Q3 2020 Mosaic Co Earnings Call
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This time, all participants have been they used in a listen only mode.
After the company completes their prepared remarks, the lines will be open to take your questions.
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Skagen you may begin.
Thank you and welcome to our third quarter 2020 earnings call presenting today will be Joc O'rourke, President and Chief Executive Officer, and pre Lynn Senior Vice President and Chief Financial Officer.
Collins Senior Vice President commercial we will host a parent question and answer session addressing the questions received last night [noise] followed by a short lives in Q1 <unk> session time permitting [noise].
All of our earnings materials released yesterday after market close are available on our website at <unk> Dot 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 third quarter press release and performance data attach says exhibits to yesterdays form 8-K filing as well as our commentary on the quarter posted to our website also contain information important on these non-GAAP measures now I'd like to turn the call over to John.
Thanks for joining us today for our quarter 320, 20 question and answer session.
Before we get started I would like to emphasize our key points for quarterly earnings report.
First we are realizing the benefits of our expenses cost transformation more gross margin for the quarter was up 27% compared with a year ago, Despite essentially flat from one.
Secondly.
Good culture and fertilizer markets around the globe are strong and improving phosphate prices are up substantially potash prices are stable, we expect global supply and demand to remain quite an old 2021.
Third our balance sheet continues to shrink.
Repaid all the short term debt, we borrowed to be prepared for corporate impacts and the business is generating substantial cash no we'll get to your questions Laura.
Okay.
I'm going to try to go through the most frequently asked questions [laughter] fairly rapidly to a lot of time for follow up questions. After [laughter].
The largest number of questions. We received last night related to phosphate markets and the countervailing duty petition PJ.
PJ Juvekar from Citi, Joel Jackson from BMO, and Adam Samuelson from Goldman Sachs, They're all asking about the impact of trade promotion.
How much premium has been built into the U.S. phosphate prices from the absent the Moroccan in Russian imports and how well a reduction in the normal global parity premium affect your margins in other words, what would the $50 price increase you expect to realize in the fourth quarter be if the U.S. was at parity today.
Thank you gentlemen.
Oh boy.
Realizations reflect indy prices up over 20% and Brazil prices.
<unk> percent, despite increasing imports in both jurisdictions in Morocco and Russia.
Well go to parity, maybe less than where no. One is trading today, it would be significantly higher than where it was trading in June.
There seems to be off on increasing common misconception somehow CBD petition is impacting global supply.
Market prices are driven by strong supply and demand on the CBD, which is expected to trade change trade flows not to overall market.
Our petition was aimed at leveling the playing field for all producers selling in U.S. not to eliminate competition.
Arc on Russian producers chose to pull back completely from the U.S. market likely leaving their customer shorter product.
And they did it to make a political point, an expressive 30 satisfaction over this being considered at all.
We are doing all we can to best serve our customers, we have even begun and pouring tons from Martin simply to meet our customers' needs and longer term. It is not our intention to replace Mark [noise] Enron.
Russian tons with problem solving for several reasons not the least which is I'm a global logistics perspective, it makes more sense for us to send that product into Asia, rather than bring in here, but we are doing now to help our customers.
Longer term, we would expect normal to trade a global earnings recognized the global parity prices today are significantly above where they were in June.
[laughter] another trade phone question comes from TJ, if exports from Morocco in Russia are ending up in India, and Brazil why are prices up there.
Thank you [laughter], the global supply and demand is stronger than many realized a few months ago economic tightness in the market is driving global prices up supply has tightened China exports are down and we started 2020 with curtailments, including over driven outages on the demand side the agricultural.
Army globally strong food security has become a great priority around the world and fertilizers are very affordable.
We have a question from Ben Isaacson from Scotia, and John Roberts for me the EPS.
They're both asking about phosphate pricing momentum September.
September realized prices improved 11% from August did that momentum continue and how much more upside do you see for the market. Thank you.
We've continued to see prices increase into October and November and seeing good demand as we move into 2021, we expect to end this fall with very low inventories, which bodes well for the spring season, and wonderful [laughter], we are seeing a normal seasonal slowdown, but we expect strong markets too.
