Q2 2022 Mosaic Co Earnings Call
Good morning, ladies and gentlemen, and welcome to the mosaic company's second quarter 2022 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 of Investor Relations and financial planning and analysis of the company.
The company Mr. <unk> you may begin.
Thank you and welcome to our second quarter 2022 earnings call opening comments will be provided by John <unk>, President and Chief Executive Officer, followed by a fireside chat as well as open Q&A.
Clint Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang Senior 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 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 <unk>.
Differ materially from those in the forward looking statements are included in our press release furnished yesterday.
Our reports filed with the Securities and Exchange Commission we.
We will also be presenting certain non-GAAP financial measures our press release and performance data also contain important information on these non-GAAP measures.
Now I'd like to turn the call over to Chuck.
Good morning, Thank you for joining our second quarter 2022 earnings discussion I hope you've had a chance to review our posted slides as well as our news release and performance data, which were made available on our website yesterday I will provide more additional context before we respond to questions. We received last night and then we'll conclude.
A live Q&A session.
Mosaic delivered second quarter net income of $1 billion and earnings per share of $2 85.
Adjusted earnings per share were $3 64.
Adjusted EBITDA was $2 billion free cash flow totaled $794 million, allowing us to return $667 million to shareholders during the second quarter, including $612 million of share repurchases, bringing the year to date buyback total.
Through June 30 to over $1 billion.
We've continued to buy back shares aggressively through July because we believe our portfolio positions us to continue driving strong results and generating significant cash flow through the rest of the year and into 2023.
As such mosaics board of directors has approved a new $2 billion share repurchase authorization to begin once the current one is exhausted later this year.
Before digging deeper into our business, let's discuss the broader agricultural markets.
There are several issues threatening global food security.
The war in Ukraine continues to create uncertainty around food supply from one of the world's most important crop producers. In addition, Europe and U S have experienced very high temperatures, while southern Brazil is showing signs of drought conditions and all of this is happening at a time of lower overall nutrient applications.
Because of constrained supply.
Each of these issues alone can have a material effect on global crop production, but together the risk to food security is significant.
This suggests global stock to use ratios, which are already near 20 year lows will remain under pressure.
Because of this we see a tight supply and demand scenario for global grains, and oilseeds, continuing through 2022 and into 2023.
As we focus on the potash and phosphate fertilizer markets. The fundamentals remain quite strong in potash. We continue to expect belorussian exports to be down 8 million tonnes. This year some of that will be mitigated by incremental supply from producers like mosaiq over the next 18 months, but that will not be enough.
After a race the deficit that we see lasting well into 2023 at least.
In phosphates, China has continued to restrict exports as it prioritizes domestic industrial and agricultural demand. We now believe full year phosphate exports from China could be down as much as 5 million tons from the prior year total of 11 5 million tonnes.
<unk> focus we believe global fertilizer demand in the first half of 2022 was down about 10% from the same period last year, which aligns with the shortfall we have seen in supply.
Grower sentiment has grown more cautious but supply constraints are supporting global prices and margins well above historical levels. A situation. We believe will continue at least through the rest of the year.
North America, and Brazil had been well supplied thus far in 'twenty, two but much of the rest of the world is continuing to see unfilled demand of both phosphates and potash as a result of limited supply.
In North America are compressed planting season macroeconomic headwinds and volatile crop prices impact spring season consumption.
First half applications were down from the record year in 2021, but remained in line with historic levels.
Looking forward, we expect normal demand leading up to fall application.
In Brazil, we saw first half demand in line with historic levels.
<unk> inventories were built in country by importers driven by concerns over supply availability stemming from geopolitical events.
<unk> customer Prepays, though indicate farmer demand will ramp up as the software season gets underway.
India, we've begun to see importers enter the market and take advantage of the recent price pullback in phosphates indium phosphate inventories are low and concerns over availability persist farmer demand for nutrients remains very strong and the government continues to indicate it will ensure adequate supply.
For domestic consumption and.
In China Port inventories of potash sit below 2 million tons and in southeast Asia shipments of potash appear below historic levels.
We see these dynamics impacting demand beyond 2022 as reduced application. This year will require a catch up in future years when supply availability improves.
As we look at our business in the context of today's global markets, we remain optimistic.
