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Edited Transcript of MOS earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 Mosaic Co Earnings Call

PLYMOUTH May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Mosaic Co earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy James Jung

The Mosaic Company - Director of Market & Strategic Analysis

* Clint C. Freeland

The Mosaic Company - Senior VP & CFO

* Corrine D. Ricard

The Mosaic Company - SVP of Commercial

* 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 Mosaic Fertilizantes

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Benjamin Isaacson

Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Michael Leith Piken

Cleveland Research Company - Equity Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Mary, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the first quarter 2019 earnings conference call. (Operator Instructions) I will now turn the call over to Laura Gagnon. Ma'am, you may begin.

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Laura C. Gagnon, The Mosaic Company - VP of IR [2]

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Thank you, and welcome to our first quarter 2019 earnings call. Presenting today will be Joc O'Rourke, President and Chief Executive Officer; and Clint Freeland, Senior Vice President and Chief Financial Officer. We also have other members of the senior leadership team available to answer your questions after our prepared remarks. The presentation slides we are using during the call are available on our website at mossaicco.com.

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 issued yesterday and in our reports filed with the Securities and Exchange Commission.

We will also be presenting certain non-GAAP financial measures. Our first quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing also contain important information on these non-GAAP measures.

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

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [3]

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Thank you, Laura, and good morning to you all. Mosaic delivered another solid quarter despite significantly lower phosphate prices and operating rates driven by weather conditions in North America as well as regulatory changes in Brazil. Despite the challenging conditions, we continue to execute at a very high level across the company, which is reflected in well-controlled operating costs and continued increases in synergy realizations at Mosaic Fertilizantes. Our results demonstrate the economic value of the much more efficient business that we have created. Before we get into the results for the quarter, I would like to provide you with an update on the situation in Brazil, where the new regulation governing mine tailings dams is having an impact on our operations. Since the Vale dam failure at Brumadinho in January, we have been working with our external consultants and the Brazilian regulators to ensure our own dams remain safe to operate and meet the newly implemented standards. In March, we recognized that our dam at Araxá did not meet the new requirement and idled that mine. In mid-April, we were unable to complete geotechnical assessments at an additional 3 dams, resulting in the idling of our Tapira and Catalão mines. Now that the assessments are complete, we have a much better understanding of the timing and implications related to idling of these mines. At Catalão, we expect to be fully operational in the second quarter. At Tapira, we expect to return to full operation in the third quarter. At Araxá, we are on track to begin operations in the third quarter.

While these mines are idled, we expect to meet our Brazilian customers' fertilizer needs with a combination of existing rock and production inventory in Brazil, rock from our mine in Peru and MAP from Florida.

For the year, we expect to incur higher rock costs from importing rock from our Peru mine primarily from higher transportation costs and additional costs from underutilization at the mines and chemical plants. Combined, we expect these incremental costs could total up to $100 million.

We are continuing to look for ways to further mitigate these higher costs. We also expect some positive offsets. For example, higher operating rates at our lower-cost Florida assets should lead to stronger margins. We anticipate the work to bring all dams into compliance and remediate the remaining upstream lifts will be accomplished within our existing capital budget over the next 3 years. Our ability to use Miski Mayo rock in our global production demonstrates the strategic and risk management benefits of owning 3/4 of this mine. In addition, we expect that these incremental shipments may allow the mine to operate at higher rates, driving lower cost per tonne.

Shipping MAP from Florida to Brazil will allow us to consume built-up U.S. inventory more quickly. Going into North American spring season, both Mosaic and channel inventories were high due to the weak 2018 fall application season and the late and wet 2019 spring. Reducing our own inventories while the spring season is depleting channel inventories should result in a tightening of supply.

To summarize our efforts related to dams in Brazil. We have a well-defined plan to resolve the issue. We are taking action and making good progress towards resolution. We are meeting our customer needs and will continue to do so, reflecting the benefit of our global asset footprint and combination of distribution and production. And finally, we believe that in the end, Mosaic will have a lower risk profile and remain in an excellent position to serve Brazilian agricultural markets for generations to come.

Now let's move on to the quarter results. We provided substantial updates on our progress at our Analyst Day at the end of March, so we will keep our remarks brief. For the quarter, Mosaic reported earnings of $131 million, up from $42 million last year, both on revenues of $1.9 billion. The company generated $430 million of adjusted EBITDA compared to $399 million of adjusted EBITDA a year ago, and adjusted earnings per share of $0.25 compared with $0.20 a year ago. The improvement in operating margin despite a lower phosphate stripping margin and the impact of curtailments reflects the underlying improvements we've made in our cost structure.

