Q2 2020 Mosaic Co Earnings Call
Good morning, ladies and gentleman some will come to the most each company's second quarter 2020 earnings Fireside chat.
At this time, all participants had been pleased in listen only know.
After the company's completes their prepared remarks, the margin will be open to take your questions.
Your host for todays call is floor again, Vice President Investor Relations optimal seed company.
Gagnon you may begin.
Thank you and welcome to our second quarter and 2020 earnings call presenting today will be Joc O'rourke, President and Chief Executive Officer, Clint Freeland, Senior Vice President and Chief Financial Officer, and Rick Mclellan Senior Vice President commercial we will the prepared question and answer session addressing the questions received last night.
By short lived culinary session time permitting.
All of our earnings materials released yesterday after market close are available on our website I'll say co dot com.
He will be making forward looking statements. During this conference call I think with include but are not limited to statements about future financial and operating result, there based on managements beliefs and expectations as of today and are subject to significant risks and uncertainties.
Actual results may differ materially projected results.
Factors that could cause actual results could 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, a second quarter press release and performance data attach doesn't visits to yesterday's form 8-K filing as well as our commentary on the quarter posted to our website.
Also contain information.
On these non-GAAP measures.
Now I'd like to turn the call over to John.
Morning, 22 for joining us today.
Good morning.
Turning to your questions.
During the quarter.
I don't imagine increasing piece born seaborne performance.
Okay, and they should be score you, resulting past five years.
She could transform or construction industry Sanchez.
Exceeding even earlier than we expected we've already achieved five 720 21 cost targets.
I can anymore she.
She was down $20 can come from sport.
Okay. So you places actress didn't go through Kim.
We generated <unk>.
Cash from operations.
Yes. It did yesterday you could go 20 cents pushing harder than consensus expectations.
Adjusted EBITDA definition change.
Dan said to me ballrooms, when short term debt restructuring variables in the quarter well between cash and the balance sheet above one b malls.
Today, we continue to invest an accelerated KCSM launches, including a major milestone.
Andrew Charles to the K, one mill, we continue to reduce or brine management costs and achieving what was cashcall. Okay conviction.
Decades.
Okay, and actually gone really both real based cost targets are choosing to do cost benefits from the we were there.
As well is realizing over 80% of on told me full year transformation benefits for instance drove the counts possible below the target and lower than last year, despite increasing distances from mining be beneficiation.
And with all of these LCOS reaffirms our commitment to you to our shareholders our employees customers and our communities to act responsibly.
It's new aggressive broad based environmental social and governance targets and we will use these targets to drive performance across the business.
We are continuing to transform the quarters accelerating earnings and cash flow clearly reflect our efforts to date.
We're driving additional future savings.
Sector deliver another $700 million and savings above the 2019 base as we continue to execute our strategy mosaic is more competitive than ever before and what your larger markets improving we have significant earnings leverage to the future.
Now we'll take your questions.
Josh I'm going to start with some questions we received call.
Adam Samuelson from Goldman Sachs.
In the second quarter movie with ahead of its 2021 time, if on a number of its key cost caveat.
How much incremental opportunities you see on each key metric to further reduce cost and if so what level of incremental capital would be necessary to achieve those outcomes.
Thanks for your question Adam said earlier.
Oh, new targets that includes $700 million of additional improvements across the company.
Hundred million of those coming from our Brazil operations, and 500 coming from our North American and administrative.
Some of the areas, where we believe we can make big gains as we go forward. Obviously, we're in Brazil, where we continue to improve that business in North America, where automation is allowing us to drive efficiencies in both phosphate and potash and then of course for Q3 operation, which.
As we ramp it off will eliminate a lot of cost and improve our brine management costs. So as we look forward, we see a lot of opportunities still and importantly in September when we bring or all of this to our analyst day, we expect to be able to give you more color in detail.
Along what that's going to look like.
Yeah, Chris Parkinson from credit Suisse.
Yes, clearly comfortably ahead on numerous cost initiatives, including your Cadthree shaft brine inflow.
Phosphate rock costs in the U.S. in Brazil, and certainly a bunch of platform, but would you take a step back how are you thinking about your structural cost base in a normalized environment and how much more could actually be done.
Definitely in phosphate.
Yes. Thank you Chris it's important to keep in mind to these cost improvement certainly are somewhat driven by high utilization, we've had a good quarter, where we're able to use our assets fully.
And we've had some benefits from exchange rate, particularly in Brazil, but also in Canada over the long term goal, but real differences have been structural and those are going to stay with those and those are going to continue and we're going to continue to improve those so if we look at you know our major projects which include etcetera.
As you can be three nexgen mining and the Brazil transformation. Those are not temporary differences zones are true structural changes that will be delivering value for the long term.
Josh Michael Piken from Cleveland Research out.
