Q4 2022 Mosaic Co Earnings Call
Good morning, and welcome to the mosaic company's fourth quarter and full year 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 Massoud, Vice President of Investor Relations and financial planning and analysis of the Mosaic company. Mr. Masoud you may begin.
Thank you and welcome to our fourth quarter and full year 2022 earnings call.
Opening comments will be provided by a shocker work President and Chief Executive Officer, followed by a fireside chat and then open Q&A.
Clint Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang Senior Vice President 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 published yesterday and in our reports filed with the Securities and Exchange Commission.
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 John .
Good morning, Thank you for joining our full year 2022 earnings call Mosaiq had a record year in 2022, delivering revenues of $19 billion adjusted EBITDA of $6 $2 billion and adjusted earnings per share of $11.01 in 2022 we reached seven.
Oh operational milestones that allowed us to benefit from strong prices.
K three reached its initial capacity of $5 5 million tonnes in Brazil, we grew our distribution market share from 16% to 18% in North America in phosphates performance products represented 43% of total sales volumes.
And now we've begun to look at expanding our micro essentials capacity further, which we will discuss later.
These efforts are driving strong free cash flow generation, which allowed us to return significant capital to shareholders in 2022.
While also strengthening our balance sheet.
Over the last 12 months, we've repurchased $1.7 billion worth of shares outstanding. If we include the fourth quarter of 2021, we bought back more than 10% of the shares outstanding or roughly 40 million shares. In addition to share repurchases. We've also paid investors nearly 200 million.
And dividends are a regular dividend now stands at 80 cents per share up from <unk> 60 per share the prior year.
And on the balance sheet, we met our long term debt reduction target of $1 billion with the retirement of $550 million of long term debt in November .
Before diving into our business further I'd like to briefly discuss broader agriculture, and fertilizer markets AG market fundamentals remain very constructive with December corn near $6 per bushel in November beans, near $14. A bushel. This reflects ongoing global food security concerns at a <unk>.
Of disappointing production global stocks to use ratios are a 25 year lows and remain under pressure because of elevated risks the threatened output in 2023.
The World continues to watch the war in Ukraine, we have consulted with top military and foreign policy leaders, who share our concern that the conflict seems unlikely to be resolved in the near term and will have long lasting impacts, particularly in the production of key crops like wheat and sunflowers.
Which is a source of significant amount of the worlds edible oils.
Europe , we believe the Usda's latest estimate for Argentinean production appears optimistic as drought conditions. During the growing season suggest yields will disappoint in Brazil weather has delayed the planting of suffering of corn, which could pressure the record crop that many are forecasting around.
The world, we still see fertilizer shortages in many key agricultural markets. Despite some major markets being well supplied however, the overall shortage still threatens total production and this will underpin global crop prices for some time.
Now, let's focus on the fertilizer markets the sharp spike in nutrient prices in the first half of last year resulted in growers aggressively mining their soils as we enter 2023 phosphate and potash prices are now half of what they were at the peak.
With crop price is still very strong farmer affordability for nutrients has improved significantly and is now back to the levels seen in 2020 and 2021.
This suggests a strong rebound in demand as growers seek to maximize yields with sufficient fertilization.
The World is still short of potash certain markets are seeing more readily available supply, but this means other markets are not able to get what they need.
Belorussian supply remains constrained because of the ongoing sanctions.
We believe Belarus galleys exports were down about 8 million tons in 2022, and we expect only modest recovery in 2023 with total exports of around six to 7 million tons or half of their pre sanctioned export volumes.
The limited product Belarus has been able to get out of the country.
<unk> has been aggressively marketed over the seasonally slow winter and we've seen similar actions from some Russian producers.
This is driving recent weakness in prices, but we believe the phenomena is temporary and will reverse as spring demand ramps up.
In phosphates, China remains committed to the structural shift impacting where it sends its phosphoric acid.
In addition to shutting down production for environmental reasons.
<unk> portion of phosphoric acid is now being directed to industrial uses including the battery markets roughly 1 million tons of finished fertilizer equivalent was diverted to the battery market in 2022, and we think that will continue to grow rapidly over the next few years as additional battery.
<unk> is out of.
This suggests China's exports of phosphate fertilizers will continue to be down significantly as restrictions extend into 2023.
Inventory levels in our key markets for both phosphates and potash have declined considerably from the elevated levels observed in the second half of last year.
