Q2 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the most <unk> companies second quarter 2019 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 Laura Kiernan.
President Investor Relations of the mostly company Misc Agnes you may begin.
Thank you and welcome to our second quarter 2019 earnings call presenting today will be Joc O'rourke, President and Chief Executive Officer, and Clint Freeland Senior Vice President and Chief Financial Officer. We also have other members of the senior leadership team available to answer your questions. After our prepared remarks. The presentation slides we are using during the call are available on our website at mosaic co dot com.
We will be making forward looking statements. During this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties actual results may differ materially from projected results.
Factors that could cause actual results to differ materially from those in the forward looking statements are included in our press release issued this morning and in our reports filed with Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our first quarter press release and performance data attached as exhibits to today's form 8-K filings also contain important information on these non-GAAP measures.
Now I'd like to turn the call over to Joc.
Good morning, Thank you for joining our second quarter earnings discussion.
As you know the spring planting season in North America was challenging it was the wettest athleta seasons on record in fact, we believe U.S. farmers were prevented from planting at least 10 million acres.
We now have seen two consecutive application seasons negatively impacted by weather, which in turn has driven grain prices to multi year highs and incented farmers to make sure. They are prepared to take advantage of those prices in 2020.
Clearly these same events have also impacted our first half results and tempered our full year financial outlook.
Clint will give you the details to understand the factors that drove our second quarter earnings I will focus on the actions we're taking to adopt.
The progress, we're continuing to make across the business and our longer term outlook. Our key points today. Our first we expect the current north American inventories to be reduced sharply through an anticipated strong fall application season, and we see much stronger fundamentals for agriculture and fertilizer emerging in 2022nd our success in ramping up Esterhazy Kthree combined with our inventory position has given us the flexibility to curtail our highest cost potash mine and focus on our lowest cost operations. This action is expected to drive potash cost even lower in the second half of 2019, and say $40 million to $50 million in cash expenditures third we expect to have all our Brazilian phosphate mines running in August ahead of schedule and we are lowering the down related costs by 20 million from our previous estimate.
Whilst we've announced the permanent closure or plant city phosphates facility, which will improve our overall phosphate cost position and cash flow going forward. The transformation, we have driven across our business units has increased mosaics cross cycle potential and has allowed us increased flexibility to adapt to changing environments. The impact of our actions to increase our operating leverage is expected to coincide with improving market conditions, the north American crop, which received much less fertilizer than usual, we'll leave fields in serious need of nutrient replenishment.
At the same time higher grain prices will provide strong incentives for farmers to plant more acres and to maximize yields next spring.
Of course, North America is just one market demand remains strong in Brazil, where the farmers are seeking to maximize output in response to a favorable market conditions.
And as we move into their peak planting season.
In India. The monsoon is picking up and the recent government decision to leave phosphates subsidies unchanged is strongly positive for the long term demand picture.
In China.
Phosphate demand was down offsetting some of the strong growth elsewhere.
While the slower demand originally drove exports, we're now seeing phosphate exports declined as lower prices impact phosphate producer economics.
Well two days lower phosphate prices are challenging in the short term we believe they can accelerate the restructuring of the Chinese industry yearend 2019 represents a milestone with investment required for many producers to maintain environmental compliance and current lower prices are likely to prevent some of those investments. It is our belief that marginal producers will cease production as we move into 2020.
The larger Chinese producers have announced a coordinated curtailment of production, which we are closely watching now I will turn to our execution, which is driving important benefits across the organization.
I will start with potash.
Our new Esterhazy Kthree mine is performing exceptionally well we believe it will produce 400000 tonnes of potash in 2019 and will approach a million tons. In 2020. This incremental production at esterhazy helped to facilitate the decision to temporarily idle Collawn site.
And allows us to begin to realize the benefits of one of the most efficient mines in the world.
We continue to drive cash cost of production lower in the potash business in the second quarter of 2019, our cash cost of production, excluding brine fell to $69 per ton and we expect costs to continue to improve as operating rates increase.
With the savings related to an idle Colonsay mine, we expect these costs to fall to approximately $60 a ton in the fourth quarter that said kalonzo. They will remain in a position to deliver two and a half million pounds of annual surge capacity if necessary to meet market demand.
Our business in Brazil also continues to perform very well and we are seeing momentum for the second half of the year and beyond mosaic for launch is on track to achieve its $275 million synergy target ahead of schedule and we expect to drive significant transformational savings. After we complete the deal related synergy work.
