Q3 2021 Mosaic Co Earnings Call
Good morning, ladies and gentlemen, and welcome to the mosaic company's third quarter 2021 earnings Conference call.
At this time, all participants have been placed in a listen only mode. After the company completes their prepared remarks, the lines will be opened to take your questions. Your host for today's call is Paul Masoud, Vice President Investor Relations of WCS Company. Mr. Mitchell you may begin.
Thank you and welcome to our third quarter 2021 earnings call opening comments will be provided by Jocko Rourke, President and Chief Executive Officer, followed by a Fireside chart as well as open Q&A quit.
Clint Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang Vice President of Global strategic marketing will also be available to answer your questions.
We will be making forward looking statements. During this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties.
Actual results may differ materially from projected results factors that could cause actual results to differ materially from those in the forward. Looking statements are included in our press release furnished yesterday and in our reports filed with the Securities and Exchange Commission.
He will be presenting certain non-GAAP financial measures, our third quarter press release and performance data attached as exhibits to yesterday's form 8-K filing also contain important information on these non-GAAP measures.
Now I'd like to turn the call over to John.
Good morning, Thank you for joining our third quarter earnings discussion I hope you've had a chance to review our posted commentary and slides as well as our news release and performance data, which were made available on our website yesterday I will provide some additional context before we respond to the questions. We received last night and then we'll conclude with alive.
Q&A session.
Mosaic delivered excellent financial performance in the third quarter with EBITDA, reaching its highest level in more than a decade. Our business continues to benefit from the strong markets. We've been discussing since the second half of 2020.
With our North America production recovery and a strong order book, we would expect momentum to continue through the end of the year and into 2022.
Before we get into our strong outlook I want to briefly give you an update on the production issues. We faced during the third quarter as you'll remember in June our Esterhazy K, one and K two potash mines experienced accelerated brine inflow and we made the decision to stop operations approximately six months ahead of schedule.
To help mitigate lost production, we further expedited the ramp up of Q3 and restarted Klondike.
The second shaft at case, III is now operational which paves the way for us to reach full production in the first quarter of 2022.
And at Kalana Ze, we hit our targeted run rate in October.
In phosphates, the damage from Hurricane Ida and the equipment failure at New Wales resulted in a 300000 ton production loss in the third quarter. Thanks to the efforts of our team the fourth quarter production shortfall has been reduced to 100000 tons and operating rates should be normal by the end of the year.
In both phosphates and potash our team has worked diligently to ensure any shortfalls, resulting from issues outside of our control were temporary.
As we head into the end of the year and into 2022, we are well positioned to take advantage of the current market.
Shifting now to agricultural markets, we continue to see strengths extending well into 2022 brain stocks remain limited and global corn and soybean demand is elevated driven in part by surging Chinese demand and rising global biofuel demand as a result agricultural commodity prices remain high.
Farmer income remains well above historic norms that strengthened crop markets combined with global industry supply constraints are the key drivers pushing fertilizer prices higher in the Americas demand is considerably stronger than we expected at the beginning of the year, Brazil is expected to once again set a record for.
Fertilizer shipments in 2021 grower economics remain profitable despite the latest surges and nurturing and prices and this has been reflected in the significant order book into the end of the year and into the first half of 2022.
In North America demand continues to be strong and prices have followed reflecting a healthy domestic market benefiting from imports from a diverse group of suppliers.
Our economics remain favorable in North America, although not quite as favorable as during the first half of the year. However, persistently low inventories and capacity constraints are underpinning the tight supply demand balance as well as pricing.
In India, while farmer demand remains strong and the government has recently acted to improve importer economics for phosphates availability is still lagging.
Recent moves by the governments will likely help in the recovery of Indian imports, which like most of 2021 because of the disconnect between domestic subsidies and global prices.
Given how depleted Indian inventories are we see India as a source of pent up demand, which should return to the market in 2022 in southeast Asia fertilizer demand is benefiting from the strength in palm oil prices and China isn't scenting as farmers to maximize yields through subsidized crop prices.
