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Edited Transcript of MOS earnings conference call or presentation 5-May-20 3:00pm GMT

Q1 2020 Mosaic Co Earnings Call - Recorded Fireside Chat

PLYMOUTH May 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Mosaic Co earnings conference call or presentation Tuesday, May 5, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clint C. Freeland

The Mosaic Company - Senior VP & CFO

* James C. O’Rourke

The Mosaic Company - CEO, President & Director

* Laura C. Gagnon

The Mosaic Company - VP of IR

* Richard N. McLellan

The Mosaic Company - SVP of Commercial

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Presentation

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [1]

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Good morning. Thank you for listening in on our first quarter virtual fireside chat. By now, you've seen our earnings release and the commentary, and so we would like to spend an hour or so answering the questions we received last night. We'll do our best to answer every question, and we've consolidated questions where they're similar to each other.

Before we begin, I would like to reiterate our key themes. First, our markets are holding up well and global fertilizer demand is strong. COVID-19 has obviously made for a very dynamic business environment, and agriculture must and will continue to produce. And secondly, we're delivering strong operating performance and making real strategic progress across the company. We've lowered costs, increased efficiency and created leverage for the years ahead.

So now, Laura, let's take the first question.

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Questions and Answers

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Laura C. Gagnon, The Mosaic Company - VP of IR [1]

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Joc, we've received similar questions from Rikin Patel at Berenberg and Chris Parkinson at Crédit Suisse. Given your progress on per tonne costs, can you comment on any updated projects versus your initial goals in all 3 segments? How sustainable are these cost levels going forward? And could there be further upside, considering that it's only first quarter '20? Finally, is there any scope to accelerate some of the company's cost reduction plans that were meant for 2021 into this year?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [2]

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Thank you for your question. Look, as we continue to pursue transformational opportunities across our business, we are looking at what are the critical few projects that we can continue through this COVID-19 that really will make a difference over the long term for Mosaic. In potash, the first of these, of course, is the K3 development. Today, we have 3 [miners] running, soon to have 4. And by the end of the year, we'll be close to eliminating the need for the K1 mine. That's a big step forward in this project and really a nice segue into having no need for brine inflow costs and pushing K3 to being the most efficient mine in the world.

In terms of Fertilizantes, whether it's the optimization of freight or cost reductions and -- through energy and our beneficiation or driving our rock costs lower, we're well on track towards our 2020 and 2021 cost reduction targets there. And of course, if we can accelerate those, we will.

In phosphates, whether it's our next-generation mining initiative or our next-gen processing initiatives, we're using technology and automation to drive costs and drive efficiency in that business.

So across the business, despite the interference of COVID, we are really pushing on those critical ones that will make a difference in the long term to Mosaic.

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Laura C. Gagnon, The Mosaic Company - VP of IR [3]

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Joc, PJ Juvekar at Citi asks, "How are you thinking about your EBITDA covenant? And what happens if EBITDA continues to fall?"

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [4]

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Thank you, PJ. We are comfortably above our EBITDA to interest rate covenants, but what I will do here is I'll let Clint give you some details on that.

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Clint C. Freeland, The Mosaic Company - Senior VP & CFO [5]

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Okay. Thanks, Joc, and thanks, PJ, for your question. As Joc said, I think the question that you have really focuses in on our interest coverage ratio which uses adjusted EBITDA. And as Joc said, we have plenty of room in that ratio right now. It is calculated on a rolling 4-quarter basis, so certainly keep that in mind.

The other thing is, as you're calculating that, to keep in mind is that similar to our reported adjusted EBITDA, the covenant does adjust for things like foreign exchange gains and losses, share-based compensation expense and losses for asset write-downs. So just be sure that you're adjusting your math for those items as you're looking at that ratio.

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Laura C. Gagnon, The Mosaic Company - VP of IR [6]

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Joc, this next question comes from Jonas Oxgaard at Bernstein. You spent $264 million on CapEx in Q1, but you're still guiding to $1.2 billion for the year. Run rate for Q1 is $1.05 billion. Are you picking up spending in quarters 2 through 4? And if so, why?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [7]

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Thank you, Jonas. Yes, we did make a conscious effort to conserve cash in Q1, and we normally do that as that is our lowest cash flow quarter. So we try not to spend as much capital in that quarter if we can help it. And with COVID, we were even more focused in the first quarter. But we do expect some acceleration of spending as we go through the year, particularly in the summer months in Canada. As you know, K3 is our biggest expenditure -- single expenditure area. And on that, a lot of that work is going to go this summer. But we believe that, that work is necessary, and as we've said previously, will drive lower cost and more efficiency in the long run.