In addition, we have made tremendous progress towards meeting the new mine tailings dam regulatory standard mosaic has completed the first phase of down remediation that but if you're a mine and has restarted mining at roughly 60% capacity. The mine is expected to resume full operations by the middle of August .
After completing remediation activities on a second down.
The company has also received an operating license for the B six down to their Shaw.
Which is expected to allow that mine to start operations. This month.
Our teams in Brazil have done remarkable work to get us to this point, reducing the expected impact by $20 million for the full year.
In the phosphates business, we're continuing to exert pressure on factors that we can control the transformation of our phosphates business is ongoing and it is driving significant operational and financial efficiencies, while simultaneously delivering excellent safety and environmental result to be clear our focus will remain on meeting the needs of our customers and maintaining our market position that will not change external factors have impacted our results in near term expectations and have led us to reduce our 2019 EBITDA guidance to 1.8 to 2 billion.
However, we've retained our keen focus on execution on controlling what is within our power our ability to improve efficiency lower cost and optimize assets has created significant operating leverage in our business.
Our outlook for the second half remains strong and we continue to expect broad strength in our markets and our business in 2020 and the years ahead now I'm going to turn it over to Clint to provide further detail.
Thank you Jack and good morning, everyone.
As noted earlier adjusted EBITDA and adjusted EPS for the second quarter totaled $349 million.12 per share respectively.
Solid results at the potash and fertilization Chase business units were offset by difficult quarter in phosphates potash adjusted EBITDA totaled $254 million for the quarter up 27% from $199 million last year as a modest reduction in sales volume, resulting from the weak spring fertilizer application season in North America was more than offset by much stronger margins mosaic for lunch as adjusted EBITDA totaled $38 million during the quarter compared to $60 million for the second quarter of 2018.
Results. This year include $36 million in nonrecurring cost to supplement rock in finished goods supply as our team worked to bring our Brazilian mine tailings dams into compliance with the new regulatory standards.
Except for that adjusted EBITDA would have been $74 million up 23%.
The phosphate segment generated adjusted EBITDA of $74 million during the quarter compared to $251 million in the same quarter last year.
Sales prices sales volume and mix.
Idle cost in raw material cost all pressured results. Additionally, equity earnings associated with our investment in modern flow through the phosphate segment and for the quarter were a loss of $11 million.
Well the segment's cash gross margin before DNA in accretion was a positive $47 per ton reported adjusted gross margin per ton for the quarter was negative $5 considerably lower than expected as a number of dynamics came together to impact results.
As a result of weak spring demand at a high level of imports trapped in the lower Mississippi River.
Market prices remained under pressure and the seasonal price improvement, we typically see in the second quarter did not materialize.
Additionally, while the Midwest warehouse premium in North America remain high we didnt capture as much of that is anticipated as north American sales, including Microessentials products were 350 to 400000 tons lower than expected.
Lower market prices, along with the change in the mix of sales during the quarter and lower than expected production and sales volumes.
Impacted margins by $45 per ton the volume and mix shift includes the impact of redirecting approximately 150000 incremental tons of fertilizer to our international distribution businesses, primarily Brazil.
And these intercompany international sales had lower margins than in North America.
In addition, with overall production volumes below expectations as a result of the opportunistic extension of two planned maintenance outages, we saw higher conversion cost per ton and slower declines in raw material costs during the period.
These factors taken together led to the quarter's results. However, it's important to note that the volume and mix impacts in the second quarter gross margin are transitory and are not expected to impact third quarter results.
Additionally, as sales accelerated in the third quarter, we expect approximately $12 per ton in raw material cost improvement relative to the second quarter.
Offsetting a portion of these benefits is a decline in average selling prices compared to last quarter, reflecting recent market pricing levels.
Third quarter gross margin per ton expectations for the potash business reflect the $25 per ton discount offered to customers as part of our North American summer fill program as well as expenses associated with scheduled turnaround activity during the period.
And while we expect to realize significant cash savings from the idling of our clones a facility as John mentioned earlier, we expect only a small portion of that impact the company's third quarter earnings as we sell down existing inventory at the facility.
Margin benefits from migrating production to our lower cost case, three facility should be more significant in the fourth quarter of this year and into 2020.