The investments we've made over the last decade have positioned us well for today's environment in Brazil, Our 2018 acquisition of the <unk> business has driven significant shareholder value.
Are you seeing EBITDA growth from less than $70 million in pro forma 2017 to $1 2 billion over the last 12 months.
And we've completely recapitalize the business, having now bought back all of the shares issued and repaid all of the borrowings to fund that deal.
Looking forward mosaic <unk> will continue to benefit from its market position as the country's largest producer and second largest distributor.
We are seeing inflation in our cost structure, but believe ongoing optimization should offset much of the impact in potash. We are realizing the benefits of case III one of the world's most efficient potash mines and we're actively working to optimize that asset we've reached our initial operating run rate target of five.
$5 5 million tons per year at the end of the first quarter and plan to continue our optimization of the complex with the addition of three new underground miners over the next year, resulting in an incremental 1 million tons of production capacity.
At <unk>, we've begun the process of restarting the second mill, which should expand output to 2 million tons per year by the second half of 2023.
In phosphates, we continued to benefit from our advantaged position in ammonia and we're now seeing an improvement in sulfur costs that should begin to flow through to our production costs. Later this year, we've seen prices moderate down to levels. We believe are sustainable for the rest of the year. As a result, we expect our stripping margins will remain well above.
<unk> historic levels.
Given the outlook for our business and the free cash flow, we expect to generate capital allocation remains a key focus for US first we continue to invest in our business for 2022 total capital expenditures remain unchanged at $1 3 billion.
We remain open to modest high returning projects and small bolt on acquisitions, especially in Brazil, but we are not interested in large scale greenfield projects.
We're committed to ensuring a strong balance sheet and plan to retire $550 million of long term debt in the second half of 2022, after which we see no need to further deleverage.
The third pillar of our strategy is returning capital to shareholders year to date, we've returned $1 $1 billion to shareholders through buybacks and dividends and we expect that pace to continue if not accelerate as the year progresses in total we expect to return essentially 100% of our free cash.
So after the commitments to the business and the balance sheet we've discussed.
Because we are approaching the end of our current authorization our board of directors approved a new authorization of $2 billion that begins once we've exhausted the current authorization at.
At today's valuation buying back our own shares provides better economics than any other use of cash. So we expect to take advantage of this as long as the opportunity remains.
We may also consider supplementing share repurchases with special dividends over time, depending on market conditions.
As we said in the past, we will not build cash on the balance sheet just for the sake of it.
Before going into Q&A allow me to summarize mosaic delivered very strong results in the second quarter, and we expect favorable dynamics as we continue through the year and into 2023.
We're continuing to help the world grow the food it needs by ensuring customer demands are met and we're returning significant capital to shareholders, while still investing in the business and strengthening our balance sheet.
Now with that I would like to move on to the Q&A portion of the call.
As we've done in past quarters, we'd like to address some of the most common questions. We received after we published our earnings materials last night.
Chuck just to start I think it might be helpful to provide an update on potash and phosphate supply constraints what are we seeing in the market today.
Thank you Paul let's start with potash, the belarussian and Russian exports together, we expect to be down by about 12 million tons. This year due to the effect of sanctions.
Now, we do expect recovery from both Russia, and Belarus and exports as we move into 2023.
But the world is going to need those tons, if demand snaps back in any way over the next year. So what do we see Russia, probably easier to come back theyre finding ways into the market, we're seeing their tons, particularly in countries like Brazil, India and Central America.
Mello Roos has had very little comeback, they're probably moving 100000 tonnes a month through to China by rail, but other than that we're seeing very little of Belorussian product in the market. So we expect between the two of them like I said at the start 12 million tonnes in phosphates. The biggest player of course is China.
In terms of export restrictions and those have been extended into the second half of the year our projection for Chinese exports. This year is down $2 seven ish million tons from 11 5 million tons. So we're seeing a good 5 million ton reduction of exports and again.
Because of the structural changes in China, we really don't expect them to come back in a big way even after the restrictions and so in 2023, we expect domestic AG and industrial demand.
<unk> continued to restrict Chinese exports.
Given the dynamics, we saw in the second quarter, we received several questions on the resiliency of potash and phosphate demand can you discuss how you see the second half playing out.
Let me start by saying because of the lack of supply in both phosphates and potash demand had to be rationed.