In terms of other capital, yes, by all means, we're going to try and minimize what we do throughout the end of the year. But at the same time, we still have to look after the quality of our assets and the safety of our people. That is always our first focus.

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Laura C. Gagnon, The Mosaic Company - VP of IR [8]

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Joc, this next question comes from Chris Parkinson at Crédit Suisse. How should we think about transportation and logistics costs in terms of both inland and seaborne freight? Is it safe to say rates could be a minor tailwind to FOB netback prices?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [9]

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Thank you, Chris. Yes. We're definitely enjoying lower transportation costs right now which is providing a bit of a tailwind. Of course, the cost of fuel is helping us from a rail and ocean freight perspective. And on rail, there's an extra efficiency in that we're not transporting as much of other products, so it adds a lot more availability to us. In terms of ocean freight, while ocean freight is helping us, it's also helping the whole industry. And so the bigger impact there is it will probably trade -- change the trade flows rather than make a real difference to our competitiveness.

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Laura C. Gagnon, The Mosaic Company - VP of IR [10]

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This next question comes from Jonas Oxgaard at Bernstein. Can you talk about the drivers of differences between rock costs per tonne in Florida versus Brazil? What is the long-term goal for Brazilian rock costs? And what is the rock costs per tonne in Peru?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [11]

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Thank you, Jonas, for the question. In terms of our rock mining costs, we have a very different mining method in Florida versus Brazil. And the main reason for that is, in Florida, we have a sedimentary deposit where we're able to use large draglines to move the rock. In Brazil, it's an igneous deposit, and we have to blast and use truck and shovel to move the ore in that situation. So Brazil will always have a slightly higher cost per tonne than the U.S. will have, but the advantage, of course, is you don't have freight from the coast up to our growing regions or up to Uberaba which is where we will use the rock. So in location, it's very competitive.

Long term, we've put out our goals as having rock costs in the range of BRL 300 per tonne. We still see that as being a good goal, and we believe we'll achieve that goal. Matter of fact, I think we've achieved that goal this year. So we're doing well on rock costs. We expect to continuously improve, and that's really a good thing.

In terms of Peru, again, it's a truck and shovel operation, but it is a sedimentary rock, so we don't have to blast. So they have pretty good costs. They're somewhere in between our Florida costs and our Brazilian costs.

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Laura C. Gagnon, The Mosaic Company - VP of IR [12]

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Joc, the next question comes from Vincent Andrews from Morgan Stanley. Can you provide some additional detail related to how Mosaic will realize the sales for the new China contract? And how much Chinese potash volume will your second quarter results reflect? When will you recognize the volumes in the bonded warehouses in China?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [13]

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Thank you, Vincent. The way we deal with potash sales outside of Canada is through Canpotex, and we follow Canpotex's revenue recognition standards. So those funds in bonded warehouses have largely been recognized. Although I will say there will have to be an adjustment for changes in price that we will recognize in Q2.

Now in terms of the -- a lot of those tonnes, they are actually going to be directed to our own distribution business. And so they're sitting today in our corporate segment in profit and inventory, and so that will move as we make the final sale of those products.

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Laura C. Gagnon, The Mosaic Company - VP of IR [14]

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Joc, we have a multipart question from Seth Goldstein from Morningside (sic) [Morningstar] Research, and this all pertains to K3. What is the expected effective production capacity for 2020? What is our total expected production as a percent of total or in tonnes? And should Mosaic decide to reduce potash production, would any of it come from K3?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [15]

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Thank you, Seth. As we look at 2020 and K3, by the end of the year, we expect we'll be running in that 2.5 million to 3 million tonnes per year of actual potash produce coming out of K3. As I said earlier, that will allow us to virtually eliminate the K1 mine and have all the K1 plant be fed by the K3 mine.

In terms of this year, we expect to exceed the 1 million tonnes that we've previously announced, and we should produce somewhere between 1 million and 1.5 million tonnes of actual production from the K3 mine. If we have to turn down production, certainly, it will not be from K3, which is, by far, our most efficient underground production today.