Finally, our margin guidance for mosaic for Lazard change reflects the higher cost associated with purchased rock and finished product as part of our damn remediation activities. However, as mentioned earlier, we expect these to be transitory is operations returned to normal.
As we look out to the balance of the year, our expectations are for a robust fall application season, given depleted soil nutrients in North America, and higher grain prices benefiting farmer economics.
Outside of North America, we expect to see continued strong demand, particularly in Brazil, where farmer economics remain solid.
As a result, we see total second half volumes for potash in a range of 4.7 to 5.1 million tons, which would equal or break mosaics previous record second half sales levels.
Phosphate shipments in the second half are expected to be 4.4 to 4.8 million tons, the highest level since idling of plant city.
In addition to these strong sales volumes, we expect inventories in North America to be substantially drawn down.
One of the key things to watch as we get into the fall is the length of the application window in North America, given the late spring planting and resulting later harvest.
In Brazil, we continue to expect furloughs on chase to deliver full year sales volumes of 9.4 to 9.8 million tons, reflecting continued market strength in our successful remediation of the issues created by the regulatory driven closures of our Brazilian mines.
With this strong demand as backdrop in both North America, and Brazil, keeping in mind existing inventory levels, we would expect market prices to remain stable if not improve somewhat over the balance of the year.
So taking first half results into account and our expectations for the balance of the year.
We've updated our adjusted EBITDA guidance range to 1.8 billion to $2 billion.
And earnings per share range to a $1.10 to $1.50.
In addition to the volume assumptions outlined earlier there are a number of factors that are incorporated into our forecast including first.
From a pricing standpoint, the low end of our guidance range assumes market pricing at the beginning of the third quarter for all remaining unpriced tons. This year.
While the top end of the range reflects an average price increase of $25 per ton across both phosphates and potash.
Next we expect raw material cost to improve as noted earlier as we realize the benefits from recent market price declines.
Next as Joc mentioned.
We now expect our mines in Brazil to be back to full operation. This month, reducing the total cost of managing through the dam issue. This year from our original estimate of $100 million to $80 million.
With modern slowly ramping up production the weaker phosphate pricing environment, coupled with the projects interest costs are now expected to result in equity earnings to mosaic of approximately negative $50 million for the year.
And finally expectations of cash taxes have declined from 75 million to $50 million.
Our effective tax rate, excluding discrete items is expected to remain in the mid to high 20% range.
The biggest impact of our effective rate.
His earnings mix.
So that remains the item to watch going forward.
Turning to our Capex plans for the year, we've reduced our 2019 sustaining capital program by $80 million to $640 million in light of market conditions.
We are however, continuing to invest in modest high return opportunities like the modifications to our dock in Louisiana.
That will allow us to use more of our own internally produced ammonia in our Florida operations generating an unlevered after tax return of over 40% and payback of right at two years.
With that I will turn the call back over to Joc for his closing comments.
Thank you Clint.
There is no question the market conditions have been difficult for the first half of this year.
And that the impact on the full year will be real.
We have solid strategic momentum markets, notwithstanding we have improved our cost base and our operating efficiency, we have successfully integrated and transformed a compelling acquisition in the world's most promising agricultural market.
We are just beginning to realize the very long term benefit of the new Esterhazy Kthree potash mine.
And we are performing at a very high level across the organization.
We expect the current supply and demand situation will come into balance and as it does mosaiq will remain in excellent position to benefit.
Now we will take your questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
That is star one on your telephone keypad.
Your first question comes from.
Stephen Berman.
Fetus as to whether you are seeing.
A behavior change down in Brazil, with the improving corn market are you are you seeing expectations of.
Maybe a bigger second corn crop any increase buying patterns on fertilizer earlier than normal or or a little more aggressive on volume.
Thank you Steve.
Welcome.
Well I'll hand, this to Rick we have the privilege of having Rick Mclellan here in the room today and.
Manages our Brazil business, but I can tell you I think the motive in Brazil to take advantage of some of the issues higher higher corn pricing and some of the trade issues that are now occurring we expect will will be very positive for Brazil, Rick you want to talk about the in season coming up.
Yes, good morning, Steve.
So the season coming up.
The if we look across the the main crops. If you look at corn soybeans cotton and citrus farmer returns are very very good and.
And so we should we see it really good sales book on now for our distribution business and and we expect a very good.
Main application period. Your question was about suffering at the second crop and yes, weve seen farmers in the last in the last two to three weeks stepping in and start to buy their fertilizer for the second crop corn and that's a very positive indicator, but it also tells you that.