Based on our actual results for the first quarter and our outlook, we are revising our full year EBITDA guidance to $2 billion to $2.3 billion from $2.2 billion to $2.4 billion. This reflects the impact of the regulation change in Brazil but also acknowledges the impact of higher Canadian resource taxes and slower phosphate pricing recovery than originally anticipated.

Moving on to the business environment. Markets for our 2 nutrients diverged during the first quarter. As I said earlier, phosphate prices fell primarily as a result of high carryover inventories in North America and high and early seasonal imports into New Orleans. In addition, Chinese exports in the first quarter increased by over 0.5 million tonnes from a year ago, adding to global market length. While lower raw material prices helped, market stripping margins still declined over 20% year-over-year. North American demand began to emerge at the quarter's end and prices have stabilized. In fact, prices have actually increased per product that is up-country in the U.S, where high Mississippi River water levels have created logistic challenges. Mosaic has a strong geographic competitive advantage in the U.S. over importers. At the end of the quarter, over 40% of our phosphate inventory was in up-country [facilities] (inaudible) of St. Louis in Mosaic's or our customers' warehouses, which gives us the ability to get product where it needs to be regardless of river shipping conditions. This also highlights why we recently purchased a very large distribution facility called Pine Bend near the north end of the Mississippi River in Minnesota. The facility significantly improves our ability to serve Midwest customers and reduces our logistics risks.

In addition, we're finally seeing seasonal demand in China emerge, which is focusing Chinese production on domestic demand. On the other side of the world, fertilizer demand in Brazil is running ahead of last year, with very strong shipment growth in both phosphates and potash. In contrast to the phosphate market, potash was much less impacted by the logistic challenges in the Mississippi River region, and the potash supply-and-demand picture remained balanced during the quarter with prices holding relatively flat.

Our curtailments in the quarter were driven by logistics issues internationally and full warehouses domestically. Those issues are now resolved and we expect inventory to flow out in the second quarter with much less logistical friction. In addition, we continue to expect constructive market fundamentals for potash through at least 2020. We acknowledge that there are risks to our outlook, including weather such as the El Niño-related drought that may impact potash demand in Southeast Asia, and palm oil demand uncertainty. In phosphates, the Chinese supply-and-demand picture continues to search for a new normal.

The continued strength of demand in our markets, combined with our strong execution, gives us confidence that we can weather the short-term challenges and come out even stronger in the end. Now Clint will discuss the segments in more detail, including our expectations for the second quarter. Clint?

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Clint C. Freeland, The Mosaic Company - Senior VP & CFO [4]

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Thanks, Joc. Good morning, everyone. I'll start by reiterating Joc's message regarding the first quarter. Our business performed well as a result of excellent execution across the business units, and we delivered results in line with our expectations despite the weather and regulatory factors Joc discussed.

Our Potash business generated another strong quarter, with shipments and gross margin per tonne coming at the high end of our expectations. Our cash cost of managing brine inflow declined to $28 million in the quarter, and overall costs remained well controlled.

We curtailed production at our Canadian mines during the quarter due to high inventory levels at the plants, which resulted from severe winter weather and slow rail service. As a result, our operating rate declined to 86%, which not only led us to recording approximately $11 million in idle plant costs during the first quarter but also having higher cost reduction roll into inventory, which will be realized during the second quarter.

Last year, we changed our revenue recognition policy, and there's now a longer lag between Canpotex shipment and revenue recognition. Fewer tonnes leaving the mines in the first quarter will negatively impact Canpotex volumes, but we expect this to be offset by strong domestic sales during the quarter. With these dynamics in mind, our expectations for the second quarter are for sales volumes of 2.3 million to 2.6 million tonnes and adjusted gross margin per tonne in the range of $70 to $80. As previously disclosed, we expect our cost of doing business in Canada to increase from where they have been in the past as a result of higher taxes. We expect the Saskatchewan resource tax increase to raise our cost of goods sold by approximately $35 million in 2019 and by roughly $50 million per year thereafter.

Our Phosphates results for the quarter reflected the deeper-than-usual seasonal price reductions and a continued delay in price recovery. While we recognized sales of 1.8 million tonnes, which was near the top end of our guidance range, we ended the quarter with over 1.3 million tonnes of finished product inventory. We expect to liquidate this inventory as we meet our North American and Brazilian customer needs, which should allow us to maintain high operating rates and low conversion costs.

We earned adjusted gross margin per tonne of $36 during the first quarter, slightly below our expectations due to lower market prices and the impact of higher costs associated with the accelerated maintenance work done in the quarter. We announced this shift to curtail production by 300,000 tonnes during the quarter because of temporary market conditions. Similar to the fourth quarter of last year, rock costs during the period were somewhat elevated as we transitioned to new mining areas. This is short term, however, and does not change any of the longer-term targets that we outlined at our Analyst Day. Cash conversion costs continue to be well managed.