New supply of Phosphates is limited deniz exports are expected to decline significantly in the fourth quarter and in the first half of 2022, reflecting the directive from China's National Development and Reform Commission that major producers hold all phosphate exports to ensure adequate domestic supply.
In potash demand growth continues to exceed new supply from higher operating rates announced by producers and prices continue to rise putting this altogether, we expect further upside in realized pricing for phosphates and potash.
Our fourth quarter order book is now about 90% committed and priced.
As a result, we expect to see a sequential increase of 55 to $65, a ton and realized phosphate prices and 110 to $130 a ton and realized potash prices.
We are seeing buyer appetite for first quarter commitments as well all of this implies higher earnings in the fourth quarter and a very strong results continuing into 2022.
Our earnings are leading to substantial free cash flow generation.
Which has allowed us to make significant progress towards several commitments. We've made earlier this year, we raised our regular dividend target by 50% to 30 a share in October our board approved an additional regular dividend target increase of 50% to <unk> 45 per share effective in 2022.
August we repaid $450 million in long term debt towards our target of $1 billion of debt reduction.
Also in August we announced an expanded share repurchase program of $1 billion since that announcement, we have repurchased more than 950000 shares.
In addition to strengthening the balance sheet and returning capital to shareholders. We continue to evaluate further investments in the business capital.
<unk> are expected to total $1 3 billion in 2021 of which roughly $450 million is growth related.
We continue to evaluate every opportunity that allows us to further strengthen the balance sheet grow the business and return capital to our investors.
Now before I conclude my opening remarks, I want to take a moment to recognize the many contributions of Lora, Daniel and what she has made at mosaic.
As head of Investor Relations for the last decade, Laura has been an invaluable advisor to me and to the entire leadership team. We are very grateful for her service and wish her all the best in her retirement almost food has been promoted to lead IR and Laura will stay on through the end of the year to help with the transition.
Join me in wishing her well with that let's move on to questions Paul.
Jock with continued strong nutrient pricing we've received a number of questions on affordability risk of potash and phosphate demand destruction.
First and what geographies are you seeing signs of potential demand destruction and how do you think about the risks for both phosphates and potash.
Thank you.
Let me start by saying the areas where consumption has been lower has been more about availability than it has been about demand destruction and in here in China because of strong pricing early in the year. The exports were high however, now the Chinese government has stepped in and restricted XP.
Ports and we expect the exports to go very low in the last quarter and into quarter one of next year.
Which will allow for a better supply in the domestic market in terms of India.
Inability to secure P and K has not been a boat farmer demand, but importer economics.
Inability or inadequate subsidies have really been what's driven the inability of the importers to economically bring product into that jurisdiction.
However, what we do expect to see based on those two is pent up demand in both China and India for early next year and into the spring season.
So with that I'm going to throw it over to Jenny to really talk about the details of fertilizer affordability in our key markets.
Thanks, Chuck I think you covered India, and China and that reduce.
Reduced demand in 2021, it's going to be depend up demand for 2022, we feel very confident that two markets will come back. We said there is strong demand in 2022.
That's the work we have not really seen a major fines.
And construction in Brazil.
A ratio that's a favorable than the previous year, we still have demand from the growers and we actually have sold over 10% of the summer crop nutrient already.
Can you compare and contrast, 2021 with 2008 in terms of affordability inventory levels.
Yes. Thank you let me start with soil levels, we don't have perfect insight into the soil inventory per se, but what we do have is we have some studies by the likes of the University of Illinois, but show that over the last 10 years actual soil inventories have decreased and that's particularly as we've used more precision agriculture, which will.
I wish you to put the right amount of fertilizer down but it also means you have to replace it every year and of course in Brazil with the depleted soil that has to be replaced every year. So there is definitely on ground demand that will be there next year in terms of channel inventory, we see that as being low.
In almost every jurisdiction there is no place around the globe, where we see any kind of buildup of channel inventory and that's fundamentally different than it was 10 years ago, where you had large amounts of inventory not only of the fertilizers, but large inventories of crops like grains and oilseeds.
