The Mosaic Company (NYSE:MOS) Q1 2024 Earnings Call Transcript

The Mosaic Company (NYSE:MOS) Q1 2024 Earnings Call Transcript May 2, 2024

The Mosaic Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Jason Tremblay: 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. 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 Bruce.

Bruce Bodine: Good morning. Thank you for joining our call. In addition to reviewing Mosaic’s performance for the quarter, there are three 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.

As the North America spring planting season winds down and fertilizer prices have moderated, fertilizer demand strength is now emerging in other key agricultural geographies, which will bode well for pricing in the second half of the year. Before I dive deeper into these areas, let me summarize our first quarter results. Mosaic generated adjusted EBITDA of $576 million on revenues of $2.7 billion. The phosphates segment generated adjusted EBITDA of $277 million on sales volumes of 1.6 million tonnes. Solid North American demand and limited supply pushed phosphate prices higher in the first quarter, and our realized stripping margins remain substantially above historical levels. Our results in this segment included a higher mix of sales sourced from third parties to mitigate the impact of the heavy turnaround schedule we discussed last quarter.

The potash segment generated adjusted EBITDA of $281 million on sales of 2.2 million tonnes, reflecting the benefits of strong spring seasonal demand in North America. Global prices have stabilized, including in Brazil, where we’re seeing prices move higher as we head toward the Safra season. For the first quarter, Mosaic Fertilizantes generated adjusted EBITDA of $83 million from sales of 1.7 million tonnes. The continued divergence of our performance from many others in the Brazil ag industry is resulting from the decisions we’ve made to prioritize risk management and margin over volume. Last year, we quickly worked through high-cost inventory. And this year, we are navigating the challenging credit and liquidity environment by prioritizing sales to lower credit risk customers, demanding prepayments and insisting on contract performance.

Our distribution margin improved in the second half of last year and first quarter results were significantly better than expected. We also had very strong co-product volume and margin performance during the quarter. Our results this quarter show that we’re successfully working through challenging environments to drive strong results. At the same time, we are focused on creating shareholder value in additional ways. A great example of this is our transaction with Ma’aden, which will exchange our 25% position in the MWSPC joint venture for an approximately $1.5 billion position in Ma’aden shares. This new structure allows our successful long-term partnership with Ma’aden to continue while also providing increased investment transparency and flexibility for capital redeployment over time.

I should note that we believe that neither this transaction nor any potential future transactions involving the Ma’aden shares will result in any material tax friction. We have several other ongoing initiatives to drive improved returns. Our $150 million cost reduction plan is on track and delivering early results. Potash production cash cost per tonne declined about $10 in the first quarter compared with the same period in the prior year. We are rightsizing our workforce and have identified opportunities to reduce our third-party contractors over the next 18 months, which will result in $20 million to $30 million in annual cost savings when complete. We are making progress on our SG&A expense management. With our first quarter SG&A expenses down by $21 million or 16% compared with a year ago.

We are also focused on improving and optimizing our operations. In phosphate, we’re making good progress on our volume improvement plans through the execution of extensive maintenance turnarounds, including activities at the Riverview and New Wales plants in the first and second quarters and a turnaround at the Louisiana plant in the second quarter. In potash, our Esterhazy HydroFloat project, which will give us an additional 400,000 tonnes of capacity will be in service by mid-next year. We are expanding our market access with the construction of a 1 million-tonne blending plant at Palmeirante in the fast-growing northern agricultural region of Brazil. The project is well underway. We are currently building the warehouse structure, support buildings and electrical infrastructure and expect to complete the project early next year.

We have recently completed the MicroEssentials conversion at our Riverview facility. Once it is fully ramped up, over half of our U.S. phosphate production will be higher-margin value-added products. We are also on track to reduce our capital expenditures by $200 million in this year versus last year. These initiatives all have one thing in common. They improve returns across the cycle. With that, let’s take a closer look at agriculture and fertilizer markets. While corn and soybean prices have softened recently, farmers remain profitable. Even a small lift in these commodity prices would return farm profitability to quite healthy levels. Moreover, the prices for many other ag commodities, such as palm oil and rice remain at very attractive levels.

In addition, weather is shifting rapidly from a strong El Niño to La Niña, which should prove positive for Southeast Asia, India and Brazil. Favorable conditions in Southeast Asia are particularly important as we expect the region will be responsible for about two-thirds of global potash shipment growth this year. In fact, in January and February, potash imports to Malaysia and Indonesia were up about 35% versus a year ago due to depleted channel inventories in a very constructive potash to palm oil price ratio. Phosphate markets remain tight, we are seeing the expected post-spring seasonal slowdown in North America, but Brazilian demand for the Safra season is emerging. Strong demand and limited supply pushed SSP prices in Brazil, up by $30 per tonne in April.

The recent seasonal uptick in Chinese phosphate export availability has exerted downward pressure on prices in India. But India demand for phosphate this year is expected to be solid on the back of an above-average monsoon season. India’s demand will surely exceed China’s ability to supply the nation. We expect the Indian government to increase the maximum retail price to allow importer economics to work in the current global pricing environment. And thus, incentivize producers to send tonnes there. Longer term, the outlook for phosphate continues to be very positive. Demand is growing to produce more grains and oilseeds for food and biofuels and for increasing industrial uses, including battery production. At the same time, limited new supply is coming to market and Chinese exports are down about 25% from historical norms.