During the second quarter, we expect to sell 2.3 million to 2.6 million tonnes of finished product, reflecting strong North American and Brazilian seasonal demand. Our gross margin per tonne expectation is $40 to $50 and includes the impact of the higher rock cost I mentioned running through the inventory. Recent ammonia and sulfur price declines are expected to flow through cost of goods sold likely in the third quarter.

Our MicroEssentials products continued to perform well during the quarter, with gross margin premiums of $62 per tonne over MAP. We expect this to remain in the $40 to $50 per tonne range for the year.

In Brazil, fertilizer demand remains robust. Gross margin per tonne in the first quarter was lower than expected due to the cost of idling Araxá and other costs related to the new regulations. Mosaic Fertilizantes realized net synergies of $66 million, ahead of the $47 million that we shared during our Analyst Day presentation. All in all, business fundamentals, production, sales and synergy capture remained very strong in the quarter. Even with the current challenges, we believe that we will achieve our targeted net synergies of $275 million in 2019.

As Joc noted earlier, we expected to incur up to $100 million in incremental costs during 2019 as we manage through the dam issue in Brazil. As part of our mitigation plan, we intend to import up to 120,000 tonnes of Miski Mayo rock monthly at an incremental logistics cost of $60 per tonne of rock. This covers about 40% of our total monthly rock use at the Brazilian plants. In over 6 months, this would add about $40 million to our costs in 2019.

Even with imported rock and existing rock inventories, we still expect to operate our chemical plants below full capacity, resulting in higher period cost and cost per tonne of finished product.

And finally, we plan to import up to 300,000 tonnes of finished product from Florida. However, I would note that the lower cost of production in Florida offsets a meaningful portion of the incremental transportation cost. Taken together, these items are expected to increase the segment's operating cost by up to $100 million in 2019, approximately $50 million in the second quarter alone.

For the second quarter, we expect sales volumes of 2 million to 2.3 million tonnes in line with normal expectations. As part of our plan to meet our customer needs, we've already begun to modify our current contracts to be optional origin, which allows us to source product from any of our global facilities, be it from North America, Brazil or Saudi Arabia, to serve our customers. Gross margin per tonne is expected to be within a range of $15 to $25, reflecting the impact of the higher cost that I mentioned, partially offset by distribution margins on the imported tonnes.

At our recent Analyst Day, we outlined 2021 targets for each of our business units, and we will continue to mark our progress toward them. This slide shows the 4-quarter rolling average as of the first quarter. Averages are meant to smooth out seasonality and the impact of turnarounds. In addition, we've provided you our starting point, the 2018 actuals.

While we work through the regulatory changes in Brazil, we do not expect to be making progress on the Mosaic Fertilizantes targets. The only other metric that is pressured near term is the cash cost of rock and phosphates where we've had a couple of quarters of higher costs as we transition to new mining areas.

As we've discussed in the past, our business is seasonal, which means our working capital and cash flow is as well. The first quarter of each year tends to see the greatest use of working capital as inventory builds for spring application season and certain accruals from the previous year are extinguished. This year was no different as inventories rose by approximately $300 million and almost $200 million in payables related to Canadian taxes and G&A accruals were paid. As we move forward in the year, however, we would expect working capital to return to more normal levels.

As noted earlier, we're updating our guidance ranges for the year as a result of incremental cost in Brazil, higher tax burden in Canada and slower-than-expected phosphate recovery. Adjusted EBITDA is now expected to be in the range of $2.0 billion to $2.3 billion, and adjusted earnings per share is now $1.50 to $2, reflecting an expected increase in the effective tax rate.

Regarding cash usage, there are a handful of items to note. First, cash tax estimates have increased by almost $15 million on higher Canadian earnings and withholdings. Cash interest expense estimates are up $10 million due to a combination of lower cash balances and higher working capital financing costs in Brazil. And finally, we've allocated $55 million during the quarter to the acquisition of the Pine Ben warehouse, which financially generates an after-tax unlevered return in the midteens and strategically positions us to better serve our customers by having increased Midwest warehousing capacity. This acquisition lowers our logistics risk and allows us to take advantage of time and place premiums like we're seeing today. This acquisition also allowed us to avoid significant future CapEx spend at our Savage facility. Based on these factors, we expect capital available for allocation to be in the range of $400 million to $700 million for the year.

Now I'll turn the call back to Joc for his closing comments.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [5]

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Thank you, Clint. Several factors have our close attention. We will continue to monitor the evolving North American spring season. We will continue our work to meet new dam compliance requirements in Brazil, and, as always, we will be monitoring Chinese phosphate exports. In addition, we are required to make a decision on the future of Plant City during the second quarter.