You mentioned that you were on track to exceed your 225 million in non narcotic less than 2020.
Which segments are exceeding your expectations at how much higher because it's not that though are 2020.
Hello, Michael let me clarify our $225 million.
Our actual items that we spent in 2019, but we did not expect to repeat in 2020. So on those some of the key items the plant city idling, that's happened and now is outside of our cost structure.
Brazilian Downs, we've completed the work now and not $80 million of cost is now behind us equally the ramp up of Esterhazy, which is gone better than we expected. We now are delivering 1 million tons a year from the K three projects about.
Benefit has already flowed through to US and then of our $50 million of transformation in Brazil that weren't part, but 225 million. We're already out over 40 million. So we see that is pretty much complete and ongoing savings will be above and beyond that original to 25, we possible.
Josh the largest number question pick a better understanding of our countervailing duties petition.
Cool thing for Morningside.
Chris Parkinson from credit Suisse asked for an update on potential regulation changes on the U.S. import duties on Morocco, and Russian supply and if the outcome is successful in our favor what should they expect changes to their landed cost in other words, what are the potential outcomes in terms of level.
The playing field.
Thank you gentlemen, let me start by saying, we believe in free and fair trade.
However, the reason we filed this protection in the first place was to address and balances associated with unfair government subsidies on imports and highlight on equal requirements on environmental standards. We believe our competitors benefit from access to artificially low lot costs, and energy will not having to be adequate and proper and by.
Our mental standards.
We also will say that.
Don is put this forward to the department of Commerce, and the International Trade Commission, they will judge on the merits and as such determine what level of duties if any need to be put in place to create a fair trade situation.
And couldn't do you have anything to add to that.
Yeah, No Jack I think you're right. We we certainly are ahead of schedule on the realization of the 225.
Million dollars in non market benefit this year, you know keep in mind that.
The $80 million that we spent on on Bam remediation last year.
With spread really through the second through fourth quarter. So we realized about $36 million and benefit in the second quarter and should realize the balance.
Out the rest of the year.
So John Roberts from easier so I'd like to now can you review the basis for your profits countervailing duties position and have you had any response from customers for competitors.
Thank you John.
Basis for the petition is clearly laid out in the public documents and I would ask that you go to those also be comments from any of our competitors for.
Customers Oracle other.
Certain groups is clearly laid out in those public documents. So I would suggest to go there our position is clearly the department of Commerce and the International Trade Commission really are the ones that will the saw one or the merits of this case.
Now clearly as we talk to our customers. Some are concerned mostly about how they're going to get their supply. We believe that this has opened up new opportunities for outside competitors to come in and make up some about supply but in the end I think all people understand why.
We put it forward and.
We'll have to wait to see what the ITC says in terms of its mirror.
Gosh, we received several questions asking about trade flows and implications to other markets specifically, Adam Samuelson is have another.
Over the next.
For 12 months, how do we think about the net impact of potential trade flow impact of potentially U.S. countervailing duties on Morocco, and Russia phosphate.
Do you see risk of marketshare competition rising in other major import market.
Audibly Purcell.
Thanks, Mike and Joel Let's answer your last question first no. We don't think this will impact global supply and demand.
All we will do is probably change trade school, the current market and resulting pricing is reflected.
A tight market and if anything the countervailing duties only.
Highlighted to people that this market was tight.
So what's causing the tight market favorable farm economics, and lower supply, which began to take shape well before we filed a petition.
However, it is reasonable to assume that the trade flows will be altered and some product will be shifted to other jurisdictions, including new suppliers coming into the U.S. and the Moroccan and rushing suppliers focusing on other markets, which could be Brazil or wherever.
Jonathan from Bernstein asked to more technical questions with respect to the petition namely.
If the mosaic trade complaint is upheld will there be retroactive benefit to mosaic and what is the timeline for final decision on the complaint.
So look thank you join US let me first clarify whether duties are applied retroactively will depend upon the level of imports from these two countries from the filing of the case until the deal see preliminary ruling we expect the case to be finalized in Q1 2021.
And at that point, if there has been excessive imports they will look at it.
Assessing a retroactive duty.
Chuck I'm now going to move on to questions about phosphate operation.
Ben Isaacson from Scotia out.
On the cash cost of mind, Ross in Florida, falling to $36 per tonne, some $40 year over year.
Much of that was due to transformational efforts for favorable geology, and how much more wiggle room is there to bring that down.
Thank you all are these cost improvement.
Thank you Ben.
Clearly our cost improvements or a combination of several factors, we've certainly been running our assets to the elevated utilization rates and that's held but our efforts to centralize mining operations streamline processes and automate have also helped reduce our cost as previously mentioned establishment of.
