The Mosaic Company (MOS) Q4 2012 Earnings Report, Transcript and Summary

Laura Gagnon James T. Prokopanko - Chief Executive officer, President, Director and Member of Executive Committee Lawrence W. Stranghoener - Chief Financial Officer and Executive Vice President Michael Rahm Richard N. McLellan - Senior Vice President of Commercial James C. O'Rourke - Executive Vice President of Operations

Vincent Andrews - Morgan Stanley, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division David L. Begleiter - Deutsche Bank AG, Research Division Joel Jackson - BMO Capital Markets Canada Daniel Jester - Citigroup Inc, Research Division Jacob Bout - CIBC World Markets Inc., Research Division Bill Carroll - UBS Investment Bank, Research Division Edlain S. Rodriguez - Lazard Capital Markets LLC, Research Division Michael Picken - Cleveland Research Company

Good morning, ladies and gentlemen, and welcome to The Mosaic Company's Fiscal 2012 Fourth Quarter Earnings Conference Call. [Operator Instructions] Your host for today's call is Laura Gagnon, Vice President, Investor Relations of The Mosaic Company. Please proceed, Laura.

Thank you, and welcome to our fourth quarter fiscal year 2012 earnings call. Presenting today will be Jim Prokopanko, President and Chief Executive Officer; and Larry Stranghoener, Executive Vice President and Chief Financial Officer. We also have members of the senior leadership team available to answer your questions after our prepared remarks. After my introductory comments, Jim will share our views on Mosaic's results, as well as current and future market conditions, and Larry will discuss key drivers of the segment results, as well as provide insight into future expectations. The presentation slides we are using during the call are available on our website at mosaicco.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, July 17, 2012, and are subject to significant risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. 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 the Securities and Exchange Commission. Now I'd like to turn it over to Jim.

Good morning, everyone. Thanks for joining our earnings discussion. I'm pleased to report that Mosaic concluded a very strong fiscal 2012 on a high note. The key messages I would like you to take away from today's call are these: first, external factors created some challenges for us and the rest of the industry; second, Mosaic made important and significant progress in fiscal 2012; and finally, prospects for our business this year and beyond are very positive. Mosaic is in an excellent position to achieve our vision of being recognized as the best crop nutrition company in the world. Before I begin, I draw your attention to the dividend announcement we made today. We will increase our annual dividend policy by 100% to $1 per share. This significant capital commitment to shareholder distributions comes after a 150% dividend increase just 5 months ago. So in total, we will have raised our dividend 400% this calendar year. This decision reflects our confidence in continuing to generate strong results and cash flow over the long term. In fiscal 2012 alone, we generated a record $2.7 billion in cash from operations. Even with the substantial dividend increase, we have ample financial flexibility to continue to invest in the business, as well as return additional capital to shareholders. Now let's review fiscal 2012 performance. I'll start with a view of the external factors that influenced our results, and then I'll discuss Mosaic's accomplishments. After Larry conducts the financial review, I will conclude with a review of what's ahead in Mosaic's bright future. In fiscal 2012, global crop nutrient markets were impacted by ongoing turmoil in India and by risk-averse behavior elsewhere. Customers around the globe decreased their inventories to avoid exposure to price uncertainty created by macroeconomic developments, including the European debt crisis, as…

Thanks, Jim. Our solid results this quarter reflect the busy spring application season in North America and strong demand in South and Central America. For the quarter, consolidated revenues were down slightly year-over-year at $2.8 billion, with the decline primarily driven by lower phosphate pricing and lower potash volumes. As Jim indicated, we saw a divergence in potash and phosphate markets in the quarter. Phosphate demand and pricing strengthened, while potash remained stable. And while year-over-year results were down, we saw significant improvement versus our third quarter and finished the year on a strong note. We generated $1.2 billion in operating cash flow in the quarter and a record $2.7 billion for the fiscal year. As a result, we now have $3.8 billion in cash, and I should note that the vast majority of that cash, over $3 billion, is currently available to us. It is not restricted. Earnings per share in the quarter were $1.19. That number includes several items that negatively impacted EPS by $0.06. The foreign currency transaction gain of $0.02 per share reflects a gain related to movements in the Canadian dollar, offset by a loss related to the Brazilian real. The vast majority of the impact to this income statement line is noncash and noneconomic, though we also report the mark-to-market impact of hedging our future potash expansion spending. I'll address the other items in my segment commentary. In Potash, average pricing remained flat and slightly above our guidance range, primarily because of the mix of domestic and international volumes and the extended spring application season in North America. Volumes were at the upper end of our guidance range if we exclude the approximate 100,000-tonne impact of the Canadian rail strike. For the North American potash industry, producer inventory levels remained roughly flat during quarter…

