approximately $1.5 billion position in Ma'aden provides a clear indication of value and greater capital flexibility in the future. Second, we are making good progress on several high-return, low-capital intensity initiatives that will improve results across the commodity cycle. And third, fertilizer market fundamentals remain constructive and the phosphate supply and demand picture is particularly compelling.
Thanks, Bruce. Before we move on to the live Q&A, as we have done in past quarters, we would like to address some of the most common questions we received after publishing our earnings last night. Our first question relates to the Ma'aden transaction. What does the deal mean for Mosaic? And how does it fit with your broader portfolio strategy?
First, I want to mention that our partnership with Ma'aden has been a great one. We brought deep technical expertise to the joint venture, and we benefited from secure phosphate supply for our customers in key markets. Now as Ma'aden shareholders, our relationship has evolved but our partnership continues. We're committed to working together on opportunities that create mutual benefits. When I think about the transaction, I believe Mosaic shareholders will benefit in multiple ways.
Our next question relates to the markets. What is your view on how the potash and phosphate markets will evolve for the remainder of the year?
Well potash and phosphate markets are playing out much as we expected. Ag fundamentals remain constructive in most parts of the world. China's long-term appetite for ag commodity imports remain strong and is particularly robust for corn and beef. This means farmers have incentive to continue to maximize crop production. We saw that play out in the spring planting season in North America, which brought very strong fertilizer demand.
As a follow-up on Brazil, are you seeing the same stress and challenges in the market which others are experiencing?
We believe Mosaic has a competitive advantage in Brazil. We have a large and geographically diverse distribution network across the country. This not only minimizes our risk exposure to disruptions in any one specific region but also equips us with the best market intelligence to inform our business decisions. Our unique positioning in the market is what led us to proactively manage our inventories last year, and set us up for a much more constructive first quarter in 2024. Now we're certainly seeing the same credit and liquidity issues in Brazil that many others are. But our view into the market has allowed us to avoid any significant impact to our business to date by identifying customer issues early and taking decisive action knowing that our decisions might have short-term impacts to market share and sales volumes.
Thanks, Bruce. And with that, we'll now move on to the open question-and-answer session. Operator, please open the line for follow-up questions.
[Operator Instructions]
I'm curious where you think you could get the Fertilizantes business in terms of EBITDA over the next coming years. You've got this [indiscernible] asset you're building. You got productivity initiatives. You got the government trying to expand cultivated land in the Cerrado region. Where do you think that business can get to?
Steve, thanks. Let me answer it this way. And I think we've been consistent about this in the past. But the way I look at EBITDA generation in that business is we've got 9 million tonnes of kind of distribution capability today at $30 to $40 distribution margins. On top of that, we've talked about before, we've got co-products and other product sales of probably around another $100 million. And we've announced the Palmeirante project and going into 2025, when that's complete, we'll add another 1 million tonnes of distribution capability, add that $30 to $40 margin and you kind of add all those up in the kind of the baseline. The other things that we are looking at is our cost reduction initiatives.
Our next question comes from Vincent Andrews from Morgan Stanley.
Bruce, is there a way to hedge in the value of the Ma'aden position since it's a publicly traded equity. I'm just looking at their share price being at record level and your's not. So I'm just wondering if there's a way you could maybe crystallize or walk in that value now and maybe put it to work somehow in your own equity ahead of the lockup period on the shares?
Yes. Thanks for the question, Vince. But let me turn it over to Clint and as he's been involved in a lot of the deal making on this.
Yes, Vincent, I would say, look, protecting our investment, I think, could be important. And certainly, we'll look at the different options that are available to us, I think we'd have to consider the liquidity of the market that it's traded on and other factors like that. So I would say more to come on that. What we'll need to continue thinking through exactly the best way to manage that position. But I would say right now, we're not ready to speak with any clarity on that topic any further.
I apologize. I was looking at the wrong name on the screen, sorry.
Our next question comes from Ben Isaacson from Scotiabank.
This is Viktor stepping in for Ben. On your Q1 slide deck under performance highlights, you referenced that phosphate supply and demand looks particularly compelling. Two questions. First, can you provide some color on that statement? How do you see the supply and demand balance evolving that makes it particularly compelling? And then by extension, why is output for potash, not particularly compelling?
Thanks, Victor. So I'll start with phosphate. We definitely view that the S&D in the overall market is tight on the phosphate side. A lot of that is due to really China backing off on their historical exports. And exports from a few years ago are down 25% from some of the high watermarks on that side, which is a significant reduction of 4 million or so tonnes out of the supply side. Demand has recovered back to kind of prewar levels overall and pretty close to that with the appreciation that we have in the market baked in this year.