A central control center for our mining and collapsing all of our mining operations basically into one large operation, which should be begin operation by the end of the year, we'll release further enhance cost savings and as we introduce new management structures incorporate automation for certain mining functions and excel.
Accelerate savings from adjustments to transportation, we start to see real long term improvements in our cost structure.
GAAP P.J. Juvekar from Citi also out.
The recent price of over $50 per ton in DMP pricing have you ramped up your production at the mine and what could be the benefit of better cost absorption from higher times in the third quarter.
Thanks for the question PJ high utilization rates on the beneficial impact, but that's really only part of the story as we've mentioned, but it will slowly as we look out.
Three going forward, we can expect those tonnage hi, tonnage and higher utilization rates to continue so we do expect to see better costs throughout the rest of the year, both structurally and because of how utilization.
We also have a question from Adam Samuelson from Goldman Sachs.
Specialty percentage rose, 14% of shipments and not the new quarterly hi, impossible coincident with micro central shipments to print a bunch of being substantially above recent quarters.
Is this sustainable why or why not.
Thank you Adam the sales and Microessentials and inspire hit record highs and K Mag came in close to the record in quarter two to 2020.
Among these girls Microessentials shipments to Brazil has been a major driver.
Now we believe that the growth Microessentials will continue over the next quarter driven by mosaic turtles onsite and also North America.
After reemphasize the value that Microessentials brings to the growers is showing positive returns for them on their investments. So these are bringing real value to the growers and to our customers. The distributors. So we do believe that as more people start using microessentials. This is very sustainable and they're going to see.
The benefit and they're going to keep using not product.
Got three analysts submitted multi part questions related to our potash operations.
First Chris Parkinson out.
The demand environment in potash appears to be modestly improving well spot prices are well off their first half low can you talk about your thought process for the second half.
21 operating rate assumption and how that May drive changes in your mind that.
Thanks, Chris as you know we've accelerated the development of Cadthree and this has an obvious impact on cost well now with declining brine management spending as in the future is the mine ramps up beyond three we continue to see strong results from Belle Plaine, which recorded as lowest cost.
Position in more than a decade.
As we move forward, we're going to take advantage of owning to have only seven mines in the world with annual production capacity of over 3 million tons.
And with some of the lowest cost in the industry. So as we look to the future we intend to optimize the production coming from Q3 and from our Belle Plaine operation and only see running higher costs mines like Collawn date, if the market really requires that in the future.
Another question comes due from Jonas Oxgaard Bernstein.
In potash you lowered your cost per ton, a fair bit, but how much of that was simply spreading fixed costs over a 20% larger volumes.
Fix the volume basis, what would your cost reduction will be good question Jonas Theres no question that the larger volume helps spread out our costs.
However, we believe there are structural changes that are fundamentally changing our strip our cross over the long term. We think one area of clear savings is accelerated reduction of brine management costs as we shipped to K treat.
Okay, one underground mining will be completed this year.
Brine management accounted for $8 a ton in Q2 and that will continue to decline as we move into 2021 and will be eliminated completely by 2022. So as you can see.
A lot of our cost reduction is actually structural and should be with its for the long term.
GAAP PJ Juvekar from Citi, Yeah, what kind of savings do you expect from sending catering potash or to the K one mill and what is the updated timeline now shuts down K, one and take care.
Thank you PJ, we expect to be sending.
Potash to K, one and actually be shutting down our K one shophouse from a production perspective early in 2021 that will start meaning we're only going to be offered into shops, and then by the end of 2022 only operating the one big Cadthree show.
Point the project will be complete will eliminate brine inflow and that really will be the end of our K. One NK two platform mines stromal production perspective.
That's infant Andrew this is interested in how he should think about our potash shipments in the second happens this year given how strong shipments were in second quarter also.
We remind him of the accounting for the Chinese contract shipments that were already in a bonded warehouse fire to contract agreement.
Thank you Vincent Yes, we did have strong shipments in quarter, one and if I.
Turning to our discussions with Canpotex I think they have a shirley for order book for Q3, and even going well into Q4. So I believe the shipments internationally will be strong in the second how and domestically we're expecting a good fall in North America. So we're expecting strong shipments there as well so from our perspective.
Second half is looking pretty strong from upon us perspective in terms of the.
Shipments in the first half, but I'd just like to throw it over to Clint to explain a little bit a boat.
Our China shipments to bonded warehouse that weve Rev. Rec in the first half of the year, but can you discuss sir.
Sure John and good morning Vincent.
So to start with.
On a consolidated basis, we don't recognize revenue.
Until that product is sold to a third party. However.
We do on a segment level basis, we do recognize revenue when.
Canpotex cells.
Product to our distribution business.
In China.
And when they said that product to our distribution business in China.
Segment.
Recognized revenue, but that was based on an estimate of pricing since the contract did not been completed.