Revenue into 2021, and as we mentioned in our written remarks, we expect prices in the fourth quarter to be up $50 per ton over the third quarter.
John both Chris Parkinson of credit Suisse, and Joel Jackson of BMO, and others asking for potential impact following the ITC deal see determinations in particular, how we'll know low and high duty impact our strategy.
Filled the void if U.S. imports.
[laughter]. Thank you gentleman.
Remember the November determination is simply if there are subsidies in the first quarter. The decision is the determination of harm and the identification of duty if anything.
If it is determined that there is going to be a high duty we would expect.
The trade flows to change to account for about as such we would expect that the Russians and.
The markets to continue to ship to other markets like India, and Brazil, Yes. There is no subsidies, we would expect the trade flows to return to what they were pre CVD filing remember the Russians and the Moroccans made the decision to pull out of these markets altogether one.
One was filed.
So we will continue to serve our customers. If there is more products required for Brazil and India.
We will redirect tons to those markets. If we continue to see a deficiency in the North American market, we will divert tons about mark [laughter].
Jack we received a number of questions related to the broader phosphate market supply and demand.
In particular with respect to the Chinese phosphate industry P.J. Juvekar from Citi asks what are your estimates of phosphate exports out of China in 2020.
Thank you PJ.
We said and we continue to believe the Chinese exports will be down by more than 500000 tons. This year. Our latest estimate is that they will actually be down by more like 700000 pounds from January to September exports were down by nearly a million tons now it's important to remember that Mount production in China continues to trend lower.
Quarter, one quarter three was down by about 1.4 million tons, while domestic demand now appears to be stabilizing that means Chinese exports are going to be constrained in the future Jonah.
Jonas Oxgaard asked how confident are you that the three facilities closed in China are permanently closed.
Thank you Jonas.
The three facilities closed in 2019, we were confident they are not coming back to DAP map production.
One was permanently closed.
One was in the process of relocation to a different place and is planned to be built as water soluble fertilizer production facility.
Third shifted production to industrial grade purified phosphoric acid.
Purified phosphoric acid from the web processes, replacing the highly polluting thermal process.
Which is also the outcome of the stringent environmental protection measurements and is ongoing.
According to China phosphate industry Association 5 million tons of DAP map production capacity has been lost since environmental protection measures have been implemented this includes permanent closure or relocation for different production and strategic production shifts to a higher value products like purified phosphoric acid.
[noise] shocking a related question, Chris Parkinson with also like an update on the projections for Chinese production costs. Thank.
Thank you, Chris the estimation into a typical southwest phosphate producers production cost is still around $300 per metric ton X plant.
Probably enough will be equivalent of $335 per metric ton out of Chinese exports pork.
Got the second most popular area of questions with mosaic for lunch it.
Mark Connelly specifically addressed this question to you after.
After you acquired fertile as Andres you told us that there were no really big cost reduction projects, but rather a large number of small to mid sized projects many of which were suggested by local employees or.
The sort of projects you are doing today materially different in expected returns and.
Among these as a transfer of best practices between and among your Brazil plants proceeded as well as the early projects get thank you Mark.
Let me say, we continue to see a number of small to medium sized high benefit projects and transformation continues to drive benefits with very little capital at very high returns for Mosaiq furloughs on thing.
No as we go forward some of these willing require incremental growth capital, mostly technology related and much of that is like our nexgen mining investment in Florida.
Now what I would ask is we're going to go into depth of this and our transformation and growth objectives for Mosaiq furloughs onto next Monday November nine. So please stay tuned and we'll give you a lot more detail of where we believe this business is going and the potential for our growth in South America.
Adam Samuelson from Goldman Sachs, and Andrew Wong from RBC, both asked about the demand outlook, how does the interplay of current farmer economics, and La-nina weather forecast impact the Brazilian demand outlook and did the very high Q3 phosphates demand pull volumes from Q4.
Thank you both.
But the current farmer economics are very strong, particularly in Brazil and are expected to push Brazilian demand growth higher again in 2021, probably in the 2% to 3% year over year.
This is the fundamental driver as for La-nina, it's not something that we're overly concerned with unless it were persistent through mid 2021. The reason for this is the strong growth signals from London, you for Argentina, and Southern Brazil is typical from June to August and what we saw.