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Laura C. Gagnon, The Mosaic Company - VP of IR [16]

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Joc, our next question comes from Vincent Andrews at Morgan Stanley. How much volume in North America was actually pulled forward from Q2 into Q1?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [17]

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Thank you, Vincent. In fact, if we look at the volumes, probably the bigger impact on volume was what would have been Q4 volume last year coming into Q1. We had a late fall, but it continued well into the late, late fall and into the winter months, and so the revenue recognition in Q1 was impacted by tonnes that would have normally moved earlier in the year in Q4.

In terms of moving tonnes from Q1 from Q2, I think that effect will be minimal. As although we got acceleration of people ordering and taking delivery, there is a lag for revenue recognition. And so from a revenue recognition perspective, many of the tons that might have been shipped in March will actually be recognized in the second quarter.

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Laura C. Gagnon, The Mosaic Company - VP of IR [18]

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Joc, the next couple of questions retain to Mosaic Fertilizantes. Steve Byrne from Bank of America wants to know what is the long-term growth potential for the Fertilizantes business. Is it becoming a bigger producer or a larger distributor or to expand into full-service retail?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [19]

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Thank you, Steve. As you're well aware, there is great, long-term potential for Mosaic Fertilizantes. This business gives Mosaic a real first-mover advantage in Brazil. And as such, we think there's tremendous opportunities to become either a bigger producer through organic or inorganic means. It allows us an avenue to distribute our value-added products like MicroEssentials and continue to grow that market.

In terms of whether we would move into a more retail base, at this stage, that isn't really our strategy. And we don't believe that that's where this business should go in the long term.

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Laura C. Gagnon, The Mosaic Company - VP of IR [20]

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Joc, the next question comes again from Vincent Andrews at Morgan Stanley. With the significant devaluation of the real in 2020, how much will that impact Mosaic's gross profit and how much will impact the SG&A line?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [21]

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Thank you, Vincent. We have provided sensitivity changes in FX rate in the appendixes. However, what I will emphasize is these were done on an unhedged base. So when you think about it, you have to think about the fact that we have hedged about half of our real-based exposure.

In terms of SG&A, about 1/3 of our costs in SG&A are actually real-based. So that gives you an idea on the impact to Brazilian SG&A.

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Laura C. Gagnon, The Mosaic Company - VP of IR [22]

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The next few questions, Joc, pertain to our Phosphates segment. So both Adam Samuelson from Goldman Sachs and Mark Connelly from Stephens are interested in hearing Mosaic's perspective on the outlook for sulfur over the balance of 2020 given the curtailments in the global energy sector and the implications for input costs. Can and would you carry higher-than-normal sulfur inventory through the course of 2020 and into 2021?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [23]

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Thank you, guys. Certainly, the oil industry disruption is having a knock-on effect in terms of sulfur. At Mosaic, there's 2 things we're doing to really help our sulfur situation. One, as you suggested, we are moving to a higher level of inventory to make sure we have a better buffer. And then secondly, we've actually been sourcing cheap or cheap-ish sulfuric acid to supplement our supply. Now that has worked out quite well because other industries have slowed down. But in terms of the overall world sulfur market, one of the things I will say is Mosaic is probably better positioned than most because of our position in the U.S. Gulf. And remember, in the U.S. Gulf, while the production is down, they're using more heavy crude right now, which produces more sulfur. Certainly, there is going to be periodic and localized sulfur deficiencies around the globe. But I think in that, Mosaic will be positioned best to weather the storm.

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Laura C. Gagnon, The Mosaic Company - VP of IR [24]

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Joc, both Mark Connelly from Stephens and Seth Goldstein from Morningside (sic) [Morningstar] have questions related to our MicroEssentials product. First, what are the main things Mosaic needs to do to reach its MicroEssentials sales target for 2021? Is there a trade-off in application between soy and corn-planted acres? How would crop prices remain at or near current levels affect the pace or probability of reaching that target? And finally, how much do you expect Brazil to contribute to MicroEssentials growth in 2020?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [25]

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Thanks, folks. I'm going to hand this one straight to Rick because I think he can give a more complete answer.

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Richard N. McLellan, The Mosaic Company - SVP of Commercial [26]

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Yes. Thanks, Joc. And for us to kind of achieve the goals we have for MicroEssentials, we need to continue to provide the agronomic support that we're doing to customers and to dealers that distribute the product as well as we need to help them focus on maximizing the returns to their crops. And in years where crop prices get difficult, we can -- we see that people focus on maximizing the return, and we've seen good growth in MicroEssentials.