Once the contract was completed and the price for that transaction was sad that gave rise to the adjustment, but again, that's an adjustment on the potash segment only because we won't recognize revenue on that product on a consolidated basis until it's finally sold with third parties.
Thanks to a clarification Quinn.
Chuck I'm not going to move on to questions about multi peril is actually.
We had for analysts, including John Roberts Media and Mark Connelly from Stephens asked similar questions about the timing of volumes in Brazil.
As William farmers are having an outstanding year, so far and have been widely reported to be buying inputs and well ahead of last year schedule.
How much do you think has been borrowed from the third quarter and are we likely to see an offsetting reduction in third quarter market to reflect lower volumes next quarter.
Typically within the quarter.
April and May were significantly higher than the prior year mine from June appeared to be much closer to a year ago is that just timing or are the trends decelerating into July.
Great question, the strong volumes in the first half the year did reflect some forward input purchases as result of generally favorable farm economics, but year over year demand is expected to be up slightly to 37 million tub and not figure. We believe we are beginning to take market share as farmers gravity.
Towards higher analysis products and high value products, such as our Microessentials.
Josh Mark Connelly at Stephens Al.
How did the dramatic improvement in cost in Brazil breakout between volume driven cost improvement and operational structural cost change that ship the peak with normal volumes.
Thank you Mark let me start with saying last year operations were negatively impacted by the changing regulations that required us to.
Shutdown a couple of operations for damn improvements.
Reduce volume and impacted our raw materials access this year.
We're benefiting from running at full operations rates and this also has allowed us to have more access to our own rock supply. So overall that it's helped a little bit so about a third of those costs are probably volume related the others are.
Improvements to our freight our inventory management, our overall planning and of course structural changes to our strip to our cost structures. I think overall goal. We're we're seeing a long term changes to how the Brazil businesses running and we're starting to see full benefit of the $330 million.
Or so of integration benefit that we announced at the end of last year.
GAAP P.J. Juvekar has a question about currency.
Resilient re Irish whiskey, that's how I was down significantly year over year in the second quarter of 2020, how did that volatility impact you and what specifically with the impact in the corner I'm not saying for intervention.
Thanks, BJ I'd like to talk about two aspects of the Brazilian real high that really has changed things and the first to those of course is the impact on farmer economics, I think that is actually the bigger improvement there.
Ability to buying fertilizers and the continuous growth of the Brazilian agriculture.
Segment is largely driven by great economics for the farmer and so that's the first place we want to talk about where the Brazilian real has helped us in terms of our cost performance you will see that we tend to put our targets and rely base. So that allows us to understand what's the real underlying improvement.
Obviously, there was some positive impact on I think we saw a definite improvements in our overall cost because.
The reality is but I would say we focus more on what is the real high base cost because that tells us where they were really improving the business or just taking advantage of currency.
Well in the back you'll notice sorry.
I'd also like to point out, but if you look at the back of our stuff you will see.
Basically our sensitivities and a one at 10 cents moved in the real high amounts to about $20 million a year on hedged. So we think bonuses being about 50% has.
It's very easy to do.
The reconciliation to last year's related costs.
Can we have another question from Ben Isaacson.
Okay. Thanks Sachin.
And when they settle down to sales claims have been notably higher year over year can you walk through the strategic strength of this business and how it relates to your mix between commodity and Microessentials time.
Thanks, Dan.
You know again I've said this before but I'll repeat.
The volume growth really was a result improvement in farm economics in Brazil on the strengthening of the U.S. dollar versus the rely excellent barber ratios and anticipation of a strong summer crop demand. So both both commodity and performance product has shown robust increase.
In shoot it quarter to have 2020 versus a year ago.
Chuck Chris Parkinson Astra covers 19 update his question is.
Brazil is in the midst of hair complex covert 19 outbreak, which has periodically than affecting the Portland logistics.
Can you give us an update on the demand environment as well as any logistical headwinds you proceed during the peak fertilizer applications.
Thanks, Chris.
Look let's start from our own through operations in Brazil, and although we've had a number of cases because of the high level of community transmission, we have not been impacted on our operations to this point and we've been instituted the number of procedures to make sure we mitigate the spread.
Well, Jim sorry, and then from an overall country logistics perspective.
We believe that in general we have been.
On the affected by coal good now obviously, there's going to be.
Local places where that impact close.
But in general we've been able to work around that and kept the.
Product moving to the end customer and from a demand perspective, despite coal.
We've continued to see strong demand again, driven by favorable farm economics, and we have got our product to our customers with relatively little impact.
The last question, we received them moving from advances comes from Joel Jackson.
Well as ounces.
Second quarter gross margin with more than doubled to results from the prior to year.
How much of that gain with market conditions persist foreign exchange tailwind.
Share gain in the market north of the pull forward of history because of cobot related legend.