Thank you, Larry. At Mosaic, we achieved many successes in fiscal 2012, and we have created an exceptionally strong operating foundation for the future. Mosaic has the capabilities necessary to be the best crop nutrition company in the world and to build momentum in 2013. I'd like to provide an overview of our outlook for the markets and our strategic focus for the new fiscal year. The recent surge in agricultural commodity prices, driven by the ongoing severe drought in the U.S. corn belt, reminds us global food security is tenuous. This year, which started with an early North American spring, the largest U.S. corn acreage since 1937 and the promise of a record-smashing crop demonstrates how quickly agricultural commodity markets can swing and how little margin for error exists in the global food system. The summer rally in grain and oilseed prices provides a strong tailwind for crop nutrient demand prospects in 2013 and beyond. In particular, we project that global phosphate shipments will increase from just less than 60 million tonnes in 2011 to approximately 63 million tonnes this year and then climb to 64 million to 66 million tonnes in 2013. In the case of potash, due to the weak start to this year, we project global MOP shipments will decline from about 56 million tonnes in 2011 to approximately 53 million tonnes this year and then jump to 58 million to 60 million tonnes in 2013. Several analysts have expressed concern that the severe drought this year will negatively impact U.S. phosphate and potash use next year because these 2 nutrients carry over in the soil if not taken up by plants. We don't believe this impact will be significant. Based upon a study of similar years and with ongoing high U.S. farm income, good crop…

[Operator Instructions] Your first question comes from the line of Vincent Andrews with Morgan Stanley.

I guess maybe one question on your potash volume guidance going into fiscal '13 and the step-up to 58 to 60. Could you just dimensionalize which markets you're thinking are going to drive the delta from the 53 to 58 to 60? And I guess particular interest probably on what you think happens to U.S. volumes in terms of restocking, as well as India and China.

Vincent, it's Jim Prokopanko here. Good question to start with, and I'm going to have Mike -- Dr. Mike Rahm answer that question, and Rick McLellan, our Commercial Manager, to add some color if necessary. Mike?

Vincent, yes, as you know, there are 6 countries that account for about 2/3 of the global shipments: the U.S., Brazil, China, India, Malaysia and Indonesia. And in the past couple of years, it seems like we haven't been hitting on all of those 6 cylinders, and the basis for our 58 million to 60 million tonne increase in potash shipments is the expectation that we will hit on all of those. So we have increases pretty much across the board in those major countries. In the case of the U.S., I think there's an interesting situation in that even with flat or even slightly lower potash consumption, we think shipments will increase from the drop-off that occurred last year in North America. The 2010, 2011 shipments were at a record 11.1 million short tonnes. Those dropped to about 8.3 million tonnes as de-stocking of the pipeline took place. And we expect that in 2012, 2013, we will see those shipments jump back up into the 9 million tonne range.

Your next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch.

Jim, I was wondering if you could elaborate on your Phosphate segment ranges put forth for the fiscal first quarter and, specifically, the volume range of 2.5 million to 2.8 million tonnes, as well as some of the sources of gross margin pressure that you alluded to.

Kevin, that was an anticipated question, and Rick McLellan, our Executive Vice President of Commercial, will add some explanation to that.

Yes, the -- as we finished up Q4, we came out of Q4 with very, very low inventories, and that, combined with some significant turnarounds that we’re expecting in Q1, is going to limit the top end of the volume that we have to ship. And in turn, we're seeing some nice price movement during the quarter. The things that are going to impact the cost, I think I'll have Joc O'Rourke answer that one.

The costs for the quarter, we're seeing some pressures on both sulfur and ammonia costs, which are mostly due to ammonia tightening up, of course, in the world market, particularly with the nonperformance of Trinidad ammonia.

Kevin, I'll just add my comment to that. What we're seeing, and we're seeing it throughout the -- and certainly in North America and generally through the world, is a reluctance by buyers to commit. Nobody has any doubt that farmers are going to use phosphate and potash, and as we're seeing in many other industries, commercial enterprises don't want to take a risk or take a -- make a commitment until the very last minute. So yes, there could be some slowness in this quarter, but we expect that will return when farmers are ready to fertilize.

Your next question comes from the line of Don Carson, Susquehanna Financial.