As far as the corn and soybean ratio, we've got products that are specific to -- MicroEssentials products that are specific to corn, to soybeans, to canola, and we'll match up the needs of the farmer and the needs of the crop.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [27]

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Thanks, Rick. And let me add, because North America is a mature market, the growth there is somewhat slower than in other markets. And in Brazil, we expect up to 60% of our growth will come from that market.

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Laura C. Gagnon, The Mosaic Company - VP of IR [28]

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Joc, we have another MicroEssentials-related question. What is the expected mix of shift between commodity products and MicroEssentials or other specialty products? And would this impact the margin mix?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [29]

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Thanks, Joel. Our 2021 goal continues to be achieving a final MicroEssentials sales number of about 3.7 million tonnes, and that normally gives us an average premium of about $40 a ton over DAP and MAP. So it is certainly our best margin product in phosphate.

And in terms of Brazil, we take not only the producer margin, but we also give the retailer, the distributor margin there. And so in Brazil, it's, by far, our most profitable and really adds to our margins.

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Laura C. Gagnon, The Mosaic Company - VP of IR [30]

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Joc, Joel Jackson from BMO asks, "What levers does Mosaic have to ensure phosphate doesn't continue in negative margin territory under the current pricing environment?"

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [31]

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Well, thank you, guys. Let me answer those one at a time. Certainly, our next-gen mining and next-gen processing will improve both our recovery rates and our costs in the phosphate business. Also, we're doing other things like considering the integration of our Phosphate and Potash business, which takes significant costs out of those businesses. So it's not just the technology. It's all the other day-to-day stuff that goes with it.

In terms of phosphate production reductions, we've always said we will match the needs of our customers with our production. At this stage, we believe that we are matching that effectively, and there will be no need for production reductions. And we believe that the demand is there today, so prices should follow in time.

In terms of our overall costs, these have been pretty much constant in Phosphates for up to 10 years. And we're able to, each year, improve in such a way that we're taking the impact of inflation out of our cost, which I think is actually making us much more competitive in the long term.

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Laura C. Gagnon, The Mosaic Company - VP of IR [32]

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Joc, Chris Parkinson from Crédit Suisse asks, "What is your forecast for long-term stripping margin assumptions based on your outlook for raw materials and the view on marginal cost of production out of China?"

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [33]

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Thank you, Chris. As we look forward and we look at the raw materials, we believe those basically are passed on to the consumer. So if we look at a balanced market for phosphate, we would look at probably what we've said before, which is a net global price in that range of $285 to $310. Obviously, at times, it's going to be below that and above that at other times, but if we look to the long-term average, I think that's where we would post it.

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Laura C. Gagnon, The Mosaic Company - VP of IR [34]

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Joc, I'm going to move on to the market-related questions. Many of them were multi-parts, and I've done my best to summarize those. The first question comes from Ben Isaacson at Scotia, Seth Goldstein at Morningside (sic) [Morningstar] and Rikin Patel at Bernberg. They've all asked about new Chinese contract pricing, including when do you think the seaborne trade to China will pick up again given the amount of potash in bonded warehouses? How did the price compare to your expectations? And how frequently do you expect these contracts to reset, in another 12 months or 18 months? And what is the outlook for volumes contracted to China and India?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [35]

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Thank you, guys. Let me take these one at a time. First of all, we expect that the actual shipments to China will start almost immediately. Yes, there is material in bonded warehouses, but our expectation is that will go and start filling up the NPK plants and the retailers very quickly. And what will come behind will be the retail for the fall.

How does the price compare to our expectations in that, certainly, we're disappointed in a price as low as came in. But I will emphasize, China is still an important base contract, and the thing there is to get the volumes moving. We've already seen the ability to move prices up in Brazil since we got that contract settled. So the big thing there is really, get it done, move forward and work on moving prices up in the rest of the world.

The third piece, in terms of volume for China and India, we do expect imports to China will be down slightly to, I think, around 8 million tonnes. And in terms of India, they'll be up maybe 0.5 million tonnes to 4.5 million tonnes. So basically, the 2 of them kind of balance off, and we see a fairly flat year for those 2 big contracts.