Thanks Joel.
I would summarize our results in the second core group in Brazil as a couple of factors first of all if we looked at the exchange rate it's probably.
Offset almost perfectly the change in pricing so what we see an actual result is almost solely the result of our own actions and the reversal log some of the down costs that we saw last year.
GAAP, we received a handful of questions on the balance sheet, primarily focused on uses of free cash flow.
John Roberts App.
What are the capital allocation priorities moving forward and can you. Please discuss your growth that level dividends and potential share repurchases.
And P.J. juvekar out beyond paying down debt, what could be uses of cash, especially with improved free cash flow and the second half of 2025.
Buyback the a prudent use of cash over the countervailing duty decision prevents you from buying back stock.
John can you talk about capital priorities to address both of these questions.
Yes, Thank you gentlemen.
Our capital priorities were on chunk changed and they continue to be what we've said in the power sorry, you know our first priority is to maintain the business.
Our next priority maintaining investment grade metrics and to do that.
Oh, you know we'd have to continue our normal capital plans we've held.
We expect to lower debt by about a billion dollars over the next few years are doing so when our bonds coming due in the next couple of years and.
Then continue some of the key.
Objects like the esterhazy acceleration catering acceleration and then what we have after the all returning capital to shareholders. All three of these are depending on future cash flow generation.
And capital allocation will not be impacted in any way by the countervailing duties.
We've also had a couple of questions from a buy side analysts and incurred.
Can you describe what's included in the 610 million of short term debt that you indicated will be paid and Tony Tony.
And does not they still plan to keep about a billion dollar cash balance.
And pay down its 2021 maturity.
Thanks for the question at the start of this year, we did increase our cash balance $2 billion by first of all taking out.
Some money from our revolver and executing on some of our.
Inventory financing debt since that time, we paid down the revolver and we will continue to pay down the rest of the $600 million in short term debt.
Throughout the rest of this year.
Before we move on the market related question, Ben Isaacson asked about our tax rate outlook.
Why is your effective tax rate expected to be in the mid to high Fiftys and how should we think about this rate under a trial or Biden presidency.
Thank you Ben.
Let me start by saying the first part of this is and the reason for the tax rate being higher is our income mix between archery jurisdictions, Cannibal, Brazil, and the U.S., but.
The details of that I'm going to actually handed over to Clint to explain why.
The negative earnings in the U.S. will create a higher tax rate overall.
Yes, Thanks, Joc and.
Then I tried it really comes down to an earnings mix phenomenon for us if you recall.
The the tax rate as is based on GAAP results by jurisdiction and when you look at the United States not only is our phosphate business a incorporated into that but also our corporate DNA, our interest expense and so forth. So.
There are times when that pre tax income in the U.S. turns negative and that can begin to skews the rate.
When you then start to factor and things like some of the foreign currency moves that we've seen and how it affects our mark to market and some of the notable items that we have on our schedule that begins to skew. It and then you know as you've seen Brazil improve this year, that's our highest rate tax jurisdiction. So so that.
Begins to influence that rate as well so really the combination of all of those things that resulting in an unusually high tax rate for this year.
And then I had two things one a on a longer term basis, we would expect that effective tax rate to be.
Somewhere in the mid to high Twentys.
But then I would also called your attention.
That our cash tax rate.
Rates and payments are much different than that matter of fact this year, we expect to will end up with a small cash tax refund.
So very different than the the effective tax rate in our financial statements.
Now, let's move on the market related question.
Mike I can ask if he can comment on our summer fill programs in the U.S. and where we see downstream inventory in the U.S. Central point.
Thank you Michael.
I think we've had fairly successful so programs in both phosphate and potash here in the U.S.
Recent discussions that we've had with our customers suggested there probably in the range of 60% fall for the.
A fall season, so there will be increased buying towards the fall season, but.
For the most park our customers are in reasonably healthy shape going into the fall.
Deeper on is looking for insight into future volume how are you trending in each of the segments through the month of July on a year over year basis, do you see volumes higher in the third quarter.
Expectation for volumes for the rest of the year.
Thanks, Steve I would characterize Q3 is largely having our order books full for both phosphate and potash and so it'll be a matter of delivery and revenue recognition that will determine where we are for quarter three but we expect a reasonably good story.
All in the U.S. and global markets are running well so for both phosphate and potash, we expect relatively normal Q3 volumes and bold and then for the rest of the year. We should also see a good stable.
Volume.
John Smart Collingwood like insight into green and healthy pricing for patients how important tumor bank earnings outlook are higher greenhouse and pricing. The current price of corn is sustained through 2020 and saving stay at or near their current prices. Do you think there is any material room for higher PK prices in the market.
Thank you Mark.