This turnaround is quite different and so as we look forward, we see affordability fine right now and we expect that affordability will be good because either price will have to go up for grains, and oilseeds, which will drive long term fertilizer or they will plant less.
Which means that prices for grain and oilseed will go up so in other words, that's a cure for high prices is high prices.
Doug how are India subsidies impacting affordability.
Well at a farmer level, it's a controlled market. So it's very difficult to compare affordability at the farm level, certainly we know that on farm demand for both phosphates and potash is very strong.
At an importer level, but the gap between global pricing and the retail price has been such that the importer economics are poor, which means they're not importing which means that the product isn't available to the farmer and really that goes for both potash and phosphate.
Let me add as we move into 2022, there is a lot of pent up demand in India, and we fully expect that the government will have to act and increased subsidies to allow the farmers to get the product theyre going to need.
Another topic that generated quite a few questions, including from Adam Samuelson at Goldman Sachs and Vincent Andrews from Morgan Stanley Chinese phosphate market, especially given the recent change in Chinese export policy.
First part of this question is what are our expectations for exports. This year and next year and how is that being impacted by changes in China's production volumes.
Well. Thank you this year, we're expecting China's total exports to run just over 10 million tons.
As we've seen recently that has led to fairly large deficit domestically.
The government has stepped in and put on export restrictions, which are now taking effects. We don't expect a whole lot of Q4 exports or probably first quarter 2022. After that we do expect things to return to normal.
For this year, we're expecting a little over 10 million tonnes of exports next year, we think that will return back to let's say 9.5 or nine three that we've had in previous years. So year over year, we should be down about 1 million and a half tons from where we were this year now we also see a long term decline in.
Production of phosphate fertilizers for agricultural use that means that the.
<unk> acid is starting to find its way into a lot of other industrial products, including these lithium iron phosphate batteries and a number of other areas. So what we see is a declining production over time and probably a restriction of availability into the phosphate fertilizer market. So that means that over time.
We should see a decrease of exports from China.
Chris Parkinson from Mizuho, and Michael <unk> from Cleveland Research, both asked about the impact of ammonia on our phosphate business and how much ammonia will need to purchase in the fourth quarter.
Thank you gentlemen.
Let me just start by reminding everyone. Our Mona is sourced from three different sources first hour Stena ammonia plant, which is obviously at cost, including the cost of Henry hub natural gas, our CF contract, which we've maximized at the 800000 short tons per year at this stage.
And then of course open market purchases this quarter, we're looking at approximately 20% to 25% will probably come from open market purchases as such what we expect to see is about a five to $10 increase per ton of our raw materials and that is.
Based on market changes in ammonia, plus a relatively flat sulfur pricing environment.
We had a handful of questions asking about our potash production assets, including questions from Seth Goldstein of Morningstar, and Andrew Wong RBC, both as details on how <unk> will ramp and how total production volumes and costs will evolve in 2022.
Thank you.
Let me start by saying that the ramp up of <unk> is going very well, we have just hand it over the both hoist system to operations. So that is now operational so we have both hoist operational and as we increase the number of four rotor miners between now and <unk>.
Quarter, we will hit full production by the end of first quarter. So that means that very soon we will be running that mine at full production again.
Now in terms of the other piece I just want to highlight is we've also been very successful as starting up our calonge like mine.
That operation is now running at its expected rate of 100000 tonnes per month ish.
About a million tons a year.
We expect between the two of them, we will have actually more incremental production by the first quarter of next year.
Steve Byrne from Bank of America, and Adrian module, Bamburg as well as others are asking about our product pricing strategy, how we think about forward sales.
Our head of we sold and how much of our first half volumes might already be committed.
Thank you gentlemen.
Well, let me start by saying availability is a big concern across a number of our regions and what we're seeing today is actually a lot of inbounds, but we're being very careful about which geographies, we're selling into and the amounts were forward selling so while the demand is there we're still being cautious I got it.
Let Jenny give you the details on that.
Sure Chuck we have seen strong demand from customers, especially in North America, and Brazil, we began to sell some modest amount for.
For Q1 and even.