And what we saw was that rationing of demand meant lower use in different areas, but specifically lack of supply in some areas. So it's very regional how this played out in North America, particularly a compressed season because of weather in the spring led to very late and <unk>.
Limited ability to add fertilizer to the ground. So this combined with growers being willing to mine the soil because of the higher prices.
Globally led to lower use in the United States and Canada.
But remember any of this missed or curtailed application will have to be made up in the next couple of seasons. So we do expect a very robust normal fall application.
Now again caveat there being it will be late because the planting was late so the harvest will be late so it could cross quarters from the third quarter into the fourth quarter, but if I look at the overall second half of the year, we expect it to be very much in line with our normal.
A year here in the United States and in Canada.
We received a few questions on elevated inventory levels in Brazil, specifically around potash. How do you think this will affect new sales and how might this also impact pricing as we discussed Brazil, we have to start by understanding that 85% of fertilizer into Brazil is imported.
And at the start of the year, there was a huge concern with the constrained supply over whether or not the country could get the fertilizer it needed for its planting deployed.
To put it to a point the minister of Agriculture, and the president of the country. Both travel the world to ensure that imports would be available for Brazil, as such Brazil led pricing in the first half of the year for around the world now because of that imports were up about 30%.
Year over year in the first half so as we move into the second half of the year inventories are high.
And because inventories are high farmers believes they can differ but ultimately solid economics for both soybeans and second crop corn are going to drive the farmer to apply fertilizer and when they start applying we believe the ramp up of buying activity will consume the inventory.
And we will end the year at a normal place the best evidence from our perspective of this is the high prepay that we have seen in the last quarter, which indicates that the farmers are getting ready to buy the farmers are getting ready to apply there just waiting for the right time.
We received a few questions from analysts about our third quarter sales volume guidance, especially for phosphates can you provide some context around our expectations for both potash and phosphates over the next three months.
Yes. Thank you let me start by saying this is mostly a timing issue.
In North America, the late spring and late planting is going to lead to a late harvest now that means that the second half demand wireless should be in line with expectation could come in the fourth quarter, rather than the third quarter due to this delayed harvest. So while we expect a very normal second half.
Where exactly that plays out in terms of the timing is yet to be seen in Brazil planting for the second crop corn or soybeans won't happen until November December as such there is time for them to delay their purchases until the last minute now again in Brazil.
Just like North America, we expect normal application in the second half of the year, but as always with higher prices people are deferring the purchase as late as they can.
Good economics will mean that in both cases, we believe normal application will occur.
If you do note the higher range for the phosphate guidance does align with a more typical sales historically, but again, we could see those slipping into the fourth quarter.
Clint This question is for you.
The question on our working capital needs in the last few quarters, how do you see that playing out going forward.
Thanks, Paul and good morning, everyone.
As we look at working capital there are a number of dynamics to keep in mind.
First the overall market pricing levels and seasonality that impact our income statement also impact our balance sheet, particularly around working capital.
As we've seen the pricing levels in the overall market increase over the last couple of years that has caused an increase in our core working capital accounts of receivables inventories and payables. So those tend to follow directionally, what's happening with the overall pricing environment and again over the last couple of years as a.
Of that we've seen the overall working capital needs of the business increase now in addition to the impact of the pricing environment that we're operating and we also have the seasonality of our business that plays out.
And so you see some some meaningful changes from quarter to quarter based on which season were either in or entering into first quarter. We tend to see preparation for the spring season. So we typically see inventory build that we typically see our accruals and payables from the previous year get paid out and then.
As we move into the second quarter, we tend to see receivables build we tend to see other impacts of on working capital. So we can see as we move through the seasons. It certainly will play out in our working capital accounts, particularly the seasons in the in North America, and Brazil are two things I think are.
Good to focus on our order recall, particularly as it relates to Brazil. One is our growing distribution business in Brazil does tend to hold quite a bit of inventory, particularly as it moves into the season and then it tends to liquidate throughout the season. So that can be a driver of some of our overall working capital the other element of that Brazil.
<unk> business is around prepayments.
Prepayments tend to build in the first half of the year and then reverse out in the second half of the year just to give you a sense of order of magnitude first half of this year, we saw prepayments in Brazil increased by about $830 million again thats. Another factor thats influenced by the overall pricing environment, but again, we would.