Clearly oilseed and grain prices do have implications for us, but in general the farmers tend to work a lot more on their needs to plant. So what's a lot more important to us is planting intentions number of acres planted and remember also the grain and oilseed are.
Just a few of the products that we heard laws. So it really depends on what does the whole global market look like and what is the demand for P and K and one supply balance there as opposed to something on the grain and oilseed it hadn't indirect impact, but I would say no direct impact on our pricing.
Vincent Andrews from Morgan Stanley wants to know about our market forecast given that the last 10 years, a pin take shipments so some pattern lumpiness.
Potash mining popping why not forecast lumpiness going forward rather than just tankers.
Thanks Vincent.
We tend to forecasts on annual growth.
Simply because some of the other factors that go into the Lumpiness of our business are impossible to forecast and those are really inventory movements globally and of course weather.
You saw in 2019, the weather impacts in the U.S. made a fundamental difference to the growth rate of bolt phosphate and potash on a on a global scale. So we really have to look at it on averages, but recognize that there will be lumpiness as we go forward.
I'm going to move onto some questions on phosphate.
This one is from Ben Isaacson.
Benchmark and they keep selling price fell by $16 to $314 per ton yet mosaic average finished product selling price fell by almost three times that amount.
$24 to freely.
Why.
Could we think this how should we think about this relationship going forward.
Thanks, Ben the answer here is simply the the average selling price import look on pages based on all the components, we sell including urea and potash and the blends both of which are down significantly. So when you look at that relationship going forward you have to take into account all three trial.
Alex it could be in our blends the we sell.
And also at Bath stripping margins have started to improve in July after a meeting likely flat throughout the second quarter.
Are you seeing this flow through to the phosphate segment margin.
Thank you Ben again.
GAAP stripping margin.
We track that because that really is what do we get after the cost of raw materials and transport as as revenue. So of course, the slows directly into our margins an improvement in stripping margin I really is.
Almost directly related to our overall profitability.
Adam Samuelson I would like to now what they see is that equilibrium prices have left no DLP and map person key off shore benchmark.
Thank you Adam.
All I can really say there is if you look at it historically other than the last say three years, where there's been a real increase in imports.
We have seen NOLA prices being similar to.
Other global prices and I would expect that under a more.
Fair trade market. That's what you would see is you would see the NOLA price being.
Equal to what the prices in other markets adjusted for the transport cost and that's exactly what we expect will happen after it countervailing duty case.
If they readjust sub market.
Chuck Steve Byrne with like more insight into our global phosphate demand outlook in its relationship to inventory swings [laughter].
What is your estimate of underlying global consumption of phosphate entire line and one of the below the shipments of 71 million.
We will.
It was channel inventory.
Thank you Steve if we look at 2019, there was no question. Yeah. There was a build up of global inventory, particularly in the U.S. I mean, the U.S. there was.
Core season, and the imports, particularly kept coming in we shut down our Louisiana operation.
A number of months last year, and and still the inventory build in the U.S. was very high likewise the Brazilian.
Inventory was probably slightly above normal coming into this year for maybe some of the same reasons.
But what I will say is in the first and second quarter of this year, we have largely cleared out all of that inventory and probably have moved from an area.
Hi inventory to very low inventory in Clos age as we move into the third quarter of this year.
Josh and a related question. He also after our normalized inventory levels. The reason for the increase phosphate shipments Forecastable 2021.
Thanks, Steve.
Yeah in terms of 2021, what we really she is the inventory levels should be.
Pretty much leveled off and we expect normal growth in the market as per or any other years about 2% type annual growth in 2021.
Vincent Andrews with like our opinion on farmer economics, yeah.
Given the recent run up in DMP prices I know all concerned about you finally deferring fall application.
Thanks Vincent.
Look our experience has been and if you look even at this spring with to cobot uncertainty.
That.
Farmers will.
What fertilizer on their fields.
According to their needs and you know frankly today with precision agriculture, they're more likely to put the right amount of fertilizers on every year. So you know and phosphate prices. Frankly are also are a very small piece of the overall cost of running.
Farm, So I don't believe that most farmers will.
Look at phosphate pricing and haven't changed their application.
I'd also highlight that phosphate prices are still very affordable when you look at where grain and oilseed prices are so I was with most all seasons, we would expect good weather will be a domain arbitrator demand and.
You know we're expecting an early crop maturity. This year, we expect we should have a good fall.
Jack we have three questions related to China and phosphate.
First just to answer that.
What do you anticipate will be the Chinese D.A.P. exports in second half of 2020 and what.
Second half 2020 DAP prices also.
With that prices are higher or lower than your assumption what would happen to Chinese.
Thanks Vincent.
Chinese exports over the first half the year were lower by about 800000 tons from last year now are based forecast calls for Chinese exports to end the year about 600000 tons lower.
In other words, we expect.