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Laura C. Gagnon, The Mosaic Company - VP of IR [36]

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Joc, the next question comes from Vincent Andrews at Morgan Stanley, specifically addressing Slide 5. Slide 5 argues that the 2020 Chinese potash contract could set off a similar potash price run as the settlement did in 2016. What are the similarities and differences to S&D, U.S. dollar and soft commodity prices that both support and refute such a comparison. And in particular, given the substantial volume sitting in Chinese bonded warehouses today, will the potash market really be able to have a near-term price upswing if the industry is not actually shipping material incremental potash to China in the next quarter or so?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [37]

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Thank you, Vincent. Let me hand this straight over to Rick, and he can give you a good answer on that one.

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Richard N. McLellan, The Mosaic Company - SVP of Commercial [38]

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Yes. Thanks, Joc. And Vincent, it really is amazing how much this year lines up to what we observed coming out of 2016 and the settlement from China. The industry sentiment at the time after entering through a period of prolonged oversupply, it was -- the expectation was for the prices to remain soft. But the fact that the China volume occurred and the contract occurred almost immediately, we saw the market kind of step up. And I think one of the questions that you need to ask yourself are what are the similarities that are happening today that are -- that happened at the last time. Generally speaking, the dollar is not much different than it was 3 to 4 years ago with the exception of Brazil, which, frankly, is positive for commodities. Ag commodity prices, for the most part, were weaker today than they were in '16 and '17. But if you remember, we also saw corn futures bouncing around the low $3 range then as well. And the other current uncertainty is the COVID-19. But we think, overall, this is a very good analogy to look at and to understand. And to the question of can we see price upticks, we're already seeing that in Brazil where we've sold potash at a much higher level.

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Laura C. Gagnon, The Mosaic Company - VP of IR [39]

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Chris Parkinson at Crédit Suisse and PJ Juvekar from Citi both have questions on the potash cost curve. So Joc, can you discuss your views of the global potash cost curve? And who might be profitable at a $215 per metric tonne CFR Brazil price? In particular, what is the benefit of the depreciation in the Russian ruble for Russian producers? And do you think $220 per tonne marks the near term for it?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [40]

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Thank you for your question, guys. There's no question that even at $215, the players on the far left of the cost curve, particularly the Russians and the Belorussians, right now will be cash positive at $215 CFR Brazil price. But remember, that does not include the cost of sustaining those businesses, replacing reserves, et cetera. So I don't think it's a long-term sustainable cost. But I believe the lower-cost players will be reasonably comfortable at those costs for a short period of time.

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Laura C. Gagnon, The Mosaic Company - VP of IR [41]

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Joc, the following question comes from Mark Connelly at Stephens. Why is it to any producer's advantage to place any significant tonnage at or near the Chinese market?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [42]

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Thank you, Mark. The question about why we would put product into bonded warehouses when there isn't a contract, it's a delicate balance between continuing to keep production going, product flowing. If there's an anticipation of a contract in the near term, I think it certainly makes some sense to advance some product to those markets. However, I would agree that, in this case, that was used more than probably was helpful, and it did delay the ultimate settling of the contract.

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Laura C. Gagnon, The Mosaic Company - VP of IR [43]

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The following question comes from Adam Samuelson at Goldman Sachs, asking more broadly about the potash market. Mosaic lowered its global potash shipment forecast by 2 million tonnes relative to its February forecast versus a downwardly revised 2019 level. Given that at least 1.5 million tonnes of fourth quarter 2019 production curtailments and 1.5 million tonnes of new capacity coming onstream in 2020, do you expect similar production curtailments in the second half of 2020 as we saw in the second half of 2019? And is Mosaic now planning for lower production and shipments than it was in February?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [44]

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Thank you, Adam. Yes, there's no question the production will be down from what it was previously, and we've seen reduced operating rates carried through from last year into 2020, for example, Nutrien's Vanscoy facility is down. And you're aware, earlier this year, we decided that we would keep Colonsay down indefinitely. So that, coupled with a few, albeit small, production cuts due to COVID-19 issues around the world, we don't see a market being particularly burdened by supply. This is also supported by our view that there will only be about 1 million tonnes of incremental production coming on this year between SQM, K+S and EuroChem and with the commissioning of the Petrikovsky mine in Belarus.

As for Mosaic's production, we continue to maintain that we will match our production with our customers' requirements. So we will continue to monitor global demand, and we will make adjustments as is required.

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Laura C. Gagnon, The Mosaic Company - VP of IR [45]

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Ben Isaacson from Scotia asks if you're seeing any abnormal demand patterns related to weather, farmer economics or COVID-19 in either potash or phosphate.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [46]

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Thank you, Ben. Let me start by saying weather is always a factor in our business. And right now, weather is actually probably helping us because we have a very normal year in the North American market and it looks like we're going to have a pretty strong spring season. So overall, weather is always plus and minus. But this year, I think it's probably helping us overall.