In recent months could have been signaled persisting a bit longer than the typical or it may have been simply dry weather patterns in south Americas large import.
Importantly for Brazil rains have improved and planting is progressing the delays were only a couple of weeks. So we do expect to see no impact on total demand demand is expected to remain remained very strong aligned with good farmer profitability.
Terms of your question of moving Q3 phosphates from Q4, we do expect to see continued strong demand in Q4 as the season has been extended by the dry weather that we've already seen.
Got Steve Byrne of Bank of America asks.
There's been significant productivity extracted from the legacy valet assets are the earnings growth drivers longer term going to be from geographic expansion from production capacity expansions in phosphate and potash or from new products and services such as selling their crop inputs.
Thank you Steve Yeah. The quick answer is yes, we see great potential in all three of those areas we.
We are and have a very strong first mover advantage, we have a great platform in Brazil, and we hope overtime to take greater advantage of that.
Now today, our primary focus for growth in Mosaiq for Lazanda is organic we continue to see transformational opportunity.
We see increases in co product sales.
The benefits from the deployment of technology.
Our geographic areas, where we feel we have a smaller distribution footprint than we would like but.
But we also have room to grow with our current distribution assets that we have so in summary, we see all areas having potential.
I do think that both distribution and production will grow and will continue to drive our first mover advantage in not great growing region.
Joel Jackson from BMO is asking about furloughs and she is per tonne margins should we expect these margins to cool expand or contract in 2021 and what are the main drivers of these thank you Joel.
When we're thinking about our per ton margin, we really have to consider two components first production, where the price of finished goods raw materials and cost to produce drive gross margins here. We are continue driving production cost down and through.
Since formation continuing to improve that business.
In distribution, where we earn a margin that is impacted by volume economy of scale and pricing trends, we continue as well as transformation and continued improvements in our performance products sales, that's really how we're going to drive long term value. So in distribution, we do see that whole.
Well as well as in production. So on both sides. We expect we can not only hold those margins.
But to expand them in as time goes by.
John We also got a large number of questions on our phosphate segment.
Steve Byrne and P.J. Juvekar, both asking about the near term performance and the expected profitability improvement into the fourth quarter.
What portion of the phosphate fourth quarter volumes are already locked in and will this impact your ability to realize the $50 per ton price increase so are.
Are we looking at a much better fourth quarter in phosphate.
Thank you gentlemen.
As expected a good portion of the tons, we expect to recognize in the fourth quarter have already been sold and priced.
We don't expect our price realization increase to be below the $50 per tonne in any scenario, we have assessed the impact.
On a potential announcement and CVD in November and our expectation is the impacts will only be a minor change to late December shipments if that goes against us.
P.J. Juvekar of Citi in Adam Samuelson of Goldman Sachs. Both asked about the Aero Reserve increase can you elaborate on the drivers for the Arrow increase and the remediation liability what is the timing of the increased cash outlays. Thank you gentlemen, I'm going to hand, this one straight over to Clint to answer I think.
The details of our bar.
Our own we just booked.
Thanks, Josh.
As.
As many of you may recall, the third quarter of each year is typically when we update and refresh the estimates of future work related they are all activity and I would say that.
Quite a bit of the amount that we booked this quarter is related to plant city as we've learned more about that site.
Over the last over the last year.
Our railroad spend is typically spread out over an extended period of time 40 to 50 years during the life of facilities and jumped stacks and so forth. So very extended type of spend profile, but also recall that against our existing Roes. We also have about a $700 million.
Escrow account that will offset at least a portion of that spend in in future years and related to the environmental reserve that we booked this quarter, that's really related to some subsurface work that we need to do at some of our facilities around some of our gyp stack kind of lets say specific to that.
That that spend is probably going to be made over the next two to four years.
[laughter], Adam Samuelson from Goldman Sachs, and Seth Goldstein from Morningstar, both asking about fourth quarter phosphate volumes is it reasonable to expect a notable tick in volumes as we move into 2021 should we expect higher year over year volumes or will you keep production lower to support higher prices. Thank you gentlemen.
As we look at the fourth quarter, we see great demand in all our markets right now and so with that we do expect to have relatively good sales through the quarter and then low inventories as we enter next year as we look to 2021, we do expect to see.