Grower demand across the Americas has been very strong because of favorable affordability, but retailers have been hesitant to replenish inventories because of the volatility in global prices, especially in potash with the aggressive off season marketing from the Russians and the Belo Russians U S spring demand is ramping up over.
The next coming weeks and we believe we have reached a bottom in potash prices.
In Brazil sentiment has improved inventories of work their way down to much more normalized level for both potash and phosphates as growers take advantage of a much more attractive BARDA ratios.
We estimate fertilizer shipments will total 46 million tons in 2023.
More than 10% from last year, and roughly 35% of those expected shipments have already been contracted and India phosphate inventories remain very low even after a year of elevated imports as most of the product went straight to the ground.
Government subsidies for the coming fertilizer year will determine whether India will be able to attract the nutrients it needs to meet its food security concerns.
Southeast Asia potash has become much more affordable for palm oil producers as well, which should drive demand recovery globally, we're seeing very good farmer economics, and depleted inventories that suggest strong demand for phosphates and potash in 'twenty two 'twenty three.
Given this landscape, we believe our business is well positioned to benefit from the market's recovery in phosphates lingering issues from hurricane impacted our operations during the fourth quarter for longer than originally expected, but Florida operations returned to normal operating levels earlier this month.
We now believe we've moved past the operational issues that impacted output and are dedicating resources to fixing key components in our production.
At Bartow, we are upgrading our sulfuric acid production facilities. Following the recent production stops we saw after hurricane in and up for Stena, We've improved operations at our ammonia plant and saw a significant increase in the amount of ammonia produced from our plant during the fourth quarter.
Florida production has returned to normal operating rates during the first quarter. We expect total shipments of one seven to $1 9 million tonnes with realized pricing of 625 to $675 per ton.
We expect stripping margins will remain relatively stable quarter over quarter as lower raw material prices offset lower finished product prices.
In our potash business slower demand led us to temporarily stopped production at our Kalonzo mine, but we think the current market situation is temporary and expect to restart operations at Culloden say within the first half of 2023.
At Astro hazy, the 12th Miner is being commissioned and the 13th miner is expected to be in service before the end of the year. When that's done it will add at least 1 million tons of additional annual capacity at one of the most efficient mines in the world in.
In the first quarter, we expect sales of 1.8 to 2 million tons with realized MLP prices at the mine of 425 to $475 per ton.
<unk> had its best year since we purchased the business in 2018 with adjusted EBITDA of $1 billion in 2022, despite volatility in the second half of the year fourth quarter results reflect the sharp reversal of commodity prices from the highs of the first half of the year.
<unk>, which negatively impacted both the production and the distribution margins, but for the full year, our distribution margins averaged $36 per ton, which is right in the range of 30 to $40 per ton that we would expect.
First quarter distribution margins will be similar to fourth quarter as higher inventory is worked through but for the full year, we do expect distribution margins to be back within our normal range.
As we think about the evolution of our business, we continue to execute our high returning investments while returning capital to shareholders in phosphates, we've begun expansion of our micro essentials offering by adding capacity at our river view facility.
The project is expected to be completed by the end of the year upon completion about 50% of our North American phosphate business will be sales of value added performance products. This is not an expensive project total budget is less than $40 million with a payback period of less than two years.
We're also building a test planned for purified phosphoric acid production in North America to verify final design plans for a commercial operation. This is the next step in our shift away from commodity fertilizers and opens up new markets like food production and batteries.
We're also exploring using the plants byproducts to produce and pks.
In Brazil, we continue to grow our distribution business.
While our footprint is already large there are still areas, where we see opportunities to expand we've begun construction of a 1 million ton blending and distribution facility at Pollo raunchy in the fast growing north with access to very attractive rail infrastructure returns of about 20% on an expected 80 million dollar budget.
Make this another example of highly attractive modest investments.
We're also monetizing past investments in January we sold our streams on resort for $160 million, because we could realize appealing value for a noncore asset.
Our joint venture in Saudi Arabia is also performing well in 2022 mosaics equity earnings from the joint venture totaled $195 million, which is about a quarter of our initial investment.
This year they plan to reduce debt by $800 million, they've also distributed $100 million in dividends to investors our proportional share of $25 million was received this month.
Finally, I want to reiterate that we remain committed to our approach to balance sheet management and shareholder capital returns.