Thanks, Bruce. I think you got that covered. Probably just some data point on phosphates. In Q1, Chinese export actually were reduced 70%, 7-0 percent, which was 1 million tonnes reduction. What does mean to the market? At the end of the spring season in northern hemisphere market, the major market ended the season with a very low inventory. For India, the inventory at the end of March was down by 28% year-over-year, which is 800,000 tonnes lower than the last year, which was already low. In Brazil, the inventory level was down by 30%, which is 700,000 tonnes year-over-year. So all this very low inventory in the major market are portending a very strong pent-up demand for the rest of the year. So I just want to add that data point on the phosphate market.
Our next question comes from Joel Jackson from BMO.
I want to follow up on the Ma'aden transaction. Talk about what other maybe deals could be on the table? Would you be looking at shopping the operational stake in the JV to other like producers to be able to cash out may be sooner by small evaluation, like were there other deals on the table? Why was this the best deal? You did talk about the rationale, but just that. And also, I think there was a view when you got involved with this maybe a decade ago that this is going to help automotive consolidation phosphate, right?
Joel, thanks. As far as other deal structures, there -- we've been contemplating how best -- one of our challenges is getting for our own shareholders and investors, what is the real value of this investment and making it more transparent. And then obviously, you got to work with the shareholder partners on what deal constructs. They'd be willing to do as well. So ultimately, this was the best one to bring that transparency of value and give us that capital flexibility that we wanted into the future, and kind of is what it is from that perspective.
No, the only thing that I would add is that, obviously, we've laid out some of the things that were on our mind as we thought about this transaction. I think at the same time, our partner was looking to consolidate ownership of the JV for their own purposes. And so I think as we looked at the structure, I think the relationship is important. I think the partnership is important. I think we both agree to that. But there were some objectives that each of the parties really had in mind. And I think this deal structure achieves that.
Our next question comes from Chris Parkinson from Wolfe Research.
A few parts to this. But just when we're taking a step back and looking at forward-looking strip margins, and I understand that a lot has been going on and there's been volatility and you have to kind of roll through the various items through your -- through your inventory.
No, Chris, thanks for the question. I think you see it very similarly to we -- as we do. The one thing is it does take some time to recognize that flow through inventory on raw materials. And given the heavy turnaround schedule that we have in the first quarter and in the second quarter as well, that's probably a little more delayed than maybe traditionally you may see flow through there, but definitely feeling optimistic on when those raw material flow-throughs do help on stripping margin and will somewhat offset some of the seasonal price pressure, to your point, that we typically see in quarter 2. So we are -- we do see stripping margins throughout the remainder of the year, staying very constructive and strong at kind of decade high numbers.
Our next question comes from Richard Garchitorena from Wells Fargo.
So I was just wondering if you could talk on the potash market on the 2.2 million to 2.4 million tonnes expected for the second quarter. Is there any way you can break down how much of that is going to be domestic sales versus offshore tonnes? And related to that, on the price guidance, 210 to 250, obviously, that's largely driven by that. What are your assumptions in terms of potential contracts, whether it's India first, China for this year in terms of how you think about that through the rest of the year?
Yes. Thanks, Richard. For sure, we've got thoughts on that, and it will be in quarter 2. I'm going to turn it over to Jenny to get into the details, but a little more of the international export pricing in the mix and then she can talk a little bit about the contract stuff as she's -- and her team are closely watching that and have good thoughts around it. Jenny?
Sure. Thanks, Bruce. Richard, to your question on the sales breakdown between domestic market and offshore shipment. Our full year percentage is around 45% for domestic market and 65% for offshore. Of course, that changes quarter-over-quarter depending on seasonalities.
Our next question comes from Adam Samuelson from Goldman Sachs.
Appreciating that there are a lot of moving pieces right now in your U.S. phosphate business between downtime and kind of some of the fire and the like, both in the turnarounds of the dragline and the chemical plant and the ammonia plant, et cetera, have a plan to get production to an annualized rate of about 2 million tonnes by the end of the year.
Yes, Adam, a lot to unpack there. But for sure, we are working hard, as you have well described, to get to that 2 million-tonne run rate by the end of the year. And as we've said and as you've pointed out, we got pretty significant turnaround schedule still in quarter 2, a little bit into quarter 3.
Our next question comes from Ben Theurer from Barclays.
Just wanted to kind of follow up on some of the global dynamics and what you're seeing in terms of just the global supply and how you think some of the proposed changes to tariffs and duties into the U.S., Russia down, Morocco up again. So it seems like that authorities don't know what they do because they just changed it the other way around a few months ago. How do you feel about this just in general? And what are like consumers actually demanding and asking for? And where do -- where does Mosaic fit into that equation?