Good demand scenario, and we would expect to see good utilization of our assets, particularly if you remember first quarter 2020, we had borrowed down for almost three months. So now we expect that to come back and our facilities to run very much closer to full production in 2020.
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John Lastly, I'd like to end with a couple of questions on our potash segment.
Ben Isaacson from Scotia asks how we think about salons and we believe there may be a need for those tons in the market in the future.
Thank you Ben.
So we definitely look at Lonza is something we would bring back of our customers needed the times and if the price is justified restarting up.
The industry is ripe with examples of sudden but permanent supply disruptions and in that case. This tonnage could be very valuable to us and as our customers demand grows salons, they will be significantly cheaper to bring back than any greenfield operation.
Last question comes from Seth Goldstein at Morningstar.
How much potash is coming out of Q3, now and how does that change as we move to 2022.
The long term plan to grow K three production in line with potash demand growth or will you try to increase market share.
Thank you Seth.
2020, K through is forecasted to produce about 4.4 million tons or the equivalent of about 1.5 million tons of finished product.
Which amounts to about 15, 20% of our total production of potash in Canada.
In June 2022, K, three or at Esterhazy, we'll be providing the ore for approximately 6 million tons of finished good production.
This will completely replace K, one and K two mines. So our expectation is we will not necessarily grow production, but rather replace pay one NK to longer term. Our goal is to match production with demand while also lowering our cost profile.
Three has already proven to lower our overall cost.
Now with our remaining time I'd like to open it up for follow up questions from our audience.
Thank you as a reminder to ask a question you will need to press star one and your telephone keypad.
Your your question baskets out there.
We will limit your question one for your participant Joe, though others questions to be addressed.
Thank you please standby well, we can file the Q anymore.
We have a first question comes the line of Steve Byrne from Bank of America. Your line is open. Please go ahead.
Drilling a little more on this phosphate supply and demand outlook that.
So it seems to be highly.
Highly contested today.
So you have a fair amount of information in your deck.
On the demand outlook for 21.
Somewhere between flat.
Flat with 2020, or maybe up 2 million patients, but if you. If you look at your supply outlook can you have a breakdown of what you see is potentially the delta in supplies from 21 to 20. There is if there is a few fairly large items in there and I'd just like to hear your view as to.
The upside and downside risk to some of those are the big ones being.
In inventory build is expected by the producers they ramp up the LCP.
And then the recovery in in supply given the 2020 outages. Those three are that is a fairly large line items is there a potential risk that those are.
Are much greater than that.
Okay.
Thank you, Steve well, let me start by saying as we look into 2021, we do believe that the phosphate SMB is quite tight. So first of all we'll end this year with relatively low inventories and that's relatively low inventory throughout the channel are.
Proxy kind of indicates us inventory will be down about 35%, which represent somewhere in that 600000 tons, Mark India will be down as much as 1.3 million tons and China down as much as 700000 tons. So as we look at how we enter this year, we do believe.
Some of the production will have to go into rebuilding distribution stocks to fully service this market.
And then if we look at the increases there is a couple of things that are important first of all with that level of inventories at the end of the year. We do expect that the <unk> will be a higher utilization of assets, which is where we have the million tons of recovered production. If you will.
So if we look at those two they relatively offset themselves that we need to increase inventory just to supply basic needs and have a normally balanced market, but we also will have the opportunity to run our assets harder in terms of the go forward, we've heard from RCP publicly that they will be.
Relatively slower in bringing on new production, they've announced that publicly so we see modest increases to new productions coming from improvements in margin as they continue to move their wallet all show mall operation up to full production over the next year or two.
Okay, and then modest increases from CP and I think the rest are fairly minor in nature. So I wouldn't really worry too much about those one way or another but overall, we do see a tightening market for next year.
Okay.
Your next question comes from the line of June as box, Jason Bernstein. Your line is open. Please go ahead.
Hi, Thank you I was wondering if you could touch a little bit on the phosphate rock supply demand as well.
Basically the same the same analysis you did for phosphate supply demand what does it look like on the rig side.
Yes, yes, okay.
We don't.
Alright. Thanks.