The international pricing mix, a little higher wounds, Hank if you extra tons coming out of China in the second half.
Prices are higher than our expectations.
There might be a little bit more upside, but we don't see significant upside and part of the reason for this is domestic demand is coming in fairly strong as we move into fall and I think the big issue there will be export availability limitations now obviously prices are lower than expectations.
You know the volumes could be even lower than what they are now.
Hello.
Goldstein and Steve Byrne, both asked about production, specifically, what fits the status and outlook for reduced production.
Well in April China, Indonesia.
He looks like the lower exports over the next several years.
Well, let me hit China first.
You know, there's been a a well known shifts towards a shutting down some of the higher polluting.
Signs, particularly along the Yangtze River.
We've seen some of these gins, all phosphates shifting production to higher purified phosphoric acid food grade phosphates.
Some smaller plant shut down throughout the year would have resulted in production declines in the first talk to you.
In terms of Chinese export volume over the next years, we maintain the Chinese exports will trend trend lower and will establish new normal I mean, we've now seen what we think is the bottoming of Chinese domestic demand.
And we're seeing a lowering its production so with that we'll have to come a lowering of exports as they need domestic demand.
14, usually it would appear the expectations for plant rooster resurgence of production in 2020 were somewhat overstated.
But it's also important to put confusion context. They have produced an average of about 750000 tons of dampened TSP over the last five years.
Current protests will certainly lead to shuttering of the rock production, but this is plug them for over a decade, so which means we would expect them to stay about the same ran rate as we go forward as well.
Chuck the lateral section of questions relate to potash global market.
As Steve Byrne is half full seen asks about the impact of all while demand on potash.
What is the typical lag between movements and palm oil prices and changes in potash demand in southeast Asia and has the rebound in palm oil prices resulted in increased potash demand that's off the table.
Thank you gentlemen.
The palm oil demand is important for Oshkosh, and what we've seen recently is an improvement in palm oil prices on you know lakeshore production reasons, they will be adding potash to their palm oil plantation. So so we see that.
As a fairly direct relationship.
I wouldn't say, we see increased demand, but we see demand that is getting back to its normal levels in terms of a longer term.
Export demand and domestic demand for bio fuels is helping.
In terms of optimism for recovery. So all of these things, meaning that we should see a better demand for potash in the southeast Asia region, particularly Malaysian will get nature.
Joel Jackson and been either from a bone spoke to understand where global potash inventories stand in the various regional particularly in China.
Thank you.
Gentlemen.
If we look at China, there's new sort of a bifurcation of inventory, we know there's about three and a half million pounds of report.
But we believe there is relatively low inventories as we move them off and so as we're now seeing a strong demand trend PK is in the domestic market. We do expect with the movements out of the port to goes MTP plants will start bringing down inventory levels assuming that the.
Arrivals are a boat at normal levels compared to last year.
Mark Connelly and Steve Byrne I, both interest in potash demand corrupt what is driving the acceleration in potash demand in your forecast and other specific geography.
Thanks.
I wouldn't say, we're actually forecasting an acceleration of potash demand our potash demand growth.
From a long term trend.
Staying fairly steady at what we believed to be around 3% and if you take 2019 out of good I think we still stay just on that trend.
And a related question if demand ends up toward the high end up their brains.
Do you see increased supply balancing the market or would you expect the marketplace.
Well I guess this is rich requires two things one it the success of production ramp ups on the new projects, particularly I guess your comes along that Ken Boerger Kelly in your soul ski, but given the delays we've seen in Russia in recent years on these ramp ups.
It would see the market should tighten actually if demand comes in volumes of our expectation.
And the last related question also what is okay or potash pricing over a three to five year period.
Thanks, there's a number of factors that could.
Create a bull run in potash prices and the first I've already mentioned.
Which is slower ramp up of the projects, particularly the ones in Russia, and Brazil, Russia.
But.
What we would really expect is probably a higher utilization rate of the north American assets over the next say three to five years and a more modest rising prices that would suggest pricing.
Appreciate slightly to where they were maybe in 2018 and utilization of assets goes up at the same time.
Another I passed away any question from Adam Samuelson and Ben Isaacson, we're both asking about the disconnect between pricing trends between Brazilian MLP that rallied off both in the second quarter list of U.S. in Southeast Asian, MLP process that have continued to lead queller.
Strong Brazilian economic I'm not talking purposes, that's another region.
Thanks, Brazilian farm economics are really outstanding at present, which is certainly helping to underpin pricing about marketing, we expect that to continue.
For the U.S. and Southeast Asian markets.
So it's important but remember the this is a suit seasonally slow period for potash demand and that will impact prices I'd also like to highlight that our summer fill program was extremely well received and it is typical of commodity markets to necessarily see first a rebound in demand and prices falling out.
To that.
We have now completed or.