In terms of farmer economics, certainly -- or COVID-19, certainly, at this stage, we have not seen any impacts from either of those. Although as we look to the long term, they certainly will become a factor if farmer economics become weaker. One area where all this turmoil is helping us is in places like Brazil and India, where solid farmer economics and positive farmer sentiment is actually driving purchase activity.

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Laura C. Gagnon, The Mosaic Company - VP of IR [47]

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Joc, the next question comes from Steve Byrne, Bank of America. In your opinion, what is the primary reason phosphate and potash prices declined throughout 2019? And what will be the mechanism for reversal?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [48]

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Thank you, Steve. If we look back on 2019, I think the biggest thing there was actually the demand shock of the North American market. North America had a bad fall in 2018, a bad spring in 2019 and really a late fall in 2019. So more than anything, this was not a supply-driven occurrence. It was more of a demand-driven occurrence and mostly through the U.S. bad spring. Other than that, it should be a relatively normal year this year. And so what we believe the mechanism for reversal will be is a good North American spring, which we're seeing today.

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Laura C. Gagnon, The Mosaic Company - VP of IR [49]

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We have another question from Steve, Joc. The upper end of your phosphate volume forecast range for 2020 is not even up to the 2018 level, and the upper end of the potash forecast range is equal to the 2018 level. What happened to the thesis that missed applications in 2019 would be applied in 2020?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [50]

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Thank you, Steve. In phosphates, the primary driver for shipments not reaching the '18 level is China. And in that market, the demand has declined, and as such, so has production. Now as we get into 2020, we see that demand level in interior China has stabilized. As such, we can see further growth as we go forward.

In potash, we've certainly seen demand rebound in places like North America, India and continued growth in Brazil. The one area where we haven't seen great demand is in Southeast Asia and particularly Indonesia, Malaysia, where palm prices have given us some concern about ongoing demand this year.

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Laura C. Gagnon, The Mosaic Company - VP of IR [51]

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Jeff Zekauskas at JPMorgan, PJ Juvekar at Citi and Adam Samuelson from Goldman Sachs all ask questions on the Chinese phosphate exports. First, what is your outlook for Chinese exports in 2020? Can Chinese exports catch up after COVID-19? And what is a breakeven price for Chinese export producers?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [52]

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Thank you, folks. As you're well aware, production from Hubei Province was low in the first quarter. And then once production restarted, it was really refocused on the domestic market. As we follow through the year, we expect that production shortfall, and as such, some of the 500,000 tonnes of deficiency in terms of their exports will be made up, and we expect to end the year with somewhere around 9.5 million tonnes of Chinese exports.

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Laura C. Gagnon, The Mosaic Company - VP of IR [53]

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Joc, the following question was raised by Ben Isaacson at Scotia and Rikin Patel at Berenberg. What are you seeing in demand growth for China this year? And what is the impact of COVID-19?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [54]

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Thank you, guys. Preliminary indications on the spring season show that phosphate demand has stabilized, with DAP demand likely ending up slightly higher year-over-year, while MAP demand is probably down modestly.

In terms of COVID-19, it just doesn't appear that it's had too much of an impact on domestic phosphate consumption, and I think the reasoning is simple. First of all, the Chinese government is focused very much on food production. As a good example, support price for corn is up 9% to $7.50 a bushel. So that really is a good incentive for the Chinese farmer to plant.

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Laura C. Gagnon, The Mosaic Company - VP of IR [55]

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Joc, both PJ Juvekar at Citi and Chris Parkinson from Crédit Suisse asked about the supply in phosphate. Longer term, what is your expectation of the cadence of new supply in 2020 through 2022? And shorter term, with global competitors' curtailments behind them, do you expect more phosphate imports into the U.S. post planting this year?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [56]

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Thank you, folks. I'm going to hand this one straight over to Rick to give you the detail on our expectations of longer-term S&D.

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Richard N. McLellan, The Mosaic Company - SVP of Commercial [57]

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Yes. Thanks, Joc. This week, we'll be providing in our investor presentations, an update of the S&D outlook. But frankly, once we get through 2020 and the expected OCP ramp-up and debottlenecking activities, along with the ramp-up of several smaller facilities in Egypt and Turkey, we expect the market to be much more balanced as we go into 2021 with most of the production additions behind us.