Thanks, Jonas we don't really look at phosphate supply and demand the rock supply and demand for the reason that we're not really involved in that market overall, where we are.
Where that comes about is domestic production in some of the non integrated markets like.
India and whatnot.
In terms of our miscue mile operation, which we do.
Have an outside production of rock is really for our own use so we don't.
Well look at it from that perspective, we assume that really what matters is overall cost for acid usage in the global market and that really drives that so when we talk about our DAP map.
Really it breaks down to what is produced from not rock and what we produce from our own rock. So we don't really look at it as a separate market.
Okay.
Okay.
Your next question comes from the line of Chris Parkinson from Credit Suisse. Your line is open. Please go ahead.
Yes.
Quickly on the potash front.
It appears certain markets.
So on are really beginning to churn throughout Asia.
You in some of your peers seem confident are we done in the Chinese market as well.
Overall in your now heading into the next.
Two years, Yeah of course of course, you're hitting on coarse grain oilseed and even FNV what are your thoughts of potential upside coming from the Asian market and then also if you could hit on that potential optionality from bio diesel.
Incredibly helpful as well thank you very much.
Okay. Thanks, Thanks, Chris Hello.
What we see today and I think what we saw through the year is not unlike.
What we've talked about previously which is when the price in 2016.
No we quickly.
Rebound in demand and we're seeing that this year as we predicted earlier in the year. So first of all I would say there's been a relative rebound in demand outflows expected some of the highlights though I would like to put out is as you mentioned China has been a really good.
Hi light out has India in both of those markets for reasons of food security and probably trying to make sure that they produce as much in countries. They can demand for potash has been strong in both of those jurisdictions and then in the rest of Asia. The Big thing there of course is Indonesia much.
Asia and the demand for Palm oil, which has really.
Bumped up and just to touch on your piece there bio diesel have been a part of that because.
Where.
Bio diesel is going to play a role in fuel as we go forward and I would like to highlight that in markets like India and China.
Basic EPS.
And I will also play a role in demand for commodities in those jurisdictions as well. So yes. We do look at these are playing a role in demand increase over time, and we are expecting good demand from Asia, India, China in the next year.
Your next question comes from the line of PJ Juvekar from Citigroup. Your line is open. Please go ahead.
Yes, hi, good morning, Chuck Thanks for your comments.
Potash volumes year to date are up 6% with phosphate set up on the 1%.
What is the why is that a difference and then secondly, if China AG markets are really robust yeah. I think that will continue into 2021, what are your expectations.
From the country in terms of imports of imports of potash and exports of prospects.
Okay, well, let me hit your first question first PJ. Thank you for for that the Big difference I think between potash.
Potash and phosphate volumes in terms of deliveries has probably been more than anything just inventory moves. If you remember we had a very big build up of inventory as we moved into this year in phosphate and for that reason I think that was had to be consumed first one was consumed in the first quarter before.
Are you really got into.
Starting to get real demand or real demand pull from production. So I think that's probably the reason for that.
In terms of sort of going to get the second question more.
BJ can we ask PJ to re ask the second question, sorry, operator I.
TJ please begin.
Again.
Oh sure Holden.
Oh, I'm, sorry, yes, yes.
Sorry, the question I think from PJ was Chinese imports of potash and Chinese exports.
Phosphate next year and.
So.
Look our expectation in China in potash PJ is that.
There's going to be continued focus and we see this in their five year plan in China, but theres continue focus on food security and ensuring that they have a robust.
Agricultural industry to ensure the less reliance on outside places so for doing that we expect that actually potash demand will increase internally because.
Because the corn demand is so strong but also the other one is their own internal production of Shanghai Lake is reaching its capacity and possibly even going down. So we do expect China to be a.
Let's call it a growth engine for next year in terms of.
Phosphate exports I think as I said, there's a couple of closure. So there has been some structural changes in the phosphate market in China and that coupled with what we believe is.
Two increasing Chinese consumption of phosphate means that our expectation is Chinese exports will be down maybe not year over year, because coal, but had a big impact at the start of this year, but certainly down from the 2019 levels.
Your next question comes from the line of Adam Davidson from Goldman Sachs. Your line is open. Please go ahead.