Regardless of the external challenges, Mosaic is in excellent position to generate strong returns. As our first quarter results demonstrate, we have made major progress, and Mosaic today is a stronger and more resilient company than it has ever been before. We will keep pushing for lower costs and greater operating efficiencies while driving excellent safety performance and maintaining the integrity of our assets. We are optimistic regarding the markets, and we are confident that Mosaic will deliver robust value for all our stakeholders across the business cycle.

With that, I will take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Mark Connelly from Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [2]

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Two things. If we look past the dam issues, you had talked about a $70 transportation cost for imports into Mato Grosso and at the time those assets weren't -- still weren't competitive despite having that advantage. If we look past the dam cost, do you have a sense of where you think you're on track to be? Are you going to fully offset that and -- or are you going to be sort of somewhere in the middle?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [3]

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Mark, if I understand your question correctly, the suggestion is that even with the 70% -- $70 transport cost, we are in the middle of the cost curve. I believe that's kind of what you're asking. And what I would say to that is 2 things. Clearly, because we are in the market, we do get the market premiums because of the time and place utility, and our synergies are absolutely moving us down the cost curve and making us much more competitive in that Mato Grosso market. So the $70 definitely is an advantage to us and one that we are, I think, capturing quite effectively in that business.

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Operator [4]

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Our next question is from the line of Andrew Wong from RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [5]

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Just regarding the revised earnings guidance for 2019. can you provide some more detail on the fertilizer prices and margins that are being run through those figures? Is that guidance made based on spot pricing, margins or maybe some improvements related this year?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [6]

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Yes. Thank you, Andrew. Let me hand this to Corrine to give you a little bit of detail on it, but I think as I mentioned in my opening remarks, the downward pressure on our guidance, if you will, was based on, first of all, our understanding -- a better understanding of the cost to remediate in Brazil. And second piece, though,, to that was obviously the Canadian taxes. And then finally, the price recovery in phosphates being slower than what was originally expected because of the late spring, but somewhat offset by higher expected performance from our Potash business that might have been in the original guidance. Corrine, can I hear your thoughts on that?

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Corrine D. Ricard, The Mosaic Company - SVP of Commercial [7]

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Yes, we have factored in a modest recovery in phosphate margins for the rest of the year. Today, we believe the NOLA price market is significantly below world price levels. It's $30 to $40 lower than world price levels, so we could see some upside in the numbers that we've used because we just put in a modest recovery for Q3 and Q4.

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Operator [8]

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Your next question is from the line of John Roberts from UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [9]

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Just to pin you down a little bit more on the dam issues here. It sounds like it was minimal in the first quarter and it will be minimal in the fourth quarter. So, again, it's roughly -- you gave $50 million for the second quarter, and it will be roughly $50 million in the third quarter as well. Is that correct?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [10]

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Yes. That is correct. The way we expect to see this flow through is, again, most of it is the transport of Miski Mayo rock into Brazil and the extra transport cost of that offset by Miski Mayo cost maybe being a little better. The second piece is the -- some transport costs, most of which is offset by lower cost from Florida for the MAP. And then the third piece is the underutilization of the assets because of the idling. So the first quarter or second quarter here, yes, $50 million. I think we're fairly solid on that. And then third quarter could be up to $50 million depending on execution.

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Operator [11]

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Your next question is from the line of Jeff Zekauskas from JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [12]

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I have a couple of questions on cash flow. In the course of your opening remarks, you said you have to decide on the future of Plant City. If you close Plant City or you have to make arrangements for it, how much can the future cash outlays incrementally be for that? And secondly, you talk in your press release about strong cash flows this year. My guess is that the cash outlays from Brazil and extra costs may reduce your cash-generation expectations by, I don't know, $300 million this year or something like that. Can you provide some insight into those 2 issues?

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

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Sure. Thanks, Jeff. Okay. Well, let me reiterate that, yes, indeed, the future of Plant City will have to be decided by July. We have to do that this quarter. And I'm going to let Clint talk a little bit about both how the cash flows this year and how they flow through. Although I will say, I believe there is a table somewhere in the deck that does go through the overall changes to cash flow. But Plant City, I think, Clint, you can give us some color on that.