Even we've started to sell the tons into.
Into Q2 as well these are all good indications continuous experience the market and we feel good.
Joel Jackson, BMO, and John Roberts of UBS or asking about mosaic for those launches given the strength of our margins over the past two quarters has been driven by distribution or production and how much are co products like gypsum sales contributing to this.
Well. Thank you gentlemen, first of all let me say mosaic <unk> is an integrated business. So it is the combined benefit of distribution with production that has really driven our results. They're part of the strength has obviously been the markets well.
We've also made tremendous progress ourselves of transforming the business.
First of all in the $300 million of synergies we found and then more recently, we've just exceeded our $200 million EBITDA improvement target through transformation. So remember the pro forma at the time of purchase was about $60 million EBITDA per year, and we just did 300 million.
In quarter. So you can see where we've extracted significant value and has dropped straight to the bottom line.
And in terms of co products. They are making a significant contribution I think certainly in the level of $50 million to $60 million of sales a year from those co products.
The number of analysts, including Andrew Wong from RBC, and Rick Patel from Exane I've asked about capital allocation, we'll break this up into a couple of questions. First can you discuss what to expect for capital expenditures going forward in terms of new growth or major investments in sustaining capital.
Thank you.
I'm going to start by giving a little bit and then hand, it over to Clint for some of the detail but over the next five years, we do expect capex to trend lower.
<unk> Capex will certainly decrease at the end of Q3, but again as part of our capital allocation, we do expect to reinvest in the business over time. So there will be some reinvestment that we will make and I'm gonna out with that leave that over to Clint to talk about capital.
Thanks Chuck.
Like Jack said I think over the next five years, we would expect capex to trend lower.
Certainly Q3, the Q3 investment will be will be ramping down and is in the process of ramping down also recall that some of the capital investments, particularly over the next two to three years from a growth standpoint will be made in extending our reserved down in Florida. We also have had a number of regulatory.
Changes, particularly down in Brazil around some of our dams.
Going to promote or require some some additional spending in one of the things. We've also been looking at is we have a number of assets that over the long term had been leased and as we've looked at how core those assets are to our underlying operations. I think there is a portion of those assets it probably make more sense for us to own instead of leasing and so.
That also will be part of our Capex program going forward, but I think with all of that taken into consideration certainly over the next five years, we would expect total capex to come down and as John said, we'll continue to look for opportunistic investments in the business that are high returning like the ones that we see today will look for those opportunities to continue to.
To invest as we go forward.
As a follow up on this topic, how do we expect to deploy excess capital between the incremental debt paydown share repurchases dividend policy and the type of growth projects that were just mentioned.
Thank you.
We remain focused on a balanced capital allocation approach between three key pillars.
First our balance sheet, we've demonstrated that by paying down $450 million of long term debt this quarter.
We intend to continue to pay down debt to the target of $1 billion over time.
In terms of growth investments, we've invested or will have invested $450 million in our business this year, including our spend on <unk> and our spend on reserve extensions in Florida.
And then finally, the returning capital to shareholders here, we've raised our target dividend for the second time by 50% to <unk> 45 per year in 2022, and we've started a share repurchase program based on an authorization of $1 billion of share repurchases over time.
And in that we've already repurchased approximately 1 million shares on the open market. So we've demonstrated that we continue to use a very balanced approach and thats, what we will do going forward.
Thank you that concludes the prepared portion of this event I would now like to open the line to Q&A.
As a reminder, chassis question you will need to press star one on your telephone to withdraw your question. Please.
We will limit to one question per participant.
Standby, while we compile the Q&A roster.
Our first question comes from the line of John Roberts.
From UBS your line is open.
Thank you, maybe Chuck talk a little bit about more of your capital return strategy and do you have a targeted dividend yield that you want to get too.
Yeah.
Thanks, John.
Sure.
Let me, let me start by saying our capital return strategy is based on on two pieces, we expect we expect to be.
Giving a regular target dividend that is affordable through the cycle one of the things as a cyclical we want to be careful of is that we don't put out a dividend too early that we may have to change if the market completely changes. So we are looking at affordability of the dividend and beyond that.