November we retired $550 million in long term debt and this allowed us to meet our commitment of reducing long term debt by $1 billion.
As we look at our balance sheet today, we believe we are well positioned for the long term Sim.
Similar to last year, we plan to return substantially all of our free cash flow to shareholders in 2023 through a combination of share repurchases and dividends.
Since September of 2021 we bought back $2.2 billion in shares and we continue to see great value in our shares.
To emphasize that point, we plan to proceed with a 300 million dollar accelerated share repurchase program in the first quarter.
We've also grown our regular dividend to <unk> 80 per share and were well positioned to consider further growth, especially with our reduced share count. In addition to the regular common dividend. Our board of directors has approved a special dividend of 25 cents per share to be paid out on March 30th to shareholders of record on March 15.
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Given our strong cash flow combined with the proceeds of asset sales. Our board approved this payout as a supplement to our ongoing share repurchases.
Before we go on to Q&A allow me to summarize mosaic delivered record results in 2022, and we expect favorable dynamics to continue in 'twenty two 'twenty three.
The World is short global grains, and oilseeds. So farmers are incentive to maximize yields we expect this to drive strong fertilizer demand in our business is well positioned to meet that demand through our existing assets and exciting new growth opportunities.
With the strong cash flows that these provide we're returning significant capital to shareholders through dividends and share repurchases with that I'd like to now move on to the Q&A portion of the call.
Thanks, John before we move on to the light portion of this 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.
Could you provide a little more color on the potash market and why we expect colons they will need to be restarted in the first half of 2023.
Thanks, Paul let me start by saying, we've had a year of low potash usage, which means soil levels are depleted and farmers will need to add potash to the soil to ensure reasonable yields this year.
So growers are seeing very attractive economics, and they're acting on it.
Seeing things like our largest channel customer in North America has already got 60% of their farmers demand is committed for spring, which is higher than most normal years. So as we move into spring. Our expectation is farmer demand is going to be good but everybody is waiting for the last moment they don't want to.
With the price risk so while we expect a very good season in North America, and we're already seeing a good season in Brazil, we do expect people to wait as long as they feel they can but once it moves we expect it to move fairly well overall, we do see the potash market is being limited.
<unk> production, so while demand will be normal we expect Russia will be exporting less than what they have in the past probably a million and a half to plus million tons in Belarus will probably export six to 7 million tons, which is half of what they did pre sanctioned.
No.
We think the situation today of the standoff is temporary and it will start moving and when it starts moving we expect we will have to run hard to supply the market. Jenny do you want to just give us a little bit of a highlight of where the overall SMB is for potash right now.
Sure John as you mentioned.
Last year, it declined by 16% driven by the supply constraints.
This year was.
Very constructive farm economics in a market like North America, and South America, We believe farmers have all the incentive to go back to apply potash on the field to maximize their yield.
Much like China, and India. The government they are concerned to afford the security and therefore, there are a lot of local policies to support the farmers to maximize their production. So that we actually have St potash demand increase in China. We believe this trend is going to continue so over.
In 2023, we expect the demand to rebound globally, but theres no way to have it.
Recovery back to 2020, you want just because of the supply constraints. We are seeing five to 6 million tons a supply shortage in this market.
Chuck mosaic for those lunches gross margin dropped significantly in the fourth quarter, what drove that margin compression and how should investors think about margins for the business in 2023.
Thanks, Paul now if we look at the second half of 2022. It reflects a reversal in prices from the first half of the year.
This impacted both our distribution and our production business in our production business. We are now working our way through high cost raw materials, such as sulfur and ammonia as those move through the system, we expect our margins to get more normalized after the first quarter in.
Fusion high cost inventory is now working its way through the system now none of this should have come as much of a surprise because prices were moving up in the first half and coming back down in the second half of the year. So in the first half of the year, we made higher distribution margins and in the second half of the year.
Those reversed as we were selling higher priced inventory into the market. If we look at it over a whole year, both our production business and our distribution business did very well and overall 22 was a very successful year and a record year for the fertilizer onto his business.
Once we get past the first quarter distribution margins should be in line with our historical expectations of 30 to $40 per ton.
And our production margins will revert to normal stripping margins as well once we work through the high cost raw materials.
Jacques how should investors think about our production volumes over the next year and what types of capital projects as mosaic initiating to support reliability.