Yes, Hi, it's Adam Samuelson so.
So good morning.
I guess.
There's been a lot of details today on the on the phosphate kind of market outlook.
And your own kind of expectations of your outperformed the market yet Jackie.
Your stock that was 15% and so clearly the market takes it takes a different view what do you think the market's getting along today.
As it relates to your own.
Market outlook or strategy or the operating performance at that.
Where we think the gaps in understanding it.
Well I'm going to have to be fairly direct on this answer Adam.
And let me, let me start by saying I suspect the market has been impacted by statements made by one of our competitors and there.
Impairment of their phosphate business.
So let me let me be relatively direct with this first of all on impairment needs to be driven by a triggering event at least that's my understanding standing in general accounting practices Orion far EPS.
When I look at the potential triggering events. The one thing I can say is that phosphate prices are up significantly quarter over quarter and if I look at the outside consultants that we use like C are you.
Their long term estimates are also up so it is.
Very difficult for me to see how.
Long term phosphate outlook was the triggering event for this write down so as such.
You asked me what I, what we're getting wrong I think people are taking the.
Idea that the triggering event was the phosphate market were clearly it had to be something different than that and there are assuming that means we have a par poor outlook now what I will say is if you compare the two businesses, we are very difficult to compare them. One by one first of all were.
Very different scale, but we also saw very different products.
They sell purified phosphoric acid, which is being highly impacted in the industrial sector by two things one the economy's slowing down and the other by external competition now if I look compare that fertilizers fertilizers is actually quite the opposite we've seen an increase in demand we've seen an increase in price.
Thing and we see a very good outlook. So I don't think you can compare the two businesses.
I certainly don't think.
Phosphate demand and supply at least for fertilizers is a factor in that so.
Yeah.
The next question comes from the line of Andrew Wong from RBC Capital markets. Your line is open. Please go ahead.
Hi, Thanks for having me on the call and good morning.
So I mean theres not been a lot of discussion on the CVD impacts and we covered that a lot, but I do want to ask another one.
So like.
Like you said, it's mostly about the trade flows aren't really that's not really what's driven the SMB.
But in terms of like on Mosaiq, but mosaic cells allow phosphate in both Brazil, and the U.S. and if anything.
Seems like Brazil is getting up there in terms of volume so.
I understand that if their trade growth flow through first maybe to U.S. premium comes down, but I guess, what's the actual impact on the company. Because then you would see less flows going to that real life, Brazil, I'd just be curious to hear your thoughts. Thank you.
Gary.
Yes, Thank you Andrew look.
You are absolutely right. This is about trade flows not overall supply and demand. So today, what the Russians and the Moroccans have done is they have redirected tons that would have otherwise come to us to either Brazil, India.
Or in some cases eastern Canada. So they have moved a number of tons to different markets.
They have not sold significantly different number of tons globally than they have in any other year. So.
We know that their overall supply and demand balance in the world is been very similar so where they fall out of the U.S., we've had to bring more tons into the U.S. to serve it but you're also seeing tons come from places that havent historically.
So tons to the U.S., like Australia, and Mexico or significant tonnage in terms of that so you do see a difference in trade flows. So what would happen if that reversed my expectation is the reversal would create.
Exactly the opposite we would see more tons going from Mosaiq to our Brazil business, we would see more tons going to India from our study.
Tonnage et cetera, and there would be.
Other imports coming into the U.S. So overall, we don't think that this is going to make a huge difference. The big difference today is demand is up Chinese exports are down and we're seeing a growing market and a good demand scenario around the world.
Well.
Yes.
Your next question comes from the line of Michael.
Cleveland Research. Your line is open. Please go ahead.
Yes, Hi, I just wanted to get a sense of hurdle is on pace of how much the real the movement in the reality has been a tailwind this year and basically if the real work to stabilize let's say from this point forward.
And then we hold all your other forecast that you talked about in terms of Brazilian market growth constant what type of impact would that have on your margins. So basically just trying to get a sense for how we should be thinking about that if the real which reverse itself a little bit and.
To strengthen at some point next year, what that might you do margins. Thanks.
Yes. Thank you Michael look let me.
Addressed in two pieces of the business first as our production business and the other piece is our distribution business.