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Clint C. Freeland, The Mosaic Company - Senior VP & CFO [14]

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Sure. So we've looked at the scenario of what happens if we make the decision to finally close Plant City, and I think there are a couple of things to keep in mind. First of all, you would have a noncash asset write-down. Currently, the book value of that asset is about $230 million. So you'd have a noncash write-off of that to the extent that you'd permanently close the facility. And then the other thing that you would have would be an increase in the ARO, the asset retirement obligation, related to that facility. And really, that change would be an increase of about $100 million. That change is primarily the effect of the present value calculation associated with it, and obviously, that work would be pulled forward. So about a $230 million book value noncash charge associated with that and then an ARO increase of about $100 million. Now when you look at the actual cash that we would spend, say, over the next 5 years, I think our preliminary estimate would be, in total, over that 5-year period, roughly $100 million. There are a couple of different lines of work that need to happen. You have the gypstack closures that would need to happen, but you also have some water treatment that would need to happen. We're looking at a number of different options particularly for water treatment, different technologies that could meaningfully impact the amount that we would need to spend on that. So that could be variable. But I would say if you think about cash over the 5-year period post closure, probably in aggregate of about $100 million. And then I think your second question...

(technical difficulty)

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Operator [15]

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Presenters, you may continue.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [16]

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Hello? Okay. It looks like we're back. Okay. Can we continue then? Operator, can we continue then?

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Operator [17]

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Yes, we hear you. Our next question is from the line of Chris Parkinson from Credit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [18]

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Great. Hopefully, I'm not echoing. Can you just talk a little bit about your update on the outlook for Chinese DAP and MAP exports? Clearly, it's been a little noisy in the -- just in the very beginning of the year, with top producers increasing op rates. But is it still your understanding there will be additional closures in '19? So if you could comment on your net outlook for the year as well as your expectations for local rock costs, it would be greatly appreciated.

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

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Okay, Chris. Thank you. And I apologize to the group for -- our line just got lost for a while there. So I apologize. But I'm going to hand this straight over to Andy to talk a little bit about the supply-and-demand balance for DAP and MAP in China. Andy?

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [20]

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All right. Thanks, Joc. And thanks, Chris, for your question. So I think we're all aware that Q1 exports were up year-over-year, a little over 500,000 tonnes. But bear in mind that Q1 is a relatively low-volume quarter for exports. It makes up usually 10% to 15% of annual exports. What we've seen from a rock cost standpoint is that rock production was down in 2018 via the official statistics 22% year-over-year. We understand that they depleted domestic inventories to maintain their downstream production relatively flat. But that will be putting upward pressure on costs as we move through 2019. We'd also expect to see sulfur prices on the rise. We've seen continued relatively high ammonia costs. So there will be this upward pressure supporting the price floor in China and because of that, we would expect to see volumes, as we move throughout the course of 2019, begin to taper off. And also supporting that is just the emptiness of their domestic channel. So they robbed their domestic channel of tonnes in order to export in Q4 as well as in Q1, and we would expect that in order to replenish that domestic pipeline, they'll have to keep tonnes at home rather than in the export market.

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Operator [21]

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Your next question is from the line of Jonas Oxgaard from Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [22]

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If we can continue on that question, let's look at demand side in China. It's been pretty weak for last couple of years. Doesn't seem to be moving much right now. Can we -- can you talk about what you're seeing and how do you think that's going to evolve over the next year?

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

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Yes. Sure, Jon. So I'm going to hand that back to Andy again, but let me make a general comment, which is, what we have seen in China at least for their corn and oilseed type crops is a flattening of the yield curve. So the yields are not increasing, which means that if they don't get back to a better utilization or a more consistent utilization, I believe that they will have yield issues, which doesn't fit their needs to become more self-sufficient. But, Andy, do you want to talk a little bit more about all that?

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [24]

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Yes, in -- I guess, into the minutia a bit more, production is around about that 25 million tonne mark. Consumption is perhaps a bit over 15 million tonnes, maybe towards 16 million tonnes, and that's less than what's the ability last year to export in excess of 11 million tonnes by taking down some pipeline inventories in the country. As we move into 2019, we think production year-to-date is roughly flat, at least so far for through the first quarter. We think that consumption is probably down slightly, maybe in the 0.5 million tonne ZIP code. And as we move through the rest of the year, we would think that production likely slips a bit lower as some of the environmental compliance issues come to bear -- or bear further, and also some of the cost pressures that I talked about earlier. And domestic consumption as they replenish the pipeline and look to a fall season, we would expect to see domestic consumption level out. As Joc mentioned, the yields, grain and oilseed yields, China have plateaued and we don't think that that's a sustainable situation for the government there. And then what brings us back to the export volume, we do think year-over-year, we'll see a slowdown in final 3 quarters of the year and for the full year be down marginally versus where we were last year.

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Operator [25]

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Your next question is from the line of Adam Samuelson from Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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So 2 questions. First, just a little bit more color on your view of spring application demand thus far through the first week of May. Just do you see enough product going to ground to actually clear out the inventories on phosphates? And I guess to a lesser extent on the potash side, how much -- is there a risk of product being stranded south of St. Louis that would knock it to the ground in time for the spring that, that would carry over to the fall and continue to weigh on NOLA values? And then just a clarification question on Clint's earlier comment on the ARO. The cash outlay over the next couple of years on Plant City, should you decide to close it, is that covered by the ARO trust, or is that incremental cash outlays from the corporation?