Thank you first of all let me say the last couple of years, there's been some extraordinary circumstances that have impacted our production, particularly in our phosphate business in our Brazil businesses.
First sulfur shortages coming out of the Gulf of Mexico has hurt us at the start of last year refinery shutdowns Covid transportation limitations at the start of last year, and then of course, a couple of big Hurricanes, one that hit Louisiana and the other one last year, which had directly onto our.
Operations here in Florida.
Now what we saw from those was damage that probably lingered longer than we would've liked because of the condition of some of our plants.
So what are we doing to improve that we're looking at how do we fortify our plants to make them more resilient to this type of occurrence.
And some of that means we've replaced a bunch of our converters and sulphuric acid. Our boilers are economizer is et cetera.
In Brazil, we're building a new sulfur tank, new phosphoric acid tanks are being overhauled.
So we're doing a lot of work to really fortify and reinforce the resilience of these plants, so where do we expect these to go what we've seen already is for instance, where we've done the repair work at Faustina in Louisiana more than 40% of our ammonia last quarter was supplied.
From Faustino, which was the highest it's been in over a couple of years. So we think we're getting ahead of all of that now if I look forward what do I expect I expect that we will be running in that 85% to 90% of our 10-K value. So that would probably indicate somewhere in the range of seven five to 8 million tonnes in <unk>.
States and three and a half million tons in our Brazilian business.
This concludes the prerecorded portion of our call. It's now move on to the live Q&A operator.
Thank you we will now begin the live question and answer session.
Asked a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
From the question queue.
Please press Star then two.
Today in the interest of time, each caller will be limited to only one question.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you.
Just kind of following up on that.
You provided a journey, where global consumption of potash down 16% in 2022, and your estimates for Russia, and Belarus sound like down another 10% or down 10% from 2021 and this year. My question for you is does the world really not need.
70 million tonnes of potash or could there be.
And impact on global crop production this year as a result of the.
And or do you think there could be maybe a bit of a panic to meet farmer demand. This spring.
The just in time purchasing mentality.
Thanks, Steve This is Josh I'll start here and hand, it over to Jenny as you requested but let me say the world does need 70 plus million tons of potash.
We believe there is a real need and what we expect to see happen and what we have seen happen is continents like Africa actually going without a product that they really need. So we're actually shorting some regions of Africa parts of Asia, because they can't afford it and even some.
Central America. So the reality is if if there was more potash it would certainly find a home.
And obviously the price sensitivity would be different as it is today, we expect the major markets that can afford will.
Bid up the potash price and that will be what what drives that so I'm going to hand, it over to Jenny to just talk a little bit about that balance.
Sure. Thanks.
Thanks, Steve.
Steve to your question on what is the.
The impact with a significant demand of shipments reduction last year, we believe that was over 11 million tons versus the previous year.
We believe the impact to the yield in some of the market might be reflected on the yield for that year and in some markets like North America, and Brazil, where to farmers probably they have invested in a potash application in the previous year the property they were able to afford.
So reducing faithful, yes, but yes in a relative cart application rate. It just not really a good decisions for the farmers to maximize their yields and production. Therefore, we believe that.
Demand recovery or the demand for potash.
In this market.
Or are there. It's just the farmers have the incentive to maximize their production.
There are certain markets as I mentioned in the prerecorded.
The government are really supporting the farmers to use our potash in order to.
Secure therefore to secure a key and we believe that the government to support are going to continue as we are getting into 2020 suite lastly on the screen.
Bring demand what.
What we heard from our customers and also the growers on the ground Steve in North America in particular.
There's very clear desire are based on the affordability and the farm economics that the farmers to go back to apply potash, especially for those who skipped a season last year all cocky right.
We are at the stage that the farmers' needs to engage with their retailers and then the retailers to cover the last part of the buying from us and we see that just happened in fact this week, we are seeing increasing.
In the south part of the U S as the feedstock it so we feel.
So confident that demand is going to recover off of potash and we still believe we used a significant constraint on supply and that the price will stay at a healthy level. Although it is just a much more moderated from last year.
Yeah, Okay I'm just luck.
Just let me add this Steve as well because you asked the question of clumsy.
One of the reasons, we believe colons, they will likely be needed in the first half of the year is as that demand comes back we think there's a good case for for the restart of clumsy. So it is in hot standby. The labor is there everybody is ready now if we don't need it it won't come up but.