We submitted questions and so now I would like to do is open it up to the audience for lives Cunego operator.
Thank you. That's your mind here just a question you will need to press star one on your telephone keypad to direct Flushing de scratched the bounty who will limit. Your question to wants their participants are allowed to others questions can be addressed thank you Lisa and I will we compile the G and H roster.
First question comes from the line as Adam Symson. Some Goldman Sachs. Your line is sort of thing.
Yes. Thanks, good morning, everyone. So I guess I wanted just follow up on on the affordability question Joc on phosphate.
On your own kinda affordability metric that you publish we're now.
Above long term average and just trying to think about where you see an upper limit to that and.
Especially if you think about next year and farmer income.
Risks Hum.
Herman support programs in the U.S. or lack thereof, given kind of the big pharma support payments that had been experienced this year unlocks [noise].
Thanks, Adam well.
You know, there's certainly a relationship between.
Crop prices and how people feel about the imports, but as you say you know support payments from governments and what not have done a lot to keep farmer incomes at least stable and yes, while we're pushing.
Phosphate and potash prices, probably not potash, so much but certain phosphates, a little bit closer to that.
Ratio two things on this I'd say is first of all you got to look at December 21 prices and if you look at December 21 prices I think we.
I think we'd be looking at what Threesixty nine through 60 for corn, a nine bucks for.
Or beans, so, they're they're going to see some reasonable prices on there.
If they sold forward into that market, so they'll be incented to get a good crop and use the fertilizer, but in terms of the direct relationship between the two I'd say you could easily go a standard deviation above about race show and not habit materially affect demand.
Thank you next question comes from dynasty brands from Bank of America. Your line is open.
Yeah, just wondering here, whether or not you saw any impacts on phosphate imports during during the month of July following the countervailing duty a petition and just a asked for an update on your you're a gypsum sales out of the euro chipsets in Brazil.
Any update on that.
Sure. Thanks to first of all Yeah in July I believe the imports were lower in July.
I'd have to get an exact number and get somebody get back to them on how much that was down but our understanding and we did talk to a lot of customers and our understanding is certainly the the importers, we're importing either the old CP or the Russian products.
Definitely took a step back to understand what the risks might be in terms of them picking up.
Some sort of.
Countervailing duty risk so we.
We did see a step back in July whether they will come back into the market in the next couple of months I don't know what we have seen however is new product coming in from places like Egypt, and Australia and Mexico. So it does say there is some some change.
I got on somebody to give me what was the second part of your question, there's Steve I missed the.
Mr. My writing.
Thank you next question comes from the line as Chris Parkinson of Credit Suisse. Your line is seven.
DAP expert should be down I guess 600000 tons or so and that you don't really that you expect much yeah on a year on year basis in terms of Tunisian availability was fair.
But you had you been a few mines over the last couple of years that were tenant in the process or the tail end of the Iran. You know in Morocco, obviously, Saudi even Turkey, Egypt, yet do you believe that the phosphate market has really just felt has already.
I felt a full effect of this previous ramps and now we can just kind of isolate.
Our saw precedence in terms of new supply on just the markets in Saudi is what's your take kind of aggregate assessment of the SD over the next lets say you know two to three years. Thank you very much.
Yeah.
Yes, Thanks, Chris I think materially it is all about.
What's left of the Saudi ramp up and you know assuming they they reach there I think 2.7 million tonnes was or targets for.
2000.
20, and there is a some de bottlenecking and other projects that old CP is expecting to do I mean, those are still yet to come.
But and maybe a little bit of extra coming out I saw.
Plus I growth has been export or has been producing a little higher numbers. So there could be some.
New tons coming out of fonts I grow.
[music].
For the rest of the World I would say basically the closures are more than offsetting any small ramp ups that we've seen.
And overall.
It really is now coming down to small increases from the Saudis and then whatever Morocco brings in in the next couple of years with a little bit of addition from possibly from POS in April.
Thank you know first a question at this time.
Well if there are no other questions I'd like to.
First of all say thank you for the questions. You brought him we had a very good a set of three submitted questions which.
Oh I thought was very healthy.
To conclude or call I'd like to just reiterate our key themes here.
Jose generated strong results, despite low realized prices for our products.
Our long term transformation efforts are really starting to deliver substantial structural cost saving and we expect to drive additional savings in the years ahead.
Balance sheet continues to strengthen as we've paid down debt generated strong cash flows fertilizer markets continued to improve and prices are rising.
We're navigating the cobot 19 situation and successfully with minimal impacts to our business.
So in summary, mosaic is more resilient and competitive business has ever been.
And we have built significant earnings leverage for rising price environment. So we're looking forward to continue improvement and continued success on our journey towards being a very competitive company. So thank you for joining the call have a great day, and we hope to talk to you in person so.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great days.
[music].