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

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Okay. Thanks, Adam. That's a barrelful. I'm going to hand it to Corrine to talk a little bit about the spring. But what we can say is, look, spring is going, and while there is a small amount of product stuck in St. Louis, it probably will not get out for spring season. That is affecting us a lot less because we are -- have a lot of material in up-country, where we're getting good premiums for right now, as much as $95 a tonne premium over the NOLA price. But, Corrine, do you want to talk a little bit about that?

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Corrine D. Ricard, The Mosaic Company - SVP of Commercial [28]

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Sure. I sure can. Thanks, Adam. We certainly experienced a wet, cold start to the spring season, but April and early May have brought on some really solid demand. It's important to note that corn planting is only about 23% completed. So there's a lot of spring yet to go, a lot of fertilizer application to hit the ground that we believe will clean out inventories. It is true that the barge transportation has been pretty disrupted with flooding and repairs along the U.S. lock and dam system on the Upper Mississippi River, and some of the barge resupply may not be hitting the twin cities markets in those northern markets until it's late as the June, and that would be pretty late for spring. So the threat of that little bit of barge product overhang has been overly impacting the NOLA price levels. What I would say is that the volume appears to be much smaller than is expected in the market. We've attempted to purchase barges to fulfill our needs for our Brazil shipments and there was not enough product available to be able to put together a vessel that was in any kind of an exportable position. And so barge count estimates put probably about 100 barges, of which over 1/2 are sold waiting for toes to go to the Upper Mississippi River. Or maybe about 130,000 tonnes is all of the overhang that we really expected out there. When you put that in the context of a normal 2 million tonnes summer fill program, it's pretty small. And so we don't -- that's why we're so confident that the NOLA price levels are overly discounted. As Joc said, our up-country positions put us in a great position to be able to see volumes go to our customers. So we've got over 350,000 tonnes in warehouses in the North. We've got about 7,000 railcars loaded with -- on sand tracks and fleeted. And so we've been able to fulfill our customers' needs. They are not waiting. We're finding ways to get them even though the barge system is disrupted. And as Joc said, that's benefiting our customers because they can get supply from us but it's benefiting us as well as those up-country values are a significant premium over NOLA. Our prices today out of Pine Bend are about $400 a short tonne and that's about a $95 premium over NOLA.

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

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Clint, do you want to just talk a little about the cash outlay of ARO?

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Clint C. Freeland, The Mosaic Company - Senior VP & CFO [30]

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Sure. Adam, the cash related to the ARO that I just mentioned around Plant City would come out of corporate cash. As you know, we do have a trust that's set up. It has about $625 million in assets in it today. But there's some limitations and some rules around when we can begin to take cash out of that to help offset the cost of some of the remediation expenses and we're not there yet. As a matter of fact, I don't think we'll be there for quite some time. So for Plant City, I would expect to have to use corporate cash to satisfy that.

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Operator [31]

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Your next question is from the line of Ben Isaacson from Scotiabank.

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Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [32]

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You've talked a lot about phosphates in China. And I was hoping you could address the rest of the world. On Page 18 of your slide deck, you have a negative demand growth in India and other Asia. Obviously, North America has been a bit of a challenge, with OCP and Ma'aden both ramping up this year. Can you talk about how -- when you triangulate all of that, how long you expect this slower recovery in phosphates to date?

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

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Andy, can I hand that straight to you? Thanks, Ben. I'm going to hand that straight to Andy to talk about...

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [34]

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All right, Ben. You're correct that we've downgraded some of our demand expectations for 2019. The biggest drop in demand is China, and we've already talked about that. But we see some small, 100,000, 200,000 tonne a year, slower demand in a number of other geographies. There are some offsets on the supply side that I don't think get probably enough attention and they haven't in the first half of the year simply because they haven't transpired. So you've got the Nutrien Redwater closure, which is basically upon us today. Mosaic's Brazil curtailments really don't impact the market until the second half of the year. And then swinging back to China once again, it's really a second-half-of-the-year story, where we expect to see production and exports decline. We've seen a few curtailments, Australia, Tunisia, South Africa, Mexico, which will probably continue to bounce around and have some difficulties in the second half of the year as well, and we think that, that leaves the market relatively balanced. And then the second half of the year, frankly, tightening back up relative to the looseness that we've seen here in the first half.

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Operator [35]

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Your next question is from the line of Joel Jackson from BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [36]

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I see from your Brazil guidance that you're expecting 300,000 tonnes year-over-year increase in Brazil in Q2. It looks like a much bigger mix shift to Q2 than you had last year. Considering all the logistics challenges going on with finished product and raw material in Brazil, can you explain that expectation a little bit more, please?