And as for the near term, there was 2 or 3 -- there are 2 or 3 vessels that are arriving, frankly, too late for the rapidly advancing spring season, and those will not make it into the north to be worked into the supply. Those are going to provide near-term price pressure, but we believe it to be transitory.

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Laura C. Gagnon, The Mosaic Company - VP of IR [58]

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Joc, we have 2 related questions from Vincent Andrews at Morgan Stanley and Adam Samuelson at Goldman Sachs. Why is potash demand benefiting from the strong Brazilian farmer economics more than phosphate? And this pertains to the global shipment forecast we included in our deck. And second, can you bridge the difference between strong farm-level economics and the tempered shipment outlook?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [59]

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Thanks, guys. We believe that strong Brazilian farmer economics has helped both phosphate and potash this year. If there's any difference in the growth between the 2, it is simply our estimate of channel inventory as we enter the year. So in some cases, phosphate may have had a higher channel inventory. And as such, that has to be worked down before we get expected higher shipments. Other than that, we really believe that Brazil will be a highlight in the whole global demand for both phosphate and potash. And as you've seen from our results, certainly from a volume perspective, the first quarter highlights that.

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Laura C. Gagnon, The Mosaic Company - VP of IR [60]

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Joc, the following question was raised by Rikin Patel at Berenberg. As the Brazilian planting season draws closer in the second half of the year, are there any mitigating factors you can put in place to lessen the impact of logistical issues exacerbated by COVID-19? And if so, what would those be?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [61]

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Thank you, Rikin. We've already taken a number of actions with respect to COVID-19. And as such, we've seen very little impact to our business, and I -- we believe a big piece of that is these precautions we've taken. We've taken those in Brazil and in North America in all our production facilities, but we're protecting all our supply chain partners as best we can. So we're practicing all the CDC guidelines. We're changing shift schedules. We're making sure that we don't bring our carriers into our plant from a perspective of truck drivers, et cetera. So we're trying to make sure that we do everything we can to protect ourselves.

In addition, we have an advantage in that we are generally using private ports in Brazil, so we think we can do a lot and have already done a lot to allow for us to continue uninterrupted through this COVID issue. And let me add, we're taking some extraordinary steps like even having our kitchens prepare meals for the drivers as they arrive, so they don't contact people on their trip into our plants.

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Laura C. Gagnon, The Mosaic Company - VP of IR [62]

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The following question comes from Jonas Oxgaard at Bernstein. We keep hearing reports of specialty crops being discarded or plowed under due to logistical issues or labor shortages from COVID-19. Are you seeing any negative impact on fertilizer demand for specialty crops?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [63]

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Thanks, Jonas. From our perspective, we really haven't felt any impacts to date. Now there is a chance that this could be a function of, there's a great strength of demand from the much larger row crop sectors, and that could be masking any negative impacts from the specialty crop sector.

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Laura C. Gagnon, The Mosaic Company - VP of IR [64]

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Joc, the last question submitted last night comes from both Adam Samuelson at Goldman Sachs and Mark Connelly at Stephens, and it's with respect to corn acreage imbalance. Given that 51% of the corn acreage has already been planted ahead of the 5-year average, what is your acreage forecast? And what gives you confidence in that figure if it's different than the USDA? Also, you mentioned corn demand in China as they rebuild their herds, but we're hearing African swine fever might not be under control. Can you tell us what you're hearing?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [65]

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Thank you, folks. I'll take these one at a time. First of all, we see corn acreage around 94 million acres. And while the USDA was noting 97 million acres, this was based on survey data before a lot of the COVID-19 impacts were felt. We have heard from our customer base that there was some switching, and there will be some switching from corn over to beans. But a lot of our largest customers have not seen too many corn acres come in below their initial USDA expectations. So we think our estimates are pretty realistic.

In terms of African swine fever, there have been reports of some small-scale African swine fever outbreaks over the last weeks. But thus far, it appears to be just that, small and isolated. And bear in mind that many were expecting the demise of the Chinese soybean imports last year during the height of the outbreak. And China actually imported slightly more soybeans last year than they did in '18. So likely, they sought to maximize output across all their livestock classes.

With that, we will wrap up this Q&A session. I hope you take away a few key points. Our business is operating well despite COVID-19. We're delivering excellent operating performance, and we remain optimistic for the remainder of 2020. Thanks for listening, be safe and stay healthy.