Yes. To confirm, the Department of Commerce did as part of their process due to their preliminary ruling from an annual review standpoint, this would be on 2022 duties, so going back in time. And what were their interpretations of subsidies or things that were done in those jurisdictions, namely Morocco and PhosAgro in Russia. And yes, the preliminary numbers went up on one then went down on the other. The other complication in this process is there's appeals that are still outstanding waiting for rulings on. And then the annual review and new duties for what was just announced don't get finalized until November of this year. So I think to your point, there is a lot of volatility, uncertainty around where some of these duties lie.
Our next question comes from Andrew Wong from RBC Capital Markets.
So just going back to Ma'aden, it's been mentioned a few times now that the deal was done in part to bring more transparency on the value of your investment. So I'm just kind of curious how you feel about the valuation now. Like I understand it's a market value. But the valuation also seems kind of high relative to some of their peers like yourselves and the ability to realize that value and maybe depends on liquidity. So how should we -- and how do you view that $1.5 billion valuation today?
Andrew, good question. Something we've been talking about, obviously, a lot as we entered into this deal. And I'm just going to turn it over to Clint because he's -- he's got some good thoughts around this topic.
Yes. Thanks, Bruce, and thanks, Andrew, for the question. A couple of different thoughts on this. One is -- as we looked at the value of our JV interest, we look at it as you traditionally would through DCF means and other means and we feel like that the call it, $1.5 billion valuation is a very fair valuation that we found attractive and obviously agreed at that kind of level with our counterparty.
Our next question comes from Josh Spector from UBS.
Just another quick one on Ma'aden. Just I was trying to think about the cost side of things. So as you convert to an equity holder versus an operator share in that JV, what's the impact on free cash flow and EBITDA over the last 12 months and you talked about some offtake agreements. Does any of that change and that you're paying market versus costs, so just the moving parts there, please?
Yes. Thanks, Josh. As far as the supply agreement, I think it's just -- we have the option to look at that if we needed for key markets so addressing your latter part of your question. And those things would be -- to be negotiated, but we have that optionality. As far as the first part of your question, maybe I'll turn it back over to Clint and give your thoughts around the EBITDA.
Yes. Thanks for the question, Josh. I think it will -- for Mosaic, I think it will have very minimal impact on EBITDA and free cash flow. Historically, we have only included cash dividends in our EBITDA numbers. We obviously have equity earnings that are included on our financial statements. I think in 2023, those equity earnings pretax were $57 million. I think the cash distributions. Last year, we received $25 million, I believe, in the first quarter of this year, we received $15 million.
And our next question comes from Charles Neivert from Piper Sandler.
Just a couple of things. One, in the turnaround -- and I'll just ask them all at the same time and you can just answer whatever. Turnarounds coming up, does they -- I know they improve efficiency, there -- they have to be done. But is there any consequent like increase in supply? I know it's not a chemical operation, so you don't necessarily get that, but would there be any supply increase on the turnaround?
Thanks, Charles. Let me start with the latter because I didn't write it down as fresh in my mind. So I don't think the deal structure changes are influenced really a whole lot. We've been a technical kind of adviser in that and a minority partner so I don't think that's going to change a whole lot. The deal, they still want Mosaic as technical input and Mosaic Resources as part of this, where we can participate and help them. And then you're going to have to talk to them about what their future plans are as far as expansion. I know there's been stuff that they've talked about in the press. And obviously, as a shareholder, we're going to be interested in them maximizing their shareholder value. But I don't think our influence is going to be much different than what it's been in the past, nor should you expect anything of significance there. Turnarounds, they are a necessity. And the ones that were the primary focus has been for us, although it's on a lot of our assets, but the primary one where we struggled over the last few years is on sulfuric acid.
We do have an additional question from Edlain Rodriguez from Mizuho.
Just a quick one on earlier comment during the prepared remarks. You talked about fertilizers being well positioned for higher prices in the second half as demand recovers -- and along with Jenny's comments on the potash contracts, would you be highly disappointed if those contracts don't reflect that view?
I think we'd be surprised, based on what we believe about the supply and demand and what's needed in the marketplace. But I'll turn it over to Jenny and see if he's got any more since she addressed that original question.
Yes, we have -- thanks for the question. We have our own estimation based on the fundamentals. And also, we are watching the latest negotiation, especially in India. So I would say the price -- contract price are likely going to be settled is already included in our price forecast.
And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.
Well, thank you, operator. To conclude our call, I'd like to emphasize our key points. First, our transaction with Ma'aden will benefit our shareholders by establishing a transparent value for our investment and providing us with greater capital flexibility for the long term. Second, we are making good progress on our strategic initiatives. We're investing in our best performing assets while reducing costs and capital expenditures.
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.