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

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I might leave this to Rick if Rick's on the call. Is Rick on our call?

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

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Yes. I'm here, Joc. I can take that.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [39]

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Yes, would you take that, Rick? Thanks, Joel.

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Richard N. McLellan, The Mosaic Company - SVP of Mosaic Fertilizantes [40]

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Yes, I think a couple of things that you have to remember, Joel, is that last year in the second quarter, we experienced the impacts of the truckers' strike, which we don't expect to have happened this year. And if we look at the first quarter, the first quarter was a bit slower for domestic demand both on the distribution side, the farm side, and the third-party side. In the second quarter, that's ramped up, and so we, frankly, look for good volumes. But if you want to draw a circle around the real issue, it was the impact of being out of business for 10 to 11 days with the truckers' strike last year.

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Operator [41]

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Your next question is from the line of Vincent Andrews from Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [42]

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Just a question. I didn't hear you mention or maybe I missed it when the line cut out, but I didn't hear you mention African swine flu at all. So I'd just be curious to get what your thoughts are at this point on the impact to global P&K markets if any short, medium, long term.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [43]

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Okay. Thanks, Vincent. Yes, again, Andy has been tracking this, and so the African swine fever, I mean, we're looking at a big, big call of the Chinese hog fleet or whatever you want to call it. So I'm going to let Andy talk a little bit about what that might mean and it's a longer-term issue rather than necessarily a short term.

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [44]

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All right. Well, thanks, Vincent. I guess we'd start off to say that there are a lot of unknowns still, and we're watching and monitoring, but we don't have all the answers quite yet. What we do know is that Chinese pork production will certainly be down significantly both this year and probably into next year as well. Following that, feed demand will obviously decline as well. And it could be significant enough that it would erase typical annual global growth in grain and oilseed demand. So if you look at corn being about 1.1 billion tonnes, soybean is about 1/3 of that, 350 million tonnes. So taken together at 2% typical annual growth rate, you're talking a little over 30 million tonnes of grain and oilseed demand that could be lost. There will be offsets, so the U.S. industry, the Brazilian industry, the European pork industry, they're all setting up to produce more pork and export to China so there will be increased feed consumption in those geographies. And then just to put it into some context, if you look at the E10 program that China is set to roll out, the incremental demand from corn for an E10 program in China would be in excess of that 30 million to 32 million tonnes of feed demand that would be lost. So there are a lot of potential offsets out there that we continue to monitor as well.

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [45]

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But, Andy, would you also say, though, once the pork starts being regrown, then the demand will increase back to what it was and beyond?

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [46]

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Yes, so that will probably take a couple years, maybe up to 5 years, depending on the longevity of this outbreak and the severity of the outbreak. And what you likely will see is a bit of a whiplash event, where feed demand ramps up very quickly as higher pork prices incentivize bigger rations and faster growth plans for the hog barns.

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Operator [47]

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Your next question is from the line of P.J. Juvekar from Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [48]

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Joc, I have a couple of questions on the Florida and Brazil. With your Brazilian mines shut down at least for now, why wouldn't you run Florida mines harder and bring phosphates from there as opposed to bringing rock from Peru? And then secondly on Florida, as you make your strategic decision on Plant City, in potash, you played price over volume strategy, should we expect some of the strategy in phosphates from you?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [49]

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Okay, P.J. Let me just give you a little bit of an understanding, if you will, on the Brazilian rock and bringing Brazilian rock from Miski Mayo. The Brazilian market is made up of a number of products, including SSP, animal feed, TSP, MAP. The only -- only the MAP really can be imported from Florida. We don't have rock to export to that location from Florida. So we are stuck -- or not stuck, but we are required to export Miski Mayo rock to Brazil to make up the SSP and the feed that we won't -- wouldn't be making. So that's the first piece. The Florida, we will export as much from Florida as we believe the market will take, and you're right, that is the best economic way to do that. In terms of price over volume strategy, I think we have previously said the conditions on which we would start up Plant City again. And I think we can consistently say those haven't changed from a year ago. So I think I can at least say that about where that might be going.

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Operator [50]

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Your next question is from the line of Don Carson from Susquehanna.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [51]

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I want to go back to North American application outlook for P&K. Now as you noted, only 23% of the crop's planted, but it's a pretty narrow preplant application window. Now obviously (inaudible) after you plant the crop, but that appears pretty limited in the P&K. So do you think we could lose some application here that would be postponed to the fall, or do you think it's lost for good this calendar year? Because I noticed on your North American update for both P&K, you really didn't change that much from your February outlook.