To see the vast majority of that if not all of it reverse out in the back half of the year and specifically in the third quarter I would expect somewhere between 50% to 75% of that number too to reverse out of working capital. So again, just keep in mind as you look at our working capital overall pricing environment impacts it but also the seasonality.
<unk> of our underlying business.
That concludes the fireside chat portion of the call operator, let's open up the line to follow up questions.
Thank you. Thank you wish to ask questions. At this time, please signal by pressing star one on your telephone keypad.
And your telephone is switched off to allow your signal to reach our equipment have always friends on the phone I would indication your line is open.
Also please state your name before before posing your question and please limit yourself to one question and again it is star one to ask a question.
We will now take our first question Paul Your line is open.
Please go ahead.
Hi, Steve Byrne Bank of America.
Like to get your view on where do you take hurdles on things from here Jack.
Jacques you mentioned.
You are looking at potentially some small bolt ons down there.
Businesses are.
Largely looking at.
And can you also comment on how the gross margins in that business differ between product you produce versus product.
You buy and then redistribute do you do you see that split.
Changing going forward as perhaps you expand your capacities.
Okay. Thanks, Steve.
Look let me start by saying, probably as we look at Brazil, the northwest or northeast.
Kind of section of Brazil, as you go towards but not into the Amazon obviously.
It seems to be the area that's growing the fastest is growing probably at 10% plus per year.
We have plans to build a hub that would allow us to.
Be more participative in that region. So as that market grows that's one area, where we would expect to expand our distribution business.
And then in the areas of production, we've got plans for optimizing our existing operations.
We're looking at plans to expand and <unk>.
Extend the life of our potash.
Our facility down there because we think it is a niche area of work and supply.
So there's a number of opportunities we're looking at down there that we think are going to have very quick paybacks.
And relatively limited capital requirements.
In terms of the margins.
Clearly producer margins are better at this type of market then.
Then distribution margins, but on the other hand, the the benefit of our distribution business is that the margins stay very constant year on year.
What I'll say, though.
Not to be too explicit about our actual margin split is that.
Our best margins are seen for things like micro essentials, where we pick up the production margin in the U S. And then both the distribution and retail margin down in Brazil. So those margins are pretty fantastic and then the other place where the margins are really good is our production b to B business.
We sell it through our own distribution and we kept to capture both of those margins. So.
But overall I think our.
Right now our.
Two thirds of our earnings are probably being driven by the production business.
And we can now take our next question caller. Your line is open. Please go ahead.
Hi, Joel Jackson from BMO, just going up on the Brazil margin question or Furloughs answer your margin question, obviously margins have been all over the place the last 19 quarters in a rising price environment.
How should we see margin.
I'm assuming Martin.
We are seeing right now have to go down the inventory gains commodity prices can stay here forever.
Do you see the next couple of quarters, and then what would be kind of a mid cycle margin guidance to you.
To think about.
Yes.
Well, that's a pretty detailed question here, Joel and one which I would be making some pretty big forward looking statements.
Statements.
Look I think our the one thing to say is where we're expanding mostly has been in our.
Distribution business those margins have been pretty stable for for a long time.
And again.
Without getting into too many details of exactly where those sit but I don't think those are going to change mid cycle, a whole lot from where they are today. Obviously, we've had some positioning gains that have helped us.
But.
And those come and go a little bit, but I think our overall strategy of how we buy raw materials, including.
Ammonia or sorry, UN and others for our business.
Because we buy those fairly carefully I think we're going to continue to make being well positioned in that market.
In terms of mid cycle, though.
And our original.
Prospectus to buy the business, we talked about a $350 million a year and I would say.
<unk> the <unk>.
Benefits of our.
Integration and then the benefits of our.
Our changes since then I would argue that we've probably added at least $400 million to that business and we would be likely more likely and are in the $7 million to $800 million per year range mid cycle.
And we can take our next question no caller. Your line is open. Please go ahead.
Hi, Vincent Andrews from Morgan Stanley .
Morning, everyone.
Chuck just maybe just give us your latest thoughts on capital allocation, obviously, the $2 billion buyback, but you did also mention.
Potentially doing special dividends and so maybe you could just layer in how youre thinking about the.
The common dividend from here and what might cause you to do a special dividend and how large it could potentially be.