Jim, just want to continue on that comment of yours about the reluctance of buyers to commit. I know in the past you've emphasized your forward price determined program. I'm just wondering, how extensive is that program? And are you having to increase your investment in that program in order to stimulate shipments? And then just as a follow-on, maybe this is for Mike Rahm, just a comment on we've still got a significant gap in between offshore and domestic potash prices. How do you see that gap playing out as shipments increase in calendar 2013?

Don, the forward price of contracts that we've had have been very successful. I'll just tell you a bit about them, and Rick will add some specifics around how we're doing with them. They've been very effective at getting product moved, getting into position and being ready for the fall season as it always comes or the spring season. So we're pleased with the performance of that program, and it's built our share and built our position in North America. So it's a program that's been very successful. Rick, do you want to add some explanation on how it's looking going forward?

Yes, Don, I think your question is did we have to expand it this year, and the answer for phosphates is most definitely not. Potash, we’ve continued to expand the programs what we have -- that we have and the amount of product that we're going to have available into North America. But that's strictly a function of how the potash market has operated. The -- what we found on the phosphate market is people are -- phosphate and potash in North America, customers are willing to layer in percentages of the volumes that they need for fall. So this cautious conservative buying behavior that Jim talked about continues, although we don't find that we've had to do anything different in the marketplace. The second part of your question had to do with the differences between domestic netbacks and export netbacks. One of the things that you have to break away is the difference between blend-grade product and standard product. And as we move over time, those spreads are going to continue to -- the export and domestic prices are going to continue to get closer together. But one thing that impacts the netbacks probably the most is standard product going into contract markets, so it leaves that spread wide. And when you take a look at the North American market, it's a blend-grade market, and so I think one of the ways to look at it is blend-grade around the world continues to trade at a premium to standard.

Go ahead.

Your next question comes from the line of...

The only other thing I would add, Rick, is that when you look at some of the granular markets in addition to North America, Brazil had record imports in 2011 of about 7.5 million tonnes. So we've seen stronger demand in granular markets. And as you mentioned, the standard markets have been off with India's imports being down and most of that product moving in on fixed-price longer-term type contracts.

Your next question comes from the line of Jeff Zekauskas, JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: A 2-part question. When the Esterhazy tonnage reverts back to the 1.3 million tonnes, does that mean that your Canpotex allocation goes up by 1.3 million tonnes? And then secondly, if your phosphate volume in the first quarter of '13 is roughly 2.65 million tonnes, that's down about 500,000 tonnes from where you were in the first quarter of last year. So with that kind of volume step-down, would you expect your phosphate volumes to grow in fiscal '13?

Jeff, to your first question, simple answer, yes. The 1.3 million tonnes that comes back under the tolling agreement is included as Mosaic Company's share of Canpotex. And to your second question about the phosphate numbers for the first quarter, Rick McLellan will help you with that answer.

/> Yes, Jeff. I'll go back to what I said before. We entered into this quarter with much lower volumes, so that limits our ability to ship during the quarter for phosphates. And one of the other pieces that's going on is a little bit of timing in our international business. So we don't expect a significant change year-on-year in volumes. It's really going to be in -- it's going to show most of itself in this quarter as we began with less inventory and we're -- we have significant production turnarounds at some of our phosphate facilities in Florida.

Your next question comes from Mark Connelly with CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Jim, just a couple of things. When we look at the announcement you took with potash downtime and then the subsequent production, it looks like you ended up taking quite a bit less potash production out of the market than you originally expected. So I'm wondering, is that consistent with the way you think about it? And did your market view change during that period? And of course, where did your ending inventories end up?

Mark, I'm going to -- with your question, I'm going to -- I'm just thinking how to answer it. I'm going to have Joc help me with it, but we had the desire to impact in terms of matching our supply with the demand that we had out there. So we got back in balance, and we addressed some of our storage issues. And I'll ask Joc to discuss how we -- the actual numbers versus the intended numbers and what happened at the facilities.

So Mark, in answer to your question, yes, we certainly had the downtime that we announced. We had inventory limitations early in the year, which we addressed by taking some downtime, in particular some longer Christmas shutdowns. We ended the year with higher inventory. However, we feel it's appropriate with the shutdowns we're going to have and particularly with Esterhazy tying in the new circuit, the expansion circuit, we expect we're going to need that inventory for the fall, and we're well prepared for that.

Your next question comes from David Begleiter with Deutsche Bank.

Jim, can you talk about Chinese pricing for the back half of the year? It looks like they want a decrease while you would like at least a rollover.