First of all let me say the weakening real life, it's had a biggest impact it has been on the.
On the profitability of the Brazilian farmer, so that has really been what's what's driving a great.
Demand picture in Brazil, So the Brazilian farmer is doing very well.
If you look at it in terms of our business.
What we would expect is our distribution business is relatively independent of.
The re pricing and the reason for that is we buy on U.S. dollars. We sell we then hedge that and convert to a Brazilian real high.
Number so really it doesn't have a huge effect on our overall.
Margins what it does is it makes a difference to the.
To the actual demand in terms of our production business. So obviously on the shorter term.
Wages and everything else, Brazil, Rebased cost go down fairly quickly. So we do see an improvement in costs in a better margin for our production business. What I will say, though is if I look at the last couple of quarters. The Brazilian real has been essentially.
Flat if I look at our statistics for the last two quarters were 5.37 versus this quarter of 5.38, so essentially they have been perfectly flat. So you can assume or semis from that that the improvements. We are seeing is actual solid improvements and how we're running the business as opposed to.
From an exchange rate.
Oh.
Yes.
The next question comes from the line of Joel Jackson from BMO Capital markets. Your line is open. Please go ahead.
Hi, good morning, Josh.
Chuck.
One of the larger alerts phosphate buyer as part of that.
Canada and getting investigation.
A large U.S. phosphate buyer publicly stated that CPR.
CP offers.
Back and what Medac can offer they mentioned things like solubility. This fact.
Shane or something in between and what can you do about it.
Yes.
The role.
Sorry. This is the second time it had to be relatively blue direct no quality is absolutely not an issue between the two commodity products. We do have very small differences in.
Rob in terms of some of the things that are in our product because of whats in the or.
But recognize this is a manufactured product that takes phosphoric acid add ammonia to it to form DIAM own in phosphate amano ammonium phosphate. These are chemically produce we have been selling this commodity in the United States for over 50 years in the.
That whole time, we have seen great response on the field.
Frankly solubility isn't even one of the specs that is measured for quality. So.
It is simply a distraction it is simply a way of.
Taking the.
Focus away from the real issue here and.
Trying to turn a commodity into a specialty product.
Just doesn't work unless you're doing with something like Microessentials in which case the actual agronomic aspects of it are significantly better than the agronomic aspects of the commodity products. So.
With that I'll leave it there.
Yes.
Once again I would like to remind everyone. Just a question you will need to press star one on your telephone keypad.
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We have a next question comes from the line of Vincent Andrews from Morgan Stanley Your line.
Open. Please go ahead.
Hi, Thank you I just wanted to follow up on the arrow in the environmental charge that I don't think I caught it earlier I'm not sure. If you mentioned it but I know it was non cash in the quarter.
And you talked about it with there would be some cash liability in the future. I think you gave Dave could you actually quantify the amount of cash liability that will actually have to pay out in the future. Thanks.
Thanks Mark.
With that over to Clint.
Let me give you sorry.
Sorry.
New to the microphone.
Thanks, Vincent I'm going to hand, it over to Clint, but let me just give you a little bit of.
A summary of this first which is.
We do once a year, we do a aro is over a 50 year period, where we look at the overall asset retirement obligations that we would have to do if we look at the asset retirement obligations themselves there long term.
Water treatment, particularly plant city seems to be the biggest one here in terms of the rest.
It is more around our other gyp stack switch Clint can talk a little more about.
Just say these are long term aspects of the business that we look out.
Hi, Vincent.
So as we as we look at the da Aro.
Number in particular first.
Recall that the typical process that we go through in the third quarter of every year and we make adjustments based on the levels of work that we see and part of that amount is is just changing things like.
Assume inflation rates assumed interest rates and things like that to actually bring that a aro back to current dollar to put on the on balance sheet.
I'd say the one notable item that's embedded in that number is.
As a reverse osmosis investment that will need to make it one of the facilities.
In the future I don't think its eminent mobile that's something that's been added as we've done more work on.
And needs to be done and part of the refinement of our future plans.
<unk> of magnitude, that's probably about $40 million investment.
And it needs to be made.
Otherwise I think a lot of the adjustment is is some of those assumptions than I that I mentioned, a little bit earlier.