We do need it it will come and we expect that might be the that is the likely cases, we see it.
The next question comes from P. J <unk> with Citi. Please go ahead.
Yes, John I think you mentioned that $1 million.
Tonic went under a fertilizer.
It's going into the battery market is that that be component that youre talking about is.
Is that.
And.
Now.
Let's see battery goes in China, and maybe in the future or other parts of the world.
What are your expectations, there and do you have any product that goes into that market.
Yeah. Thanks P J.
Just checking my numbers to make sure I have this right, but so yes, you're you're <unk>.
Equivalent C is correct, where we're seeing are we saw last year about half a million tons of purified phosphoric acid be redirected from fertilizers too.
To batteries now that is equivalent to about a million tons of DAP and what we're seeing in that market. What it was last year at least a growth of virtually doubling over one year. So we've gone from a 500000 equivalents to 1 million equivalents.
Even if that goes to a million and a half equivalent to 2 million equivalent where we're going to see a heck of a lot of.
Displaced phosphates are not getting out of China. So that's the reason we feel fairly confident that R. R.
Expectation for exports is.
It is reasonable.
In terms of our own we are not supplying any of that market. At this stage. We are in the process of doing a.
Pilot study now we've done the.
Tabletop work and we're now doing a pilot plant.
To get the design criteria and the costing for our own purified phosphoric acid and I would expect to be saying more about that in the next six months too.
So and we'll be talking about making an economic decision after that.
The next question comes from Christopher Parkinson with Mizuho. Please go ahead.
Thank you so much.
You have a helpful outlined on slide 10, just just given the sensitivities to that MLP. So on and so forth can you speak to the potential year on year benefits from.
From all three of your sources of ammonia as well as the.
The average sulfur price the way you see that trade in the first half.
Any color on that as it pertains to GAAP strip margins. Thank you so much.
Alright, Thanks, Chris I think what you're asking is if I've got this right is how is the stripping margin sensitivity to.
Input prices if you will.
And what we expect for the year is I think what we're seeing is we're seeing an increase in refined refinery activity, which is leading to a better supply of sulfur and probably.
Making the sulfur market, a little looser, but if if DAP demand goes up a lot that could tighten again, but again that sort of sets itself out with price and then on ammonia you know what we're seeing is a big decline in the price of natural gas in Europe and that price of natural gas of course is driving down.
The price of natural gas here in the U S and also driving down the price of our nitrogen inputs. So our expectation is that that will continue and then flatten.
So we will continue to decrease for a while and then it's probably getting close to flattening now where you've got I think urea prices are down and not 300 dollar range I can't really go that much lower than that or you'll start seeing production slow down again, so we expect that to happen and we expect that.
Over the year stripping margins are actually going to be quite flat for us in other words, the any drop in price will be met because of a drop in raw materials and vice versa.
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, yes. Thank you good morning, everyone, maybe Jeff just to clarify that that last point on phosphate stripping margins. So is the implication then that if you're able.
I think I heard seven five to 8 million tons.
Our product.
23 of that would be the current kind of plan.
As you as you sit here today.
Flat stripping margin is that the EBIT that you think your EBITDA is growing.
In phosphate.
And then the.
The second question I had was just in front of us on day one of them.
A clarification on the.
The drivers in the fourth.
In the first quarter.
How just that.
Weakness in margins between the distribution in the hole and.
Shrimp phosphate production.
Similarly, both businesses will look similar from a margin perspective in the first quarter before normalizing thereafter, I want to make sure I heard that right.
Yeah, Okay, so I'll answer them.
The first one here, which was sorry, I just got a re.
Oh, Yeah, our volume our volume I think is that's not an unreasonable expectation for volume that was the question was in.
With respect to what our production capabilities worse. So I will qualify that and say that are you know are we always are driven by what is the on the ground demand for our product and I'm not necessarily what our production capabilities are.
So there could be a gap between what our production capabilities our in our sales.
But that'll depend likely this year, we expect for both potash and phosphate demand will be good. So we expect to sell most of what we make so that's not an unreasonable assumption.
In terms of the pricing yeah, our expectation is that as as the season gets moving both phosphates and potash prices should.
Move up at least somewhat and I think in the case of potash it could move up a lot, but certainly in phosphates, but we expect that phosphates will kind of balance off with a relatively flat stripping margin. If you will so.
That's that's that's our basic prediction of where where that would go in terms of Brazil.