Yes, David. We don't see China doing anything much until sometime in August. Yes, we'd very much like to see a rollover or higher pricing to what was achieved last year. Those discussions and negotiations are currently underway with Canpotex, and we'll see what emerges. What you do have -- what's different in these last few weeks is what's happening in these grain markets, and the question we're all asking is this going to be a catalyst to start moving, increasing, enhancing demand for crop nutrients, and is this going to impact the fertilizer pricing? And it's early to make a final call, but grain is becoming more expensive, corn, oilseed and the knock-on effects to wheat, palm oil and so on. So I think there are some things that are changing between now and August that everybody has to pay attention to. But it's in Canpotex's hands. They're negotiating.

Your next question comes from Joel Jackson with BMO Capital Markets.

Just a couple of follow-up questions on China and India. We've seen Chinese potash port inventories significantly increase in the last couple of weeks. Imports have been very strong in May and June, it seems. The first question would be what is your view here on inventory stock -- port stocks building? And could that possibly push out your August timeline for a settlement for Canpotex? And also in India, we've seen a lot of spot volume picked up by Chinese exporters, and we also saw PhosChem sort of half-year volumes on the contracts to your Indian customers for DAP lower year-over-year. What are your views on possibly losing some share in India this year? Or will you pick it up later?

Okay, Joel, good questions. I'm going to ask Rick, our commercial leader, Rick McLellan, to answer those questions.

Yes, Joel, on Chinese potash inventory, we just see everybody shipping to meet their contracts. It's going to reflect -- their first half contracts, which is reflecting a bit of build in inventories at the ports. Nothing that we hadn't expected, and I think, as Jim said, a lot has to play out between now and August when we expect the deal to be closed. The second piece was the -- your question was on India. And on India, we continue to see them buy volumes out of China, little bits and pieces every week. There still isn't enough DAP going into India. We had -- we limited the amount of DAP we had in our first quarter, which you saw in our contract that we completed, and we focused on markets that provide us a little better return. And so longer term, we know that we're going to do less into India, and we're very comfortable and our customers were very comfortable in the program we put together this year.

Your next question comes from P.J. Juvekar with Citi.

This is Dan Jester sitting in for P.J. I believe you said in your prepared remarks that you're working on a feasibility study for an ammonia plant. Can you just walk us through the timeline for that process? And maybe just give us some color about what you're thinking about in terms of going forward with that or not once the feasibility study is complete.

Joc O'Rourke is leading our project, the ammonia expansion, the new plant and the expansion of current facilities, and he'll add an explanation of what our timeline looks like.

So Dan, in terms of the timeline, we are in the process of doing a detailed feasibility study at this point. It is quite a complex project. We are now analyzing not only the economics, but the technology, the permitting and the design options. As Larry said, we expect to have that decision towards the end of this calendar year for construction next calendar year.

Your next question comes from Jacob Bout, CIBC.

Just a couple of questions on Esterhazy. So you gave some guidance here on the brine inflow costs and also the inflow rate, and it sounds like you're guiding to flat year-on-year inflow rates. What has been the trend over the past 3 to 4 years? And has something actually changed there? My impression was that the inflow rates have been gradually increasing, and then just a status on K3.

Jacob, we have been dealing with the brine at Esterhazy for about 30 years, and from time to time and over those 30 years, we do find different and emerging flow patterns. Some odd anomaly flows may come in at a -- from a different area than we might have previously experienced, and that's been the history over the 30 years. And the rates go up, and the rates go down. We've dealt with this -- we've dealt with it for 30 years successfully. We continue to deal with it, and we are very, very confident that we can deal with some of these new, we call them anomalies, there’s some unexpected events. Every one has been dealt with. We've not lost, in those 30 years, a single day of production. We don't see the Esterhazy brine inflow as so much a matter of losing production, but one more of the cost issue with us. So we're -- as I say, in summary, we're confident that we will deal with whatever is dealt with us, and we've got 30 years of experience doing that. For the K3 mine expansion, Joc is leading that project, having some good success, as we said, on time and on budget. And Joc can add some details.

Jacob, the stage we're at right now, we've been working on the pre-sinking, the civil construction of the site itself. We have the freeze plans in place. We'll be moving into the freezing, and we'll be raising up the headframe this year in preparation for shaft-sinking starting in the next fiscal year, right on time.

Your next question comes from Bill Carroll with UBS.

It seems that the expectation for full production at South Fort Meade has slipped a couple months since the last update. So can you fill us in on the dynamics of restoring production there? And also, once operations are fully achieved there, what are your expectations for output at your other phosphate mines? Would you pull back some of the production at Wingate and Four Corners?