We're looking at methods.
Methods like share repurchases to continue to reward shareholders or are there.
Holding our shares and for investing with us. So we do expect not to have a huge dividend that's necessarily targeted as a percent, but one that is well affordable through conservatively affordable through the cycle and augmented by share repurchases. Clint did you want to add anything to that.
Sure.
No I think that's right Jack I think we look at.
The return of capital to shareholders in the form of an affordable dividend supplemented by by share repurchases and what is that program look like in total.
Maintaining a level of fixed return as well as a level of flexibility as we go forward.
I will reemphasize, Jon though that we do expect to move.
Move that dividend as our earnings potential grows in our some of our internal projections.
Programs come to fruition.
Yeah.
Our next question comes from the line of Chris Parkinson from Mizuho. Your line is open.
Great. Thank you so thank.
Thank you so much.
On the potash front can you just quickly discuss the evolution of your order books for.
Spot markets, just given the current demand dynamics, where you already indicated inventories were and how that ultimately sets up canpotex for future contract negotiations.
Okay. Thanks, Chris.
Yes, so where are we at with respect to our order books I'm going to throw this over to Jenny in a second but let me say first of all demand is very good you've probably recently heard canpotex is fully committed for quarter four.
Sure.
At least 90% committed and priced for quarter four.
Really sets us up for a real strong position as we move into 2022 and in terms of Canpotex and contract negotiations for the major national contracts. If you will it also sets us up very well for that.
There's a lot of talk about early contract negotiations with China that hasn't started but again.
We don't really need that in the near term so.
Think time is on our side not the buyer side in this case Jenny do you want to talk a little bit about that allocation.
Yes sure.
<unk>.
Thanks Chuck.
For both North America, and Canpotex, we basically have a fully committed.
Fourth quarter in 2021 context stock.
Socket itself into Q1, and which basically are going to reflect the latest spot.
Spot market prices. So you will see a map.
Between the bench.
You are saying today and versus the realized prices, which likely going to be reflected in Q1. So that's basically the.
Our book.
One point in terms of that.
The market situation the inventory.
Level.
The contract market India.
60% lower than the map.
Same kind of last year and in the case of China, that's over 25% lower than it's been kind of last year. So was this a low inventory situation.
We believe that the contract settlement will be needed for this market earlier than previous years.
<unk> mentioned, we don't need we don't need this market, how do we see that market demand point of view.
You want me to have already.
All of the previous year.
Our next question comes from the line of Mike <unk> from Cleveland Research. Your line is open.
Yeah. Good morning, just wanted to get a little bit of a sense for where we are in Brazil, there's been some talk about.
The.
Logistics and the ability to get product into Brazil, I mean.
I guess from your perspective, given that you have some in market adoption and some of these challenges bringing product in the higher freight rates like how are the net puts and takes and do you think the farmers are going to get enough fertilizer to be able to plant the screen year crop.
Moving forward a couple of months thanks.
Okay. Thanks, Michael I think you've hit the nail on the head yourself, we have a great logistics advantage and that was one of the key benefits.
Investing in country in Brazil.
We are we have ownership or part ownership of a port in Paraguay and access to a port in Santos that really gives us an opportunity to get product into Brazil are much more effectively than others and then of course in country production, where we save not only the ocean freight.
The rail or truck freight from the coast. So you know all of this logistics.
Restrictions are actually working to our competitive advantage right now compared to others, who would sell at the coast or others, who would have to come in through public ports.
We feel that we're in a really good position there overall, Brazil will be tight for fertilizers.
Particularly I guess as we look forward there could be some.
Any restrictions on the belarussian, there could be some restrictions on getting the.
The product to Brazil and of course Ocean freight.
Has at least probably doubled so.
But that's going to affect everybody equally.
It does come into our overall CAD.
<unk> of the economics for the Brazilian farmers, but at this stage as Jenny mentioned earlier.
We believe their economics are still quite strong.
Our next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
This is Josh can I am maybe follow up on Brazil.