There is a market there for that corn and the farmers reacting and the market is working.
And let me just remind you that we are going to be bringing back to pure and.
Our Shaw just in time for the big season coming up so we think our b to B business is going to be in very good shape as well to take advantage.
And how do you look at the growth potential for furloughs on things down there.
You have 14 blending facilities would you say would you prioritize expanding that particularly as.
More rails, good constructed in in Brazil, or or could you envision a diversification of the product offering.
These facilities such as.
Moving into more distribution of other products crop chemicals seed treatments et cetera.
Thanks, I think both of those are really good opportunities for US first one expanding our distribution platform itself and capturing a bigger piece of that overall market is a really good opportunity for us, but obviously expanding and using those platforms for other commodities is another growth opportunity, we got into Brazil on the basis. We believe it's one of the best agricultural regions in the world growing at a at a great rate and we fully think were a first mover in there and we're going to take advantage of that first mover advantage.
Your next question comes from.
Vincent Andrews.
Thank you.
Chuck maybe I could just ask you how you're thinking about.
Third the bridge from 19 to 20 in terms of volume and I guess, what I'm, what I'm asking is obviously we saw reduced.
Usage in the US this year and maybe in Europe as well.
So are you thinking we get that back.
And then you get normal growth on top of what should have been the underlying demand growth this year or if we rebased.
19 volume or shipments and we'll just getting normal growth off of that.
Thanks, Vincent I'll start listen the handed over to our more of our market analysis people, but I think everyone understands that we had an unprecedented.
North American spring, but that's that's behind US today and what's left is left to prevent planting up to 10 million acres. So we expect coming out of the season of stock to use ratios, maybe as low as 10% well that's going to really push grain prices and really going to push planting intentions up for the spring. So our expectation is we're going to have a big spring in North America, and we fully expect big volumes coming out in 2020. So if we bridge from 19 to 20, we expect to have a much higher acreage or higher acreage and we expect to have.
Higher application to support that and then the rest of the world will follow.
I think from you Korean or Andy.
I think just from a specificity standpoint, we won't make up all of the tons that didn't go down last year in 2019.
Will make up some of them, but we'll just return to.
A more broad based linear demand growth pattern in 2020 and beyond.
Your next question comes from John Roberts.
Thank you how should we think about the fertilization today's earnings split between the third and fourth quarter.
Third quarters, I think normally seasonally bigger, but you still have.
Maybe a full capabilities back in the third quarter. So should we think about earnings being roughly equal between third and fourth quarter and fertilization days rather than the normal seasonality.
Yes, Thanks, John look the split between the third and fourth quarter. As you said normally we would expect them to be just as as last year, which is a third quarter slightly bigger than the fourth.
But I think this year, we have still another somewhere around $40 million of raw material pricing for rock and whatnot that we had to import for the the downs. So overall volumes are going to be up.
But we're going to still be.
Absorbing a little bit of the all the down cost for that for another quarter.
Your next question comes from Jonas Oxgaard.
Hi, good morning, guys.
[laughter] question.
In the first quarter, both you and your your your Big African competitor.
Shutdowns on capacity in phosphate.
Just the market in seem to need it in Q2 that it didnt seem that anyone dead and I haven't heard any announcement that's happening in Q3 either.
Yes pricing is continuing to be weak can you talk a little bit about the strategic backdrop of.
Why not taking outages in Q2, and how you think about it going forward.
Yes, Thanks Jonas.
Let me I'll hand, this to occur in a second here, but.
Just let me give you a high level, obviously, we did take capacity out in Q1 and into Q2.
Which you see in our sales results as such our inventory build probably isn't as big as some of the others and also means that we want to be ready for.
What comes up in in a big third and fourth quarter. So we think for ourselves at least in our market position.
Those tons are needed.
We don't believes that the demand picture is a long term demand issue. It was a short term thing driven by a bad you a spring.
Yes, I would add Jonas that.
The logistics complications that we faced during spring season.
I have been at were significant and mosaics operating rate was maintained with lots of rail shipment and shipment to our country warehouses that was difficult for others to replicate basin barge positions.
I think we have some of the same risks and a very large fall season that getting product up into the markets that need it for fall are going to require rail loading.
And the kind of logistical capability that mosaic is going to happen. So I think we'll be operating.
At full rates for the very large fall season that we anticipate.