Bill, no, our plans at South Fort Meade are right on plan. We are getting the mine up to the production rates that we forecast, and it's on time and on schedule. And I'll ask Joc to talk about what our experiences have been at the other mines. I think we have made -- have commented that the other mines did step up in a material way to deal with the gap that was left by South Fort Meade being shut down. But Joc, how are we going to manage those mines going forward?

So going forward, Bill, the first priority for us is to rebuild the inventories that we drew down, the rock inventories that we drew down over the last year or 2. We are well on our way to doing that. South Fort Meade, as Jim said, is well on its way to be up to-- being up to full production again as we move draglines into the new Hardee County portion of that site. In the next year, once we get our inventories up, we will start moving more material to Louisiana to offset any of the purchased rock we've had in the past. So we'll still need high production rates from both Wingate and Four Corners. That may change in a year or 2, but up until then, we expect to run those operations just as hard as we are today.

And Joc, if I could just add just to be sure that while we're very much on schedule to be running at full rates by the end of this fiscal quarter at South Fort Meade, we won't start to see the full P&L impact of that until the second half of our fiscal year.

Your next question comes from Edlain Rodriguez with Lazard Capital Markets.

A quick question on potash. Can you talk about what you're seeing in India in terms of when do you expect them to come online -- I mean, to sign a contract? Or is there a possibility that they could sit out for the full year? And also in Brazil, can you talk about what you've seen in terms of pricing? Because we've heard of what that $30 price increase -- that's out there. But are you seeing any implementation of that at all?

Edlain, it's Jim here. We are -- as far as India goes, we are not anticipating a contract for potash in India until September. It'll likely be post the Chinese resolution and September probably at the earliest. To your question, can they defer a year or take this year off or the balance of the year, yes, I think they -- if they choose to, they can hold off a year. But they're not going to avoid, they're just going to delay. And whatever they don't buy this year, I have little doubt that those potash purchases will have to be made some time shortly after that. Rick, do you want to add anything on the India, what's happening in country and then the Brazil questions on pricing?

I think, Jim, you've covered India, other than the fact to add that these local price increases because of the change in the currency are taking farmers some time to get used to. So that's why we expect not a robust return to demand there. But overall, we still expect the Indians to come in for a contract discussion in September. Now in Brazil, there's been several announced price increases of $30 a tonne. It's our belief that a portion of those have been -- a portion of that $30 has been captured. I think the Brazil market, as we went into the calendar year, carried through a significant amount of potash. That is getting used up with the marketplace as strong as it is. It's amazing the impact of beans in the teens will have on demand for crop nutrients, specifically phosphate and potash in Brazil. And so we've seen strong volume, and the price is continuing to edge up, rather than take a significant $30 price increase.

Your next question comes from Michael Picken with Cleveland Research.

Yes, just wanted to get your thoughts on the demand for phosphate down in Brazil. Again, you talked about the potash there, but any sort of update in terms of what we might expect? And I guess with the drought in the U.S., do you think we're going to end up seeing more Safrinha corn being planted? And what type of impact that might have on demand for both your products during this Safrinha season, during the winter?

Michael, Rick McLellan is the right person to answer that question.

It'll be -- yes, Michael, the kind of Brazilian demand and what gets planted. Right now, the economics for soybeans are extremely compelling in Brazil, and so this October's plantings, I think the expectation is, is that we will see more hectares planted of soybeans. Brazil has had a significant Safrinha this past -- that's just being harvested, and expectations are is some of that will come on the market. Phosphate demand, we think, is going to continue to be very strong into Brazil, and we look for good second half shipments to meet up for what the market will need. One of the things that the Brazilians are experiencing that is something they continue to need to focus on, this is a growing market, and vessels are waiting at main ports for up to 45 days. So I think we'll see a lull in new purchases of phosphate just to deal with the offloading of purchases that are coming in right now.

Okay, with that, we're going to close our call this morning. In closing, I'd like to summarize 3 key messages that I hope you leave with: first, external factors created some challenges for us and the rest of this industry this past year; second, Mosaic made important and significant progress in our fiscal 2012; and finally, prospects for our business this year and beyond are very, very positive. Mosaic is in an excellent position to achieve our vision of being recognized as the best crop nutrition company in the world. Everybody, have a great day. Thank you.

Ladies and gentlemen, that does conclude our conference for today. You may disconnect, and thank you for participating.