Sorry, I guess I got my Mic backwards. Thanks Vincent.
Yes, as we think about capital allocation really our thoughts on that have been reasonably consistent which we've made a commitment a longtime ago to pay the $5 50 down to make the $1 billion of payments, but once that is done.
We believe that is done we've got a very strong balance sheet. We're comfortable obviously, we have to do our capital and that brings us down to the question, you're asking which is.
How are we going to distribute the rest and I said just earlier, we expect to give that all back to shareholders. We don't see anything more enticing than our own business right. Now. So we expect that certainly at these types of share prices in our types of EBITDA to enter.
Prize value ratios.
We think our shares are very compelling and we will continue to buy those now.
If the price of our shares changes or the.
Business changes then we may make a decision to move towards some level of special dividends, but recognize that just says that we originally intended to have more of a balance.
Actual dividend would.
Support or be in favor of the long term holders, who don't intend to sell their shares so in some respects I want to see.
All in all of our shareholders and so that might be something they would like so that would be the reason for that in terms of.
Regular dividends.
We've made the decision that we would look at the regular dividend basically annually and so our thought was we would leave that till the end of the year, but look our share count is lower our debt level is lower so we have.
Less money going out for on a total on a dividend basis today than we had a year ago and obviously, we have less debt repayment to make so are less interest payments to make so I think all of that would go into our our dividend increases on a regular dividend plus to make sure that we're paying out what we.
We think is reasonable for the long term shareholder.
Thank you take our next question caller. Your line is open. Please go ahead.
Hi, This is Lucas Beaumont from UBS.
I also had a question on <unk>. So I just wanted to talk about the purchase nutrient volumes.
It was up modestly in the second quarter, but down a bit over 10% in the first half from last year, just given how strong demand is being in Brazil.
Just wondering if you could tell me why that purchase nutrient volumes. They were acquire and if you could give us your thoughts on how the second half is likely.
Greater shape out from a volume perspective.
Sorry can you repeat that last bit of that I missed.
Okay.
Volume.
Just nutrient volumes in the second half.
Please.
Well now we've lost you completely.
Lucas are you still there.
Yes, I can hear you can you guys hear me.
Okay. We can hear you again, yes, we lost you completely there you were breaking up and then we lost you completely I apologize profusely, but if you could husky.
Sorry, we're struggling with.
Probably my accent.
Thank you.
Okay.
And federal is that size with a purchase nutrient volumes they were down about 10% year on year in the first half.
I was just wondering why it wasn't strong given how strong Brazil Hussein.
And what Youre thinking for an outlook in the second half on Texas nutrient volumes. Thanks.
Okay.
Yes, Lucas I think I think that actually has a fairly simple.
Explanations, which is we as we have integrated our b to B business and our B to C business.
We've tried to focus on selling our b to b product through our own distribution sales system and so because of that.
That is an intercompany transfer and doesn't count towards.
We don't we try not double count the volume so I suspect what you're looking at there is although purchased nutrient volumes were down that's because they were replaced by internal volumes from our own beta b to B business. If you will of our production business.
And our next question caller. Your line is open. Please go ahead.
Hi.
Jack nutrients are supposed to be applied an optimal ratio is something called the liebig, Bob the minimum so with potash and nitrogen more constrained than phosphate.
Does that reduce demand for phosphate, even though phosphates less constrained people aren't going to apply as much because they can't get the nitrogen and potash.
Yes, sorry, I didn't pick up.
The name.
Can I get you to repeat your name.
Yes, no I'm, sorry, sorry, sorry, Oh, Hi, John Hi.
Hi, John Okay, I think I got your question.
So I think there's no question there will be a big deficit in some.
Markets, particularly like you say potash will be underutilized in a lot of markets, including Asia West Africa.
Europe , probably etcetera and likewise, so we'll nitrogen.
I don't know if that would stop people from using.
Or make people use less phosphate.
I suspect you would still try to use the right amount of the fertilizers.
I know that obviously, the optimum ratio is best but.
So I guess, it's like vitamins not having enough vitamin D. Wouldn't mean, you wouldn't want to have enough vitamin C. If you will so.
<unk>.
It is probably beyond my agronomic understanding to know if that would have on it.