And really it's two parts one on the affordability point and Theres been some pretty notable comments from some of the grower and industry associations, they're telling farmers not to apply fertilizer at these price levels.
Is your view that that just is not going to have a material impact on an actual consumption and offtake and then second on your distribution business and this is more for 'twenty two.
You talk about a little bit some slowdown in demand are more flat demand next year and your market outlook.
In that scenario and if prices ever did correct. How do we think about the profitability of that distribution business in a falling price environment.
Okay, well, let me start with affordability again.
No.
With the rise in the rate rise in commodity prices and the Brazilian currency devaluation over the last couple of years.
The Brazilian farmers had the benefit of extremely good profitability now that has certainly decreased.
This year.
And because of rising mark just fertilizer, but fuel prices seed prices everything has gone up and so not surprisingly.
Squeeze them more than they're used to.
However, I mean, our own belief is.
Farmers like to farm.
They're not going to see.
<unk> yield.
By not fertilizing that just is not a good economic solution to.
The problem matter of fact, if anything that would exacerbate their profitability issues. So we think that that will continue as normal do we expect growth to be strong in the next year or so no. We would expect that growth would be more moderated.
Then it has been.
And matter of fact, our longer term growth numbers, we're looking at that being slightly lower than what the history has been but overall, we think that it'll continue and Brazil will continue to be a great market and.
And ultimately it will be one of the big bread baskets for the world in terms of our distribution business.
I think we have a very strong.
<unk> customer base, we are well respected in the market our brand has a very good name down there.
Plus we have you know.
A great growth in our micro essentials, which is a good pull for that market. So they want our product specifically.
So we have a very stable customer base. So even in a in a declining market I would expect we would do as well or better than any of the others in that situation. So.
Hi.
I worry less about the margins in distribution. They are very good right now but I.
I suspect, we will be able to keep those.
Overtime.
Our next question comes from the line of CBD.
From Bank of America. Your line is open.
Hello, Steve Your line is now open.
Our next question comes from the line of Joel Jackson from BMO capital markets. Your line is open.
Hi, good morning, Josh.
Maybe a longer term question.
Good morning.
Obviously, you have a pea taking off more on the catheter market research in the last few years.
Can you give a sense of where you think <unk> could be in 2030 in terms of incremental demand for either phosphoric acid or map and I believe that companies like prey on nuclear units or the chemical or the big leader in the purified phosphoric acid market do you need to upgrade some of your thoughts asset production what would it cost and what are you looking at doing.
Yes, Thanks Joel.
I'm going to turn this over to Jenny to talk about the the growth of the lithium iron phosphate battery market.
May be aware of that I think Elon musk just commute minted too.
Using the those batteries in the cars the model three in China and has talked about building an LLP.
Planned here in the U S. So there is no question that is coming on.
In terms of purified phosphoric acid you are absolutely right and we are absolutely doing research into how we can create.
Purified phosphoric acid, although I would say, it's a little early for us to tell you either the cost or the capital, but generally you can talk to you about the LSP market sure.
John.
Actually Joe.
Increasing demand of LSP battery as being one of the drivers changing the Chinese industry.
This is all we are saying around 300000 tons of purified asset already shifted to OSP, which equals to mean in terms of.
And I saw some questions related to that production.
Thank you first of all either in 2022, we believe the trend of shifting P. 12, five to LSP will be trained and will be the structure change and that well.
Fondly changed the phosphate industry in China coming into the U S. As Jacques mentioned, we have seen the announcements made by Tesla.
Working with some other party yourself, a beauty LSP factories in the U S and building up the U S or supply chain.
We are looking into this area as well so the major producers.
What do you say Mike.
Thanks, Chuck mentioned, we are we are doing our own study this is going to be.
Long term.
Long term driver in terms of industry, starting from China, and we believe it will have impact.
Yes.
Our next question comes from the line of Adrienne Tim from Baird. Your line is open.
Hello, Good morning.
Question.
Yes.
First since we spoke with colon V. How should we think about the cash cost of fund auction.
But I'm talking about 2023.
And can you just please recall need.