Your next question comes from Andrew Wong.
Hi, good morning, So maybe just following on that a little bit more on phosphates.
I think it's fair to say that the prices on the Mark has been weaker this year than expected.
So maybe just first can you talk about whats kind of being the main factors driving that weakness a supply demand.
Maybe go through some of the various supply and demand situations in the main regions like China, India, Brazil.
We know about us obviously.
And then just secondly, like when do you expect prices to maybe.
Start seeing a little bit of a bottom in a rebound and what are some of the catalyst that we can watch for ahead of that thanks.
Okay, that's a bit of a doozy, Andrew I'll I'll get through it and I'll help get current to help me here, but let me at a high level say look we've had 10 years of relatively linear growth in our phosphate markets.
And for the first time I think you know in probably half a dozen years the issue with the supply and demand has been about demand and it really is predicated on mostly on a U.S. bad springs somewhat on.
It's a lowering Chinese demand, but really other than that.
Pretty much a normal linear growth for the demand for phosphates.
So what what that's meant is the equivalent of probably about a new mine coming on all of the sudden.
New new production is not great. It's only about a million tons. This year I believe and so.
If not for this displacement of the U.S. spring I think the market would have continued to be.
Quite.
Balance and we do expect it to rebound.
As early as this fall and into the spring current do you want to add any detail to that.
Sure.
In terms of.
What happened this spring I think Joc is covered it we we had a full poor season, and then we had a disappointing spring season, probably about 800000 tons of demand was lost.
At the same time, no we had a million tons more export imports into the us into that really exacerbated the problem along with the flooding along the river. So these tons were trapped in the lower Mississippi and.
Traders started liquidating those physicians very aggressively when they couldn't get tons up.
In country in time for spring season.
And so that really caused and very small amounts of trade prices to drop quickly, but that fundamental demand issue is really going to be largely overcome as Andy noted with what we think will be a large fall season and going into 2020, and so when we see prices turning we'll work through the inventory levels that are been carried out at the end of the spring season, and we should see things tightening up as we get into 2020.
And if I can just add I mean, we are hearing numbers of us have a corn plant, maybe 95 plus million acres next spring.
If we're going to have that level of planting it'll it'll suck up the inventory very quickly.
Your next question comes from Adam Samuelson.
Yes. Thank you good morning, everyone.
So a couple of questions continuing in phosphates.
First on the.
As we think about the price declines that we've seen year to date.
I think.
Talking about.
Russia, and Moroccan tons that have just been cargoes that have been going on priced into NOLA and into Brazil has been an important contributing factor can you talk about as market structure.
You just any visibility that.
Distribution patterns can change here it seems like some of those cargos or.
Being pretty disruptive to the market and then secondly.
Can you talk about the cost curve a little bit it just.
With the magnitude of the price decline as you've seen year to date, even with sulfur having come down.
The fact that the Chinese kind of kept producing up until.
Quite recently and even then.
Cuts remains to be seen but just.
Kind of how your view of the cost curve has evolved as the years progressed. Thank you.
Okay. Thanks, Adam Let me, let me say first of all the.
Cargos from some of our competitors that kept coming into NOLA I suppose some of that might be a misunderstanding or a miss prediction of what the spring would.
Do but.
Theres No question. These unpriced tons that are just shipped into these markets are are pretty disruptive.
And I think that's kind of the nature of that Beast. So it really will take the tightening of the market too to reverse up but hopefully the tightening will come soon and that's good in terms of the cost curve. We don't have no I don't think we have a good cost curve in this business, but let me give you a couple of benchmarks that I can I can kind of touch on first of all our main north American competitor reported a couple of weeks back or a week ago. They had in their phosphate business cash margin of zero.
The Chinese players our calculations they have negative cash margins right now.
Modeling at least on Martin too I think Clint mentioned, our equity earnings will be negative to about $50 million. This year.
I don't have information on the North Africans are the Russians, but clearly a big big chunk of the cost curve is either breaking even or losing money in this in this market. So that really tells you that the pressure upwards on price.
Is not far away.
Your next question comes from Mark Connelly.
Okay.
Good morning.
Hello.
Good morning. This is actually Jones on for Mark Connelly, how are you guys doing.
A question on potash, obviously pretty strong results and performance there.
Just wondering given the outlook on potash, how long you're going to idle.
The cause a online do you have an estimate there.
Sure John .