A thing, but we're not looking at any kind of restricted sales because of others. The one thing I will acknowledge on that though is if the price of nitrogen gets so high that it takes up a lot of the budget that has historically been a problem for the other nutrients and.
Countries like India, where they tend to over over apply nitrogen and if it takes up a disproportionate amount of their budget. They could restrict other uses.
We will now take our next question caller. Your line is open. Please go ahead.
It's Adam Samuelson with Goldman Sachs.
Jack I was hoping to maybe come back to the phosphate business a little bit in.
I know you talked a bit earlier about kind of the volumes and improving in the back half, but more holistically.
What.
Would it take for your operating rates in your U S phosphate business to get back over 85%. They haven't been there in some time.
Just trying to hit.
Is it logistics issues in Florida, I am just trying to get a sense of.
There's a lot of under absorbed overhead and idled in turnaround costs that you're absorbing here.
Or maybe.
Leading to cost and margins not as robust as it could be.
Yes.
Yeah, Thanks, Adam look.
I saw that you had asked a question in your pre stuff and I was thinking about it a little bit.
If I look back the last couple of years, we've had a freeze in Texas that.
Restricted sulphur use which actually restricted our ability to run.
We had hurricane, Idaho, which knocked out power and in.
Louisiana for I think three or four weeks etsy.
Et cetera, and if I look at and then first quarter of this year. So we went into the first quarter of this year with low inventory in phosphates.
Then we had rail restrictions unbelievable rail restrictions and so while we've built up.
Inventory, it's been very difficult to move the product and hard to we've been low on sulfur now where high on sulfur.
But it's our turnaround quarter.
Just gone through and so now as we get there I am hoping that there is no external factors that continue to.
Push against our.
Southern U S location, if you will and that should be what it takes to get us back to normal there hasn't been any big internal things that have slowed us down it's been more of this.
Damage from the hurricane damage from the ice storms, and then or not damage story restrictions from the ice storms.
Logistics and actually earlier at the start of the 18 18 to 24 months, you've talked about actually constrained because of inventory.
But we had to shut down plants, but.
We are looking to more normal as we go forward.
And we'll take our next question now caller. Your line is open. Please go ahead.
Yes. Good morning. This is Michael <unk> from Cleveland Research and just wanted to talk a little bit about modern in your investment there and when we might.
You might see the trajectory of profitability increase are there any issues with.
Getting ammonia there and just overall.
For ammonia costs across the business in light of some of the European and Asia.
And curtailments.
Yes, Thanks, Michael.
In terms of Martin.
Second quarter equity earnings were about $34 million of sales.
Attributed to the business was 413000.
Tons.
While not quite up to what it is ultimately going to hit.
It is actually making a positive contribution to us which is good and helping us supply our Indian customers, which is also a.
Good thing, we want to see that going to our customers around the world. So overall.
They continue to have a ramp up plan, it's certainly been slower than we would have loved to see but.
That is what it is having said all that though our modern continues in this market, particularly modern continues to be highly advantaged.
Natural gas price than they are paying in the kingdom of $1.
Thank you.
That represents an unbelievable.
Sort of structural advantage to that operation and then the other one is a very low sulfur costs. So one would expect that modern right now would have a very low actual cost per ton.
Compared to the rest of the world and probably is now taking as places is the low cost producer.
In terms of ammonia availability, our ammonia availability I think that was the second part of your question has been actually unrestricted we have basically two thirds to 75% produced between ourselves and our contract with CF and then the rest that we're buying on the open market, which we have.
Long term agreements and contracts that tend to make that work quite well and I think if I look back to it our price for ammonia was in the high 500 range compared to a 200 plus on the market. So we're not only getting the ammonia we need but we're getting it at a very advantaged price.
We can now take our next question comes from your line is open. Please go ahead.
Hi, Andrew.
Andrew Wong from RBC.
So a similar question to Adams, but on federal is on days phosphate production.
Recall the business was impacted by some extended turnarounds last year.
But it looks like Q2 production was down versus Q1 and are there still any constraints.
In that part of the business and.
Are we setting up for a Q3 seasonal strength.
Which is typically what happens in Brazil.
And then just one follow up on.
Some of the corporate line items, there was a negative charge there in Q2.
Can you talk about that was it mostly inter segment sales and does that reverse in subsequent quarters.