Right Okay.
We expect fiscal 2022.
Thank you.
Okay. Thanks, Adrian let me start with Colons.
We expect clumsy.
Ramp up to its 100000 tonnes per month as we mentioned in the earlier comments at that point.
Now I guess the cost of Colons, they will start coming down I mean, right now we've been going through a transition overall I would expect <unk>.
To make up about.
15, 10, 15% of our total production and as such I guess, it's going to move our cost maybe four or $5 a tonne overall, so it's not a big cost changer and that'll be offset by as we move.
Esther hazy as K three tons up they'll really start coming in at lower cost. So overall I don't see a really significant increase in cost because of clumsy.
The overall market because of the offset of lower costs at <unk>.
You ask about the 2022 ramp up of K three.
Again as I mentioned earlier, we've just handed over the.
South shaft hoisting to operations and so we have I believe three or four miners left to build which takes.
A couple of months each and then we will be up at full production on <unk> three.
By the end of the basically by the end of the first quarter. So what you'll see now as we go forward as a slow move up too.
Full production at <unk>, which will mean that our K, one and K two mills will be fully utilized by the end of the third quarter, giving us approximately.
1 million tonnes of new capacity.
Our next question comes from the line of Steve Byrne from Bank of America. Your line is open.
Yes, sorry about my technical problem earlier.
I wanted to drill in a little bit on where do you see the greatest returns on investing new capital in growth.
Would it be in Brazil.
And if so would it be to expand production capabilities or extending potash mine life or something on the end of <unk>.
Being more more productive in the in the country or would it be to invest in.
More distribution assets to expand your network throughout the country.
Yeah, well thanks, Stephen we're glad we got you back.
We were worried about you.
So as.
As we look at new capital and you ask what how we would prioritize I guess there is theres, probably a couple of areas that I would like to highlight.
We're not there yet, but we are coming close to where our micro essentials production capabilities are matched with our.
Our.
Sales.
Book and so it won't be too long until we will be looking at micro essentials expansion and right now we're asking ourselves the question, how and where do we expand micro essentials do expanded in North America.
And you're still the growth is still in Brazil, but is it more efficient to expand it in North America or do you expanded in Brazil, so that questions being asked.
Another area of we think growth opportunity and you've mentioned it is distribution in Brazil, whether that be organic or whether that be.
Our purchase.
We think there's good opportunity in Brazil, it's a relatively lower capital lower.
Lower cost lower capital intensity.
We see that as good we've looked at a couple of opportunities to grow production in Brazil, and then the other one I would say right now we are extending our reserves in Florida that might not increase our production, but it certainly extends the mine life and the quality of the product as we go forth.
Words so.
<unk>.
Between micro essentials reserves.
Extensions.
We're not really looking at expanding potash is I think might've been the one you are asking I just don't see that being.
Required at this stages. We've just started <unk>. So those are kind of the areas. We're looking at but they have to be high return.
Fairly quick payback.
The one other one I just want to mention is.
There is.
Theres, a real opportunity investing in technologies for our Nextgen transformation work, we think is going to pay back really well.
I would encourage any of you to come and see some of the work we're doing around automation because it's great. So.
New products.
Distribution reserves.
Automation would be the kind of the summary.
Our next question comes from the line of Andrew Wong from RBC capital markets. Your line is open.
Hi, Thanks for taking my question.
I just wanted to pull back on fertilizer affordability and.
Any impact on fertilizer demand and just looking at it from a different angle.
If we do see any sort of reduction in application rates or anything like that.
Could you just talk about what that might do to crop yield.
What does that do you see a crop balance sheet projections going out into the next couple of years. Thanks.
Yes.
I'm not sure I didn't quite catch the last piece of that Andrew do you want to just maybe repeat the last piece of that about.
Yes.
I want to understand like if if we do see a reduction in application rates because that's what people are concerned about today.
What could that do to your crop balance sheet projections and in crop yields and what would that mean for pricing going forward. Thanks.
Yeah. So you know let me start by saying today affordability is okay. I think we all are kind of on the same page there and I think the big question for most is well what happens if affordability gets to a point where people start rationing.