I would say that both the production business and the distribution business have been equally impacted one by rising raw material cost and the other by just the timing of sales versus purchases of third party material. So with that in mind, you can think of it as.
Returning back to more normalized level after quarter one.
The next question comes from Richard Garcetti Arena with Wells Fargo. Please go ahead.
Great. Thank you.
Just wanted to touch on the plans to restart clause that I guess.
When you look at yes.
And where we were a year ago, when you were planning to expand.
Further you know when you when you start off I guess, how long will take you to get back to that I guess $1 3 million.
Run rate initially when it was shot and then.
How are you thinking about you know moving forward.
In terms of expanding that capacity.
Is it probably any more of a 'twenty four event you know assuming we have demand recover or where is that on hold indefinitely until the market recovers.
Yeah. Thanks, Richard I look the way I'd look at Kalana Zee is.
So when we we expected the volumes would continue at the rate they were in lets call. It the middle of the year to the first half of the year.
That slowed down significantly in the third and fourth quarter, which was.
Less than what we would expect so reasonably we.
Shut down plants like now like I said earlier, we shut it down we still have the employees, we still have everything ready to go so it doesn't take much to restart.
But what's happened in the meantime that has to be considered is we've added since that time and because of the slow down we've been able to add two new miners at Astor hazy. So very soon after hazy will have an incremental capacity of 1 million tonnes. So if you add the 1.3 ish million ton run rate of <unk>.
<unk>, plus 1 million tonnes of extra hazy.
It doesn't seem to me that we're going to need the second mill at Colons. They so I would say that generally that would be on hold.
And then in a matter of fact I think.
The longer the demand weights are the later that colons, they would need could be down because of extra hazy, taking up the slack.
The next question comes from Vincent Andrews with Morgan Stanley . Please go ahead.
Thank you and good morning, everyone.
Could you just talk about how you sort of view the shape of the year volume metrically in terms of seasonality and weather and as we get after the U S spring season, which presumably is going to be quite strong do you anticipate the supply chain sort of.
Entering a restocking phase or do you think they're going to want to have empty bins and theres going to have to be you know summer fill and all and all that.
And I'm just curious because it seems like everybody's running hand to mouth right now and I just can't tell whether you're sort of assuming that this is the end of hand to mouth as we get into spring and then we go back to maybe sort of the supply chain, having normal levels of inventory through the year. So what are your thoughts there.
Thanks, Vince and look.
I think the.
But right now with the volatility in front of people people are very concerned with waiting very long. If you will so everything is always just in time, but of course, the dealers and our customers have to.
Balance that with the need to make sure they get the product they need in time for season. So that's always the balance my expectation and what we Jenny and I were at the fertilizer Institute meeting a week or two ago and in almost every customer we're still hearing we would like to have.
[noise] product in position for the start of the season, we're not going to refill until we need it and then we want to end the season empty. So that's our expectation that's what they'll do but that also means that the summer fill program should be strong here in North America.
In Brazil, I think the because of the long lead time for everything it'll be a little different than that and I think the Brazil market will be more stable.
Throughout the year, and we'll see the normal pattern of third quarter being our strongest quarter and like we've said here, even though the frito season, we're starting to see some pretty strong demand signals at least so we think that will continue we think third quarter will be pretty normal with a with a.
The U S Bill and and then the one you've got to consider is at some point, we need to see and we expect to see Central America, China, India.
Asia, you know the the potash going to the Indonesia, Malaysia, we expect all of that has to ramp up because they've got a year, where they just haven't used.
The products they need so so you know even if theyre not refilling.
Are they they're going to have to buy.
The next question comes from Edlin Rodriguez with Credit Suisse. Please go ahead.
Thank you good morning, guys.
So quick question on walnuts affordability.
It has improved quite a bit as fertilizer prices declined over the past several months. So that's good for the farmers.
But what's good for you useful fertilizer prices to start moving higher.
But if they do doesn't that swing back the affordable affordability issue again and so my question is like how do you try to balance that delicate lot.
Yes.
Yes Edwin.
This is a this is a big challenge for us and that we sit in a global commodity market.
And.
While we try to make sure that the.
The spikes in the troughs are.
Reasonable and the farmer economics stay good what you see and what we saw last year and the start of the year was panic buying if you will so everybody was buying they were very worried about getting their product and then the then the farmer said well that's awfully expensive and recognized last year the farmer economics work.