I'll leave that one to Clinton that last piece to Clint, but I might need you might need to specify a little more which one youre talking about but let's talk about phosphate production in in Brazil I think.
Brazil.
Probably more than anywhere we've got out of sync with our turnarounds and some of our.
Some of our maintenance because of Covid.
And again these things take time to play out, but we had to delay and minimize a number of turnarounds and particularly the plants that were impacted the most were probably our Shaw plant.
There we had a couple of failures of equipment. There was we have the part sitting there, but because of restrictions of the communities put on us and others.
We put off the shut down until I think it was supposed to be the third quarter of this year and then we've had.
Breakdowns of that equipment and into <unk>, we had a couple of issues with respect to the.
Conveying systems and stuff and it's just been harder to get them fixed and longer to get them fixed, particularly in Brazil, and so theres been a bit of a hangover there in Brazil from that but again.
We look like we're already four strong third quarter and like you say, that's one we're going to need the production to meet market demands that are owed in that country.
And Andrew This is Clint I think to the second part of your question about what Youre seeing in the corporate segment I think the driver of that is.
Intercompany sales its profit and inventory and Thats typically happens when when one business unit makes it makes sales to another business unit, but.
But the final times haven't gone into a third party and we had about 300000 tons move in June moved from from phosphates down to <unk> and so I think I think thats, what youre seeing in the corporate segment, we do that so that as the results of the individual segments come together for the consolidated.
Number we need that.
Offset to get all the numbers right. So I think I think what youre seeing is an internal shipment.
That occurred in June and again that should.
Clear out as fertilizer entrees makes that sale.
Okay.
And we can now take our next question caller. Your line is open. Please go ahead.
Hi, This is Jeff zekauskas.
From Jpmorgan.
Two questions.
I didn't fully.
Understand your phosphate price guidance for the third quarter, you gave an explicit number for <unk>.
At Ash.
Secondly.
In your cash flows from financing activities.
If you exclude what you did in terms of debt pay down and share repurchase.
And dividend.
You had a negative 600.
$72 million outflow.
And the number isn't as negative for the year.
Just wondering when you net out all of those numbers.
2022.
What should they be and why aren't those numbers in cash.
Cash flow from operations.
Does the two questions.
Yes.
Okay. Thanks, Vincent I'm, sorry, Jeff sorry, sorry, Jeff.
One name off.
Jeff I'm going to let Clinton give the first one or is he still trying to figure out what exactly you are.
He's ready I'm going to let Glenn and then I'm going to come back and talk to you about the price forecast for phosphates.
Yes, Jeff I think I think what youre seeing.
Are some of the entries associated with some of the some of the short term financings that we have.
We we have not only inventory financing facilities that that we use seasonally to finance some of our working capital, but I think some of the other.
Entries that you may be seeing are related to some of the accounts receivable securitization facilities.
And those are.
Some of our working capital funding mechanisms that we use again through the seasons and one of the things in particular in the second quarter is.
As we look at the increase in customer prepayments, particularly down in Brazil.
Year to date as I mentioned, a little bit earlier year to date, that's up about $830 million and when we look at that that is a source of working capital financing.
To us and so as that cash comes in and that typically lands in your cash from operations line.
We use that cash to actually replace other sources of working capital financing like our inventory financing and our AAR financing and so as we.
Use that basically cost the interest free.
Working capital financing from customer pre pays to pay off some of those lines that were drawn earlier in the year. What youll see is a disconnect because the prepayments are in cash from operations paying down some of those short term lines are down and.
Financing and so what you will see also though in the back half of the year as those prepayments reverse out I think you'll probably start to see a draw off of some of those lines and probably see a reversal of what youre seeing through the second quarter. So happy to spend some more time with you and go through that in more detail offline, but I think thats, what youre seeing is.
Some of the replacing external third party financing with customer Prepays as those dollars come in and then I would expect kind of those dynamics to to reverse out in the back half of the year.
Okay. So Jeff let me talk a little bit about the phosphate price forecast.
We didn't mean to confuse in any way I think the challenge is again same thing it depends a little bit on when sales come in and at this stage I think we're only about 25% sold and priced for the for the quarter. So.
You know pretty early in the in the piece in terms of what we expect so.
I guess the way you could look at it as prices have retreated from where we were in the second quarter slightly moderated.