The structural changes in phosphate supply and demand point to strong fundamentals in the years ahead. The global potash supply and demand picture is balanced, the same seasonal dynamic occurring in potash, North America is slowing, but Brazil is picking up, resulting in a $30 increase in MOP prices in Brazil in recent weeks, an indication of positive market sentiment and constructive supply and demand dynamics. With Southeast Asia demand returning, we continue to expect near record global potash shipments this year. Now moving on to our outlook. For phosphate, we expect second quarter sales volumes of 1.6 million to 1.8 million tonnes and average FOB prices at the plant of $530 to $580 per tonne. The fire at our Riverview facility caused damage to pipes, pumps and a phosphogypsum transfer station.

Our team engineered a temporary solution that enabled us to restore some phosphoric acid production in just two weeks, and we are now back at full capacity. We expect some reduction in the second and third quarter sales volumes, but overall, the impact was minimized. Our second quarter guidance reflects the impacts of the fire, the ongoing turnaround activity and the seasonal softening in the U.S., partially offset by improvements in Brazil. For potash, we expect second quarter sales volumes of 2.2 million to 2.4 million tonnes and average FOB price at the mine of $210 to $250 per tonne. For Mosaic Fertilizantes, we expect second quarter sales volumes and profitability to improve from the first quarter, reflecting seasonality and our differentiated approach to tackling Brazil’s operating environment.

We expect planned turnaround activities to weigh on production margins in the second quarter. As you recall, we completed the high-priced inventory destocking in the first half of last year. Going forward, we expect distribution margin to be at normal annualized level of $30 to $40 per tonne, but it may vary from quarter-to-quarter. To conclude, despite the seasonal reset of the market as we transition out of North America planting season, our outlook for the year is positive. We are taking near-term actions and executing long-term initiatives, as our agreement with Ma’aden demonstrates, to continue to strengthen our business and maximize shareholder value. Now we’ll move on to Q&A.

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Q&A Session

Operator: 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?

Bruce Bodine: 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. The deal provides a fair value for our investment in the Kingdom, gives investors transparency on that value and greatly improves our capital flexibility over time. In terms of our vision for the broader portfolio, we’re continuing to invest in our competitively advantaged and best-performing assets.

This is why we’re expanding our MicroEssentials production, growing our distribution business in Brazil, and further optimizing our Esterhazy operation. We’re also focused on demonstrating value and creating still greater capital flexibility over time. You saw an example of this last year when we divested Streamsong Resort for $160 million, and the Ma’aden transaction is just the latest iteration. Our continuing review of assets could result in a number of additional outcomes, including divestitures, finding partners for certain parts of our business or idling underperforming assets. These actions, together with our cost initiatives and CapEx reduction are all in service of driving returns for shareholders.

Operator: 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?

Bruce Bodine: 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. The current market reflects seasonality that one would expect. After a strong spring, price resets are typical ahead of North American summer fill demand, which we expect to be normal. In Brazil, farmers are preparing for their main soybean growing season. After a delayed start to fertilizer buying, demand has emerged over the last several weeks, which we’re seeing in potash and phosphate prices.

Both are up roughly $30 per tonne from the lows and demand is expected to intensify as we head towards the Safra season. In India, low fertilizer inventories and expectations for a good monsoon this year should drive strong demand. In phosphates, we still expect total Chinese exports to be flat to slightly down from 2023, which is well below historical norms. Tight supply should support above normal stripping margins through the year. We believe the potash market is balanced. Russian and Belarusian producers are getting back to prewar and pre-sanctioned export levels, but the demand is there to absorb it, and we continue to expect near-record shipments this year. Southeast Asian demand, in particular, stands out because of their depleted channel inventories and constructive palm oil fundamentals.

Additionally, La Niña weather pattern should provide more rainfall to support the increased demand. In summary, we’re seeing normal seasonality, and we expect constructive market conditions throughout the year.

Operator: As a follow-up on Brazil, are you seeing the same stress and challenges in the market which others are experiencing?

Bruce Bodine: 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.

Some of those actions include securing a higher percentage of our sales to lower credit risk dealers, taking prepayment from customers when possible and ensuring sales contract integrity. As a result, our collections as a percentage of sales are well ahead of the same time last year. And our distribution margin per tonne exceeded our internal expectations for the quarter. We believe we have an enormous structural advantage in the country. and the combination of risk diversification and proactive risk management are allowing us to successfully navigate the current environment.

Operator: 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] Our first question comes from Steve Byrne from Bank of America. Please go ahead with your question.

Steve Byrne: Yes. Thank you. 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 [number on GE] 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?

Bruce Bodine: Steve, thanks. Good morning. 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 at 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.

And those are going to play out in a couple of different ways that would affect probably the ultimate P&Ls there. Some of what we announced in the prerecorded calls have some of the third-party contractor costs of $20 million to $30 million. A good chunk of that is in Brazil. And then some of our GDA savings will flow through to that as well. So we should see something there on top of that. But outside of those type of things, I think that’s a good way to look at kind of the base. We also believe that our distribution businesses, particularly in Brazil, could be the platform to launch our biosciences portfolio with the reach and access that we have in Brazil. And we have kind of launched that earlier this year, and we’ll kick that off and probably start to see gradual growth starting in 2025 of EBITDA contribution there as well.