Bad so the psychological piece took a toll.
My fear of this year is actually somewhat what you said, which is people wait too.
Rush to get your product and suddenly there's another price spike that does hurt product hurt farmer affordability to the point, where theyre resistant to buying fertilizer again, but I will say one year you get away with it the second year, we're going to start to see.
Yield drops and if you start to see yield drops youre going to see.
So as for the underlying agricultural commodities so I.
I think it's really self correcting this year, which is.
If they don't use the product yield.
All of these will go up.
Which is going to drive the demand so I think yeah.
You can't control it hopefully people buy early enough and we get through in a fairly rational way.
And farmer affordability stays reasonable.
The next question comes from Josh Spector with UBS. Please go ahead.
Yeah, Hi, Thanks for taking my question I just wanted to follow up on an earlier point around I guess similar question in terms of potash affordability, but maybe specifically with the markets that you could have a more price sensitive when you talk about Africa Asia et cetera are we at a point, where that's not an issue today and youre going to.
Our expected buying to return.
And is there a range of prices of about $5800 a ton that's still going to be a point, where it's attractive for that region to buy or are we still at the point where that still questionable.
Yeah. Thanks, Josh.
I think we're as we look around the world It really depends on where you're where you're looking.
Look if you're buying fertilizers for and the vast majority of fertilizer is used for big crops and export crops. So if you are selling your crop into an international market.
Where you can get the international price.
Then you're fine and the demand will be there. So if you think about North America most of South America.
Europe .
Et cetera.
That's all fine if you think about Africa the problem in Africa, and the reason I would say no. It's not the case they still can't afford it in Africa is because they're buying for selling into an international market. They are buying for subsistence farm farming to feed themselves so whether.
Crop prices are high or not is almost irrelevant because it's how much yeah.
And to the problem.
Oh.
And that's where the supply gap ends up.
Being most acute and you know we've heard it from for instance, the U S State Department, which says that parts of Africa now moving from hunger into acute.
What do you call it.
From from hunger to starvation basically so in Asia, yes, they'll be able to afford it I think.
But if you get to the poorest parts of the World know now does that affect the overall market not really because those are not big users in the first place but.
That's probably the most tragic part of this whole thing.
The next question is from Jacob bout with CIBC. Please go ahead.
Good morning.
Wanted to go back to that discussion and Collins.
Nestor hazy.
Gentlemen, mistaken extra hazy as your lowest cost lowest cost potash mine by far.
Just.
Why wouldn't the next incremental ton, becoming from <unk> is there anything that we should be thinking about from a mellow hoist perspective.
We're bringing on incremental capacity.
Yeah, Thanks, Jacob and good to have you back on the call.
Yeah. Your comments are exactly correct Esther hazy is by far our cheapest or at least expensive to operate mine.
And you know you can think about this as each new minor that comes in it gives us approximately 400 ish thousand tons of new capacity and there is no limit as we see it we expect no limit on the hoist and we will be a plant limited at about the one.
Tons of incremental capacity that we've talked about bringing on so we'll be plant limited.
By you know, let's call it the middle to the end of this year.
And at that stage yesterday, hazy will maximize tons for master hazy first.
And.
Only use.
Then bell plane and unused colons as required.
The next question comes from Andrew Wong with RBC capital markets. Please go ahead.
Hey, good morning, Thanks for taking my question.
Wanted to go back to Atlas.
We've seen a couple of <unk>.
The project sponsors in the U S I'm kind of curious what's new on the domestic allergy opportunity.
Maybe there's a little bit early given you're doing some pilot testing to hear about it.
I appreciate any initial thoughts like if you wanted to produce.
Terrified fault that are for batteries.
Sorry for that to happen.
I think that with the current wrong that they have or do you think.
Type of Voc, or what kind of offerings, which you need to do to your personal plans today, and what kind of cost with that in the ballpark.
So thanks, Andrew Let me say, we we've been in.
The testing phase and I can tell you fairly definitively that we are capable of making the grades of a purified.
Purified phosphoric acid.
Required for batteries and as you said, there's a number of L. F P lithium.
Iron phosphate plants being talked about in the U S. Here.
And you know we're in discussion with some of those and obviously theres non disclosures for each of those sets of discussions so I won't talk about specifics, but I can tell you. There is a huge desire amongst those battery manufacturers to have won a shorter supply chain I E. A more stable supply chain out of.