I think we're now at a stable range. So you can almost look at today's price if you take the.
The cost of freight from the todays published price you'd be pretty close to where we are what we're going to see for the quarter. So I think that would be the easiest way to look at it certainly I think pricing has come down a bit from quarter to moderated a little bit, but we expect it to stabilize about where we are in probably stay at about <unk>.
Where spot is right now.
For the quarter.
Yeah.
And as a reminder, the starwood. Thank you wish to ask a question.
We can take our next question caller. Your line is open. Please go ahead.
Hey, it's Chris <unk> from Mizuho.
A quick question just given the outlook for cash flow and certainly appreciate all of your comments about returning to shareholders, but just a quick question outside of some of that modest growth Capex Youre planning are there any other meaningful projects at Faustina uncle, Sam or anywhere that you are currently assessing to further improve reliability or things you've been.
Kind of looking at it for years that are now of interest or should we just stick with the.
Buyback into the potential for special dividends. Thank you.
Yes, Thanks, Chris.
Certainly, we're making sure in this stage that we're looking at those reliability projects I mean, I think we just put in a new reformer in Louisiana for the ammonia plant.
<unk>.
Over time, we will make a big difference in terms of the reliability capacity of that of that plant. We've mentioned in colon and say, we're going to start up the second mill, which has been idled for a couple of years, but these are all $50 million projects I think in potash we've got a.
Well as part of our K three the final part of our Q3 will be building a finishing off a.
Ah.
A compaction unit for that plant, which aligns the production with the needs for compacted product but.
And that so that's sort of where are.
Our needs have stayed basically constant despite the K three number coming down is because we are taking the opportunity to do some of these high return projects, particularly when at these kind of margins that payback is so short.
So whether you look at the CTV project, where we're going to extend the life of the are intending to spend extend the life and increase the production of our potash unit down there or increasing production of clumsy improving reliability at Louisiana all of those things we're doing but we expect with these prices they'll have a very.
Good payback and it doesn't compromise our intention to give back 100% of what remains to the shareholders.
We can take our next question caller. Your line is open. Please go ahead.
Hey, it's agile from BMO again, maybe a bit of a tricky sensitive question, but.
Interesting with the UN duties.
Excuse me investigation the other week.
Yeah.
Indicating that there wasn't any damage the U S in you and industry.
Subsidize Russian gas, but that wasn't what the termination wise in your own DAP map phosphate case.
Could there be any future ramifications on your own policy.
Due to the situation in the states.
Hey, Matt.
Well, yes, thanks Joel.
We have definitely looked at that we have had a.
We have had a second hearing.
Another hearing from the judge on this case and we'll probably know in a month or so if he will refer that back to the ITC.
But one has to look at this from the perspective of what are the difference. So the appeal has gone to the U S Court of International trade and then that goes back to the International Trade Commission to say was their original ruling was there any they have to have an actual.
Error in their ruling or something like that and so they might refer it back to the ITC to look.
Actually think that the <unk>.
Grueling and ours was fairly substantive and there's not that much question that the there was damage to our industry. So.
No from our perspective, we still think theres not too much risk in that.
And the whole thing and.
We'll have to see but our expectation that might get referred back to the ITC and the next.
Two to four months lets say and then from what I've understood as the ITC takes quite a while to even look at that so we won't really know anymore on that for a number of months, but our belief is that the.
The facts of each case is quite different the timing is also quite different if you remember we were in 2019, which was.
Very very they pushed the phosphate industry to the brink of.
Negative.
Margins, so a very different case, if you will so we're quite confident.
There are no further questions I would like to turn the call back to Jeff for closing remarks.
Okay. Thank you folks I know, it's been a long couple of hours of listening to companies for for you analysts. So I appreciate your time and your attention.
To conclude our call I'll call I'd, just like to reiterate just a couple of quick messages.
First of all we delivered excellent results in the second quarter.
And we expect the strong business conditions to continue well into 2023.
We remain committed to meeting our customers' needs and meeting our mission of helping the world grow the food it needs.
And at the same time, we think we can do that and be a great.
Provider for our shareholders and returned significant capital to our shareholders, even as we invest in our business and continue to strengthen our balance sheet. So with that thank you for joining our call and have a great safe day.
This concludes today's call. Thank you for your participation you may now disconnect.
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