We didnt, we didnt really give a time frame on what we would idle kalonzo from clearly it's a it's a temporary idling and and it's really more than anything let's call. It a cash preservation opportunity Esterhazy K three is ramping up very successfully which will give us incremental tons.
We had some inventory and so we felt with existing predictions, we would make this year without needing any incremental tons from kalonzo right now that could change.
If the markets in the fall or better than we think.
Kalonzo they may come up earlier, but we had plan somewhere around the end of the year being kind of our target for where we felt comfortable that with plans today that up.
Plan could be shut down, but let me highlight kalonzo is a 2 million tonne.
Hundred dollar a ton cash cost producer and 2 million tons that would be much better than that we've been running at less than.
At at less than capacity, so that represents an incredible level of flexibility answers that we have available for us in a better market.
Thats great. Thank you and then just questions on China and.
Well, what you see in China in terms of grain demand just want to understand it.
The African swine flu, obviously, there are a lot of different view about how it's going to affect the grain demand, but we haven't seen grain demand falling off the cliff just wondering what you're seeing there and also for China 10 program, how realistic they are really going to move forward with that thank you.
Let me leave that one straight over to Corona and Andy.
All right. So what we've seen on grain demand standpoint in China is like you said it hasn't fallen off a cliff and we wouldn't expect it to.
There's still a lot of people and those people still demand food. What we have seen is some switching so a big increase in animal protein imports for the month of June both beef and pork imports were up about 60% year over year. So.
While we might see some switching out or product mix changes there, we don't expect that to be particularly meaningful to the global SMB in total.
And then from a 10 program I think its been relatively slow too.
Be adopted but it appears that there.
Continuing down that road, it just might take a little bit longer time horizon.
One may have hoped for in the past.
Thanks, Andy.
Your next question comes from Christopher Parkins.
Thank you.
So there's been a lot of movement in ammonia and sulfur prices for North American producers over the past few quarters.
But there is obviously going to be a delay in the realization of lower inputs can you just comment on your outlook for strip margins for the balance of the year just the cadence of realizing those benefits and then just any quick update on your longer term efforts to further reduce rock costs will be incredibly helpful. Thank you.
Okay. Thanks, Chris.
Let me start with.
Both the price of ammonia in the market and the price of sulfur in the market have come down significantly.
One of the challenges for us today is with the market being slower it takes longer for that raw material to move through our product through our product.
Into goods for sale and then finally into our our sales and cost of goods. So that takes time at the best of time, we figure that takes at least six weeks for ammonia and probably more like three months for sulfur in this case is probably three months plus for both of them. So you got to take a quite a while if we look just at next months prices are sorry next quarters prices that we have seen today I think we're expecting to be down in the range of 20 to $25 a ton just on on flow through of these cost to goods, but that's going to take some time and that is going to take one the consumption comes through so overall, we expect stripping margins to improve because of raw materials, but luckily that won't likely that won't come till the end of the third quarter or even into the fourth quarter before we see the meaningful drop.
Translated into cost of goods.
Your next question comes from Duffy Fischer.
Yes, good morning.
Two questions about EUR two subjects on your shutdowns. So one I thought I heard you say that the plant city shutdown helps your cash flow, but because it's been idled for over a year.
That struck me is strange so can you just walk through how shutting down plants city, both impacts European now going forward and then what are the shutdown costs, how would it affect the cash flow and then just on Colonsay, you said you'd been running under the 2 million what is the LTM production for Collawn say in when was that shutdown affected.
Okay.
Let me start with plant city I think.
The issue there as we've been holding plant city, while not in hot ready, we've been holding it in a ready mode and we've continued to.
Have it ready to be brought up if required the decision to finally move it into.
Shutdown mode does two things one it reduces and stops those costs.
Obviously from a noncash perspective, it stops the depreciation because of depreciation was moved into a write down and then.
While we will have a aro costs or asset retirement costs.
Those will be.
Not BNL based costs.
So.
Hopefully that helps on that one and I'll hand, it to Clint to give you maybe more detail on that and then Kalonzo say PML.
And effective date effective date I think is early September .
Or sorry, mid mid August and then the PL impact I got to separate PL impact, it's going to depend on when things are sold but we do know it will be about a 50 million dollar cash savings Clint do you want to.
Sure Hi, Def is client.
So on plant city as that facility has been kept an idle status.
The total idle cost associated with that has been about $50 million a year about half of that is depreciation half of that is cash.