The U S and secondly.
Lot of these subsidies and stuff require that the U S content to be there. So there's a there's a number of reasons why the market at least is very interested in that and what we're doing now in conjunction with doing the pilot work on this which is going to give us a design criteria tell us.
Help us define what the costs of both capital and operating will be but at the same time, we're doing market studies to understand what the what the final.
Size of this market could be here in North America in particular.
But remember as we think about purified phosphoric acid. There's also the.
Other industrial uses and food and everything else. So this could be a quite a useful branch for us to de commoditize to some extent.
The next question is from Jeff Zekauskas with J P. Morgan. Please go ahead.
Thanks very much.
With.
Fertilizer prices coming in.
Should.
Should working capital be roughly a source of 700.
<unk> million dollars in cash.
2023.
And secondly, with all of the different.
Ammonia facilities.
Are being proposed for the Gulf Coast.
Does it make sense in the future to buy more cost plus ammonia or are you happy with what you thought.
Yeah. Thanks, Jeff.
Let me hit the these.
These two in terms of.
I missed your first question, sorry, I got it.
Working capital Yeah, you're you're.
Depending on your assumptions clearly we are going to work our way through some product.
That is pretty high priced right now.
And depending on what you assume for the final pricing there is definitely going to be some cash coming into the system from working capital. So in other words, our working capital needs should go down with price obviously.
If I look at this year I think our working capital has been almost all due to the price of third party product.
So the volumes of our inventory hasn't changed but the value of that inventory has changed significantly and that's not for produce product that's for third party purchase product.
In terms of the ammonia I think you've yeah I hit that exactly on the head in terms of where we're going with our CF contract, which as you know.
We've said that.
This was an eight year contract with CF.
CF has given us notice they want to renegotiate it but if they had not done that we probably would have.
As well no I think it's worth hedging part of our.
Our needs for ammonia with a cost plus type contract, but maybe it won't be as high a volume as we've done in the past or it might be a different formula, but I think there's ways.
As in both ours and CFM CFM interest to re look at that contract and look at how we how we price our ammonia going forward, so and there's others like OCI and whatnot that have obviously come into that market. So we see ourselves in a pretty good bar.
Getting positioned for what we do going forward.
Yeah.
The last question comes from Joel Jackson with BMO capital markets. Please go ahead.
Hi, Josh Good morning, we'll see you next week.
I wanted to ask a bit more about Brazil, I understand some of your color around margins.
Obviously.
The big margin reduction.
Or I think you said, you expect margins and put us on pace to improve by the end of the year can you give a bit more color should we expect similar margins in Q1 and improving across the year and when you say back to what I think a historical or average margin, but I don't really know what that is anymore. Because you bought the ballet asset.
Exchanged margins went up with the higher commodity prices you get a lot of work to improve the assets you're out there some optimization synergies what is historical margins.
And for example.
Yes, Thanks, Joel So let me let me say historically, we were talking specifically about the distribution margins and if we look at the distribution margins that overtime. They really ended up somewhere in that 30 to $40 per ton now the production business obviously.
Much more.
Price of phosphate and potash dependent but if I look at the distribution business, that's not a bad place to start.
In terms of how we expect this to play out.
We are now buying product at today's price, but that product won't be sold until the.
The end of quarter one into quarter two so the product we're working our way through is the higher price product from quarter four that we were purchasing at that stage, because there's that big big lag in Brazil, let's call. It three months. So we do expect margins, particularly distribution margins to be similar to what they were in <unk>.
Four.
But.
I may have been misunderstood when I said, they were going to build over the year over the average of the year, we still expect them to be in that same range of 30 to $40. So that means they have to rebound fairly quickly and then we fully expect they will.
This concludes our question and answer session I would like to turn the conference back over to Jack O'brien for any closing remarks.
So thank you everyone for all your questions and your interest in us to conclude our call I'd just like to reiterate our key messages mosaic delivered record results in 2022, and we expect strong business conditions throughout 2023 farmers around the globe have strong incentives to match.
<unk> is their yield and fertilizer is in short supply in many parts of the world. So.
So we expect strong demand and mosaic is well positioned to deliver this for our customers.
We are also delivering for our shareholders by returning essentially all of our free cash flow through dividends and share repurchases. So with that thank you for joining our call and please have a safe and happy day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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