Then I think on the environmental remediation I think the the ultimate cash cost is going to be right around 35 million dollar mark, but again that will be over multiple years.
Based on the assessment is today.
Sure.
Your next question comes from the line of Jeff Zekauskas from JP Morgan. Your line is open. Please go ahead.
Thanks very much.
Your quarterly.
Capex and in potash.
It's about 110 million then your depreciation is about 70, so it's about 40 million per quarter above DNA when 60 per year.
Does does that incremental 160 go away and your Capex coated depreciation when your K three project is done.
[laughter].
Thanks, Jeff, Let me hand that straight to Clint I'm not sure exactly.
Yes, hi, good morning, Jeff So typically outside of our key three spend the typical sustaining capex level.
Can vary each year, but it's in kind of a $100 million to $200 million per year midpoint of about 150.
And generally as an example of what we're seeing this year on a sustaining level, it's about $150 million. So.
I think thats, what we would expect as we go forward and obviously, we will be migrated from K, two and hey, one over to Q3, we would expect that sustaining spend to migrate when it.
Think longer term you will see more alignment between sustaining capex spend in depreciation in potash.
Oh.
Your next question comes from the line of Jeff Feinberg from Feinberg investments. Your line is open. Please go ahead.
Okay.
Thank you very much good morning, just want to make sure that I'm understand the big picture here with all the.
Variables, we're talking about when you talk about the $50 a ton in the fourth quarter.
Over the base that we just reported it looks like we're talking about a run rate of half a billion dollars of EBITDA.
Got it puts and takes but just this.
Dynamic correct and if so the rate of growth for that next year that related to base. It makes them understand these rebels were describing here.
Thanks, Jeff Let me just do a quick in my head here I think you are saying is if I'm getting your question right is a 50 dollar increase in Q4.
Going to lead to approximately a $50 million or $500 million quarter for EBITDA and let me just let me just do a quick math I think we sell some 2.2 million two to 2.2 million tons a quarter. If you multiply that by 50 that would add $100 million to our EPS.
For the for the quarter. So if you took our today's number amounted to $100 million I guess you'd be pretty close to a reasonable.
Yes, although you do have to take into account mosaic furloughs onto seasonality and what not.
Quarter over quarter, there, but yes, I think thats not unreasonable starting point is the sensitivity would be about $100 million.
Corporate owner seems to be a lot of skepticism and the sustainability of this but a 2 billion, but it sounds like given.
Marketers demand is a very conservative approach next year, one of its our understanding that the message being portrayed.
But again if the price holds for 2021, you would again be saying much. The same thing you're looking at nine ish million tons at $50 over today again the calculations much the same it would add a half a million dollars.
Your next question comes from the line of John Roberts from UBI EPS. Your line is open. Please go ahead.
Thank you maybe back to the capital spending question you got earlier, but are we late enough in the year to have an outlook on 2021 at this point.
How many years.
Keep your overall capex relatively near the current levels.
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Thanks, John.
I'm going to hand over to Clint for some clarification on this but I guess overall look here's our our big picture is our longer term and 2021 being no exception. Our longer term is we would have $6 million to $700 million of sustaining capital and then today, what we're seeing is.
No other other improvement capitals and whatnot, but the big one that starts dropping off after 2022 is of course, the $300 million or show. So we're spending on esterhazy case, three so that capital spending comes down but there are other areas of improvement and high return projects.
We may want to put in there so.
How long can we maintain it flat I think certainly it will it will go down over time, how much goes down depends on opportunity.
Okay.
Okay. A question look I think we've.
I think we've come to a close now and before I close I'd like to invite you all to enjoy join US on November nine nine am for our in depth presentation on Mosaiq fertile advantages and our South American strategy, so with that I want to run.
GAAP up todays call mosaic continues to execute extremely well, we are increasing our global competitiveness by driving cost down and we're managing well through the challenges of co at 19.
The Tailwinds, we're seeing today from and proving fertilizer and agricultural markets. We expect strong results to continue through the end of the year and well into 2021. So thank you for joining us and again come back next week for our South American to do.
Detail.
Ladies and gentlemen. This concludes today's conference call. Thank you all for participating and you may now disconnect have a great.
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