Now that it has been.
Formally closed and now we're going into our own work that 50 million running through the PME now.
We will be reduced to about 10 million.
Again about half of that on depreciation about half of that in cash so.
Certainly we will be beneficial to the PNM now as we go into a Aro work I think what we've said historically is that that would be roughly.
An average of call it $20 million a year over the first five years, so I think from a cash standpoint.
You are probably fairly flat from a PNM all standpoint, you will see an improvement.
And then.
Back to Kalonzo day.
Again, I think you need to to to separate cash versus TNL impact I think as as we've talked about a little bit earlier, we will continue to sell down the inventory at that facility and so while we do expect to see call it $40 million to $50 million in cash benefit this year.
As it relates to the PNM and the flow through of costs.
In the near term, we only think that there will be about a $5 million TNL benefit. However, as that inventory is fully sold and then we switched to selling the inventory coming out of Q3 that $40 million to $50 million cash benefit will have now become TNL benefit, but that will be a little bit more delayed.
Your next question comes from Jeff So cash cost Chris.
Thanks very much.
Hum your ammonia costs came down a tiny bit I think they were 337, a ton I think you've been buying them. In January you are buying ammonia to 85, a ton in the last couple of months have been to 15.
Is there something unusual as to why your ammonia costs are so high and they're coming down so slowly I realised volumes are a little bit late but is there something more than that.
Yes, Thanks, Jeff I'll give the simple answer and hand, it to either a current or Clint too.
I think what you've got to take into account. There is our CF ammonia contract is a fixed volume and basically think of it as a fixed price contract probably today in that 320 range. So as the production goes down and ammonia consumption goes down the ratio of CF contract ammonia goes up so actually it can dampen the price decline by quite a bit we do expect that to go to more normal one third one third one third where we've been but I think last quarter, we were something like 40, some percent of CF ammonia.
Which makes our cost structure a little.
A little higher than it would have been on just market.
Clint or current.
Yes, the one thing I would add to that Jeff and I think I alluded to it in my.
In my comments, a little bit earlier.
Is that one of the things that we're trying to do to improve that blended cost.
For ammonia is to be able to use more of our internally produced ammonia out of Louisiana.
And so one of the things we're doing is we're making a modest investment in a dock in Louisiana that will allow us to transport more of that ammonia from Louisiana to Florida to use in our operations that again should.
Should allow us to bring down that average cost because that is the lowest cost source that we have and we would expect that project to be done by the end of this year. So we should start to see benefits from that in 2020.
Your next question comes from Joel Jackson.
Hi, good morning, everyone.
I wanted to talk a little bit about the bare case or the sort of low end of your guidance range for the year. So if I understand youve assume flat pricing in TNK for on price tons going off rest of the year.
And I Wonder why that is the low end of the range since the price trend in both as commodities have not reverse has been falling for some months, maybe what's different now were you expecting prices to rebound you speak about Chinese production discipline.
Statements made some weeks ago, we havent seen anything really prevail yet so maybe just a little commentary on what gives you conviction that now is the time for both commodities to rebound.
So let me give you a two sides two things on us say.
Prices.
Move up which is our expectation.
First of all your mix will change if you think about it first half the year more focused on Asia less on U.S. for potash as an example, Walt potash and phosphates probably.
But potash in particular now we're going to have a big North American fall and Brazil coming into season, those are premium grades or whatever blend grade potash, which sells for a higher price in phosphates, we've just said.
10 million new acres.
Our 10 million acres not planters, so we expect the farmer to.
Really be pushing for higher higher acreage and that will mean higher volumes, which really drives a positive price pressure for for so we.
Felt that was a reasonable level between the bear case in the Bowl case.
And we were transparent about what the assumptions we used.
Your next question comes from Ben Isaacson.
Good morning, Thank you.
Two questions.
First one is on your on allocated capital, which on your slide deck shows 300 to 500 million down from four to 700.
And that's supposed to be weighted in the back half of the year. So here, we are and maybe you can kind of run through how youre thinking about using that capital.
Clint or jogging among balance sheet buybacks, you've obviously doubled the dividend is there room for further increase there.
Second question is on plant city can you talk about the alternative uses that you are evaluating what are they timing capex et cetera. Thank you.
Well, let me.
Let me answer the first ones for the second one first ban out no I can't really talk about the alternative uses because we are in negotiation with.
Other parties for what we might do with that.