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

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Thanks, Don. I'm going to leave this straight over to Andy and Corrine. Yes. Andy, Corrine?

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Corrine D. Ricard, The Mosaic Company - SVP of Commercial [53]

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Sure. Thanks, Don. We have a fairly narrow window that remains. However, we believe that as long as product is available, we're going to see application that goes with the rest of that corn planting. And as we said, Mosaic is in a position to have product available for customers in the north. We do believe that the application and demand overall will be relatively unchanged. We may see some of what we had lost last fall will be potentially replaced next fall. We don't think we will be seeing a lot of those tonnes in the spring season this year, but perhaps in the fall. Andy, do you want to talk about that some more?

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [54]

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Well, I'd just add a little bit of color in that we've seen seasons like this before and the historical data shows us that, by and large, you really don't miss on-farm demand. Whatever problems exist, the industry and whether it's producers, distributors, retailers, farmers themselves will find a way to get the product to ground because you don't want to spend hundreds of dollars on a bag of seed and then not feed that plant.

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Operator [55]

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Your next question is from the line of Michael Piken from Cleveland Research.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [56]

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Just wanted to talk a little bit more on the potash side of the market. I wanted to get your sense in terms of the brine inflow costs. I know they were $28 million in the quarter. Just trying to understand the margin compression a little bit. How much of that is from price? And how much of that was from potentially the spillover effect of running your plants in 1Q at a lower level that's going to compress the 2Q margins versus the 1Q margins?

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [57]

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Okay. Thanks, Michael. I -- yes, I can answer the margin compression. It's virtually exactly what you said. The idea of running the plants at a slower rate in the first quarter will impact the cost profile in the second quarter. The second thing that happens is recognition of revenues in the second quarter will change the product mix slightly, which also impacts those margins. But most of that is flow-on of the pricing from the first quarter. Now your question on brine inflow costs, I would say, they are managing that quite effectively now and that's the reason we've seen, I think, up to $100 million lower cost per annum than we had maybe 4 or 5 years ago, which is really great to see.

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Andy James Jung, The Mosaic Company - Director of Market & Strategic Analysis [58]

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Michael, the one thing that I would also add to that around the margin impact in the second quarter is, recall that the increase in CRT, the taxes are going to start flowing through in the second quarter, so that will need to be factored in as well.

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Operator [59]

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Our next question is from the line of Alex Falcao from HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [60]

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I have 2 questions. One regarding Brazil. We saw yesterday Vale coming back and saying that they will probably operate or restart operations of the Brucutu mine in a couple of weeks. So I just want to know if that's a leading indicator since they were the ones most affected and it seems that the sort of normalization on licensing in Brazil and that's -- that could lead to better-than-expected reopenings for you guys. That's the first question. And the second question is on freights specifically on potash. We saw huge declines in the first quarter. Is that something that is going to continue going forward for freights and what's the reason for that?

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

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The second question I missed.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [62]

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On freights for potash specifically, right? So the potash freight cost is down significantly. I just want to know what's the reason for that and is that something that should continue in second quarter?

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

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Okay. Great. Well, let's talk -- start with Vale. There is no question that time will settle a lot of the churn in Brazil. And I think, yes, Vale restarting in a couple of weeks is probably a good sign. It means that there's starting to be some level of discussion between regulators and Vale and that may be returning to a level of normalcy. In terms of our expectations, this -- our plans are relatively set now, so I don't see it affecting us per se in terms of coming in back earlier. In terms of Canpotex freight and overall freight from -- I'm going to hand that to Corrine.

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Corrine D. Ricard, The Mosaic Company - SVP of Commercial [64]

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Yes, I believe what's happening there is that proportion of tonnes that are going to Canpotex versus the North American distribution system, we don't pay the freight. Canpotex pays the freight on those export shipments, whereas we do on the domestic shipments, and with the North American fill season a little bit lower, we had less winter fill shipments to the domestic market and its associated freight cost.

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

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Do we have another couple of -- yes...

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Operator [66]

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(Operator Instructions)

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James C. O’Rourke, The Mosaic Company - CEO, President & Director [67]

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There's no more questions. Let me conclude. To conclude our call today, I would like to reiterate our key points. First, we have a well-defined path forward to manage through the dam situation in Brazil, and we are confident that we will be able to continue to meet our Brazilian customer needs. Second, despite regulatory and weather-related challenges, Mosaic continues to deliver very strong results for this quarter, and our outlook for the year continues to be strong. And third, Mosaic is executing very well, and we have made tremendous progress on our business transformations. Today, Mosaic is a stronger and more resilient company than ever, and we're in excellent position to deliver strong returns across the cycle. So thank you for -- all you for joining our call and have a great day.

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Operator [68]

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This concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.