Fertilizers.
And I could easily see where marginal crop land, particularly here in the U S or something.
Yeah.
May not get planted or whatever.
But what I would expect to have happened in that case I mean today, we're looking at under 16%.
Carryout for corn stocks to use ratio of under 16%, which is down to one a month.
And so if you're if you're looking at a month of supply.
Any kind of disruption or anything that's going to cause.
Run up in the price of corn or soybeans or whatever it is and so you look around the world right now.
Yes.
Palm oil prices more than doubled our corn prices are sitting in the $5 50 range or something like that.
Bean prices are good.
And Ah.
Availability of all of them is low.
No.
It's kind of a precarious spot for crop so if people do.
Les and that gets even tighter I would expect you could start seeing price spikes.
Likewise, if they plant more.
Price may moderate.
But then to do that they're going to have to use more fertilizer.
Either case.
I don't see a huge downside going forward from an affordability perspective.
Because you didn't get good good yields you need the fertilizer and we need the crops. So you put the two together and you say one of two things it's got to happen you've either got to use a lot of fertilizer on a few acres or.
You've got a plant a lot of acres in either case.
We're we should be in pretty good shape going forward.
Our next question comes from the line of P. J <unk> from Citi. Your line is open.
P J <unk> from Citi. Your line is now open.
Again to ask a question you will need to press star one on your telephone. Our next question comes from the line of Ben Isaacson from Scotiabank. Your line is open.
Thank you very much and good morning Jacques.
Thanks, so much excitement about DAP and map that we haven't talked about Michael.
Micro essentials or your value added phosphate our performance products in quite some time, you did mentioned that a little bit I was hoping you could dig in a little bit and talk about how is market share in the U S and Brazil.
Argue see end users downgrade to lower quality commodity phosphates and.
Can you talk about the.
Leaped patents come off in 2021 and 2022.
Talk about what that means for mosaic and are you working on new product development. Thank you.
Yes, Thanks Ben.
In terms of.
Market share I guess right now micro essentials is amounting to about.
35% of all of the phosphate product, we make so it's definitely become a very big piece of our overall market.
In terms of market share I guess in the U S.
Be around 10.
20% so.
Yes, so we're probably up to about 20% in the U S, which would be about 2 million tonnes a year.
Sure.
Probably approaching 1 million and a half tons in Brazil, So it's coming up to a similar sized market I guess, both of 15% and is still growing strong in Brazil. So in both cases.
I think we're going to as I mentioned earlier, we're going to run up against some.
Production limitations before we run up against market limitations in terms of the.
In terms of the actual patent on it I mean, there's two aspects to that yes, we are working on.
Days to adapt the product to extend the patent and whatnot.
But what we're seeing is there's a lot of copycats, but nobody's been yet able to make.
A product that has the same.
Agronomic benefits that has the same quality and certainly has the same reputation.
10, plus years of of good results.
So far.
It's been very successful continues to be very successful nobody is really penetrated that market very much from us so were very positive going forward.
In terms of some of our other performance products. We continue to do market development as we've talked about before our aspire product is growing well.
It seems to be quite successful and particularly in certain markets like Brazil, and some of those markets it's been quite successful.
And we're continuing to find opportunities to.
Modify and work on potash and phosphate.
<unk> products that can really change the market.
There are no further questions at this time now I'll turn the call back over to Jack.
Closing remarks.
Well I know you folks have all had a very busy morning of listening to fertilizer companies. So thank you very much for your participation and let me end by saying.
Here at mosaic, we have just completed a very strong quarter.
As I look forward I see that momentum continuing through quarter four of 2021 and well into 2022 now.
Now clearly strong fertilizer and agriculture markets are providing some pretty good tailwind for us, but we're also realizing the bottom line benefit of our own work and the long term, we are doing to grow our business and to transform our cost structure.
We expect to continue to build momentum as we finish the year and well into 2022 as I say.
And we will maintain our cost and capital discipline throughout so with that thanks.
For joining us and please have a great safe day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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