Capex, there would not be anything for us it would be something for somebody else the idea would be that rather than.
Tearing down the plant, we would actually re re purpose the plant and.
There are active negotiations there in terms of unallocated capital I think I'll, just hand that straight over to Clint.
To give you a little background.
And Ben I don't think our thinking on on that really has changed I think as we look out to the balance of the year and even into into 2020.
I think we are going to look to.
You know certainly continue to to to look at.
You know different investments, we're going to take into consideration, where our share prices and look to.
To be sure that we're allocating capital to the highest risk adjusted opportunities that are available.
I think our balance sheet is in a in a pretty good.
Spot as we've spoken about before so I think we we can look at those other two alternatives with that said.
We have said that we want to have the cash on our balance sheet and available before we actually allocated so.
At this point I would say that we're not there yet.
But when we are there those are the things that we would be looking at.
Your next question comes from PJ Juvekar.
Yes, hi, good morning.
So we've seen numbers that we only care application could be down as much as 6% this year.
Do you agree with that and how much do you think it can bounce back next year could it be more than 6%.
And then secondly on China DAP exports.
I think they were up about 10% in the first half.
Where do you see them going, especially with the weaker you on thank you.
Thanks PJ.
Let me, let me touch on those and then I'll hand them over to current again.
Certainly pmk acts applications were down you know if it's 10 million acres that certainly down at least 6% probably closer to 10% in terms of application.
So we do expect a bounce back but I guess, if you took the normal 95 million acres instead of 91 or 92 that would represent about a 3% to 5% bounce back. So while there has been a loss, we expect say half of that to come back in the in the spring.
In terms of China exports, we're seeing those quickly come down I think we were about a million tons ahead of last year at the start and now in two months were down to where we're maybe a 100000 over anything you can add to that current.
No I think I think Thats right. Jack we started the year at at those higher margin levels. They were exporting a little more aggressively.
And they certainly starting decreasing the pace of those exports in May and we saw a further reduction in the pace of those exports in June .
With the weaker currency it does help a little bit in terms of their margins, but they are still down very close to their cash what we believe our cash cost and so we expect that we'll see a continued decrease in the pace of those exports and we still do expect to see a lower number of when the year end up from the prior year.
And recognize the weaker currency does help their cash costs slightly but it also incents them to grow more in country, which should incident.
In country demand.
Your next question comes from Michael Piken.
Well I don't see a lot there, but nothing that you'd have to lose about 50 million a modified weekly or just your thoughts as we move into 2020 and how much of that was market conditions versus anything associated with logistics are up.
Thanks, Michael look I think in terms of modeling.
No.
I believe the forecast this year is to be running somewhere in that two to two and a half million ton Mark from Martin and those are questions better ask of them, obviously than us but.
I think with that lower volume that they're making this year.
Hi, there their cash margins are their margins will be a little more pressured big as they ramp up.
But obviously the market is the other factor I mean.
And the low ammonia price means are normal.
Advantage in ammonia is much less than it would be under more normalized market conditions.
Let me let me go back to a question from Chris Parkinson I think we missed your rock costs question, Chris So in the interest of.
Helping out let me.
So rock costs are we component those between.
So a couple of things we have the idling idle costs of.
The south pasture mine, which for now is down.
We've had a number of turnarounds that we've done which have impacted the.
Near term rock costs, those will come down and the other thing is when we're using less the ratio of miscue Mio comes down or comes up and that tends to add to our overall consumed right rock costs. Our 2021 targets that we set in the spring and talked about in the spring have not changed and you will see an improvement in those rock costs as we move into the second half the year.
Operator are there any more questions there are no more questions.
Okay. If there are no more questions I want to conclude our car I'll call and let me emphasize a couple of key points first we are executing very well, we have transformed our cost structures and operating efficiencies in each of our business units and that work is delivering meaningful benefits regardless of the markets mosaic today is stronger and more resilient than any time in our history. Secondly, we're making major progress on key initiatives, our Brazilian mines will be Matt back in full operations. This month and our new K three mine at Esterhazy is ramping up as expected and that is giving us extremely good flexibility in our potash business. Finally, we expect much stronger market fundamentals to immersion as we move into 2020, and we expect mosaic and its shareholders to benefit from our work to strengthen the company as markets improve thank you for joining our call today and have a great day.
Thank you for joining us on today's call at this time you may disconnect.
Yeah.