Good morning, and welcome to the Mosaic Company's First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Your host for today's call is Paul Massoud, Vice President of Investor Relations and FP&A of the Mosaic Company. Mr. Massoud, you may begin.

Thank you, and welcome to our first quarter 2023 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer; followed by 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 Joc. James O’Rourke: Good morning. Thank you for joining our first quarter 2023 earnings call. Mosaic delivered revenues of $3.6 billion, adjusted EBITDA of $777 million and adjusted earnings of $1.14 per share. The fundamentals of the agriculture market remain quite attractive. Global stock-to-use ratios for grain and oilseeds are at 25-year lows. To put that in context, it would take 2 to 3 years of perfect weather and adequate fertilizer applications in every major growing region around the world just to get back to normal levels. With weather patterns shifting to an El Niño environment, the likelihood of that happening is low and would be exacerbated by under fertilization. We are beginning to see the negative impacts on crop production. Yields in the European Union turned lower…

Before we move on to live Q&A, 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. Joc, the first question that we received was, how do we see ag markets evolving over the rest of 2023? James O’Rourke: Thank you. While there has been recent volatility in the agricultural markets, the fundamentals remain strong. We're starting with a 25-year low stock-to-use ratio for grains and oilseeds. Now much has been made of Brazil's larger-than-expected crop, but offsetting that is problems in the Argentinian, Europe, Asia and others who are suffering from lower yields due to weather and under fertilizations. Then as we look at going forward, this year's El Niño and under fertilization brings up a real risk to the 2023 ag markets. Now weather is always a known uncertainty. But as we've seen in recent past, extreme weather events that negatively impact ag production seem to have become more commonplace. Longer term, we do continue to see great potential for demand growth from biofuels, including an increased call on oilseeds to feed renewable diesel production as well as the enormous potential for sustainable aviation fuel. We also believe that biofuel use will continue to rise in the medium term even as cars transition towards electrification. To sum up, there is a rational basis for ag commodity prices to have eased off in recent weeks. However, there is strong fundamentals for ag bullishness .

Joc, a follow-on to the ag markets question. How do we see what you just said impacting fertilizer markets over the rest of this year? James O’Rourke: Well, thank you. I'd like to start by saying what we're seeing in North America demonstrates just how strong the market could be this year. If we look at North America in the months of March and April, those were both very strong months and up about 20% from where we were probably last year. So if I look forward there, I expect that will carry over to a stronger season in Brazil once the application gets started, and then it will continue for Asia and other regions. Now I'm going to turn it over to Jenny to give a little more detail on the supply and demand of the fertilizer markets.

Sure, Joc. Let me start from phosphate. The export control out of China is going to continue as the country is going through phosphate industry shift from production on fertilizers to industrial products. The Chinese government is going to continue to ensure their farmers to have affordable and available fertilizers in country for their own production. The export restriction is going to continue to be in place. We believe this year, the export out of China will be somewhere between 7 million to 8 million tonnes. With the tight supply of phosphate and the rebounding demand, we believe this is a very constructive margin environment for phosphate. Turning over to potash. Export out of Belarus last year had significantly reduced from 12 million tonnes to 5 million tonnes. This year, despite multiple export corridors being utilized by Belarus, we still don't believe that they have opportunity to export over 8 million tonnes out of Belarus. And the production out of Russia is continuously under the risk. On the demand side, as Joc mentioned, we are seeing a very strong spring season in North America. In the market when spring application have started, we're seeing a bigger volume and we have seen price appreciation in the market. And in the market in Northern plants, where the spring season are still ongoing, we have started to get inquiries from our customers for their summer fuel demand. This demand to summer fuel and applications are indicating a strong and robust demand for the full season in North America. We believe what is happening in North America is going to happen in a market like Brazil, where they are going to prepare for their incoming seasons, and we believe they will engage soon. With strong demand in Asia, we believe the buyers will reengage and the price and volumes will respond positively.

Thank you, Jenny. The next question is a follow-on to what we just talked about. Given this constructive outlook on the fertilizer markets, can you explain your thinking behind the guidance for pricing and volume, particularly for Potash? James O’Rourke: Thank you. In Potash, we guided to a normal quarter in North America and a conservative view of the export market. Early quarter demand in North America is stronger than we would have expected and certainly stronger than normal. And history would say that the strong North American market will be followed in other markets such as Brazil and Asia. If this occurs, there is certainly upside to both potash volume and price. We have seen over and over again that once volumes move, price follows.

Joc, our next question is on Mosaic results. Could you provide more color on the quarter and how you see the performance of the segment evolving over the rest of the year? James O’Rourke: Thank you. In the distribution business, the lead time to position products is quite long. As such, when the second half volumes were lower than we expected, we ended the year with high-priced inventory. Now we have sold most of this higher cost inventory down and expect the rest of the year to be much more normal. Transitioning between cycles can temporarily expand or contract margins, but true cycle margins remain unchanged. For example, in quarter 4 of 2022 and quarter 1 of 2023, distribution margins were below historic levels, but they will return as market stability is achieved. Distribution margins in second quarter to the fourth quarter will be in the $30 to $40 range when averaged together.

Joc, one other thing that I would note that I think is important in this discussion is that we use average cost accounting for the cost of inventory in Brazil. And what that means is that as prices -- sales prices are moving either up or down, the average cost of inventory that we're recognizing in our results is moving a little slower than that market price. And as a result, during increasing price environment, you'll see expanding margins. During declining price environment, you'll see declining margins. But that's why over the course of the year, we will see margins in the target range that we've talked about. But quarter-to-quarter, as market prices are moving, you can see a level of volatility in results.

Thank you, Joc, Clint and Jenny. Operator, let's move on to the live portion of the call.

[Operator Instructions]. Our first question comes from Christopher Parkinson from Mizuho.

Could you just give us a real quick update on how we should be thinking about your phosphate strip margins just across Florida rock cost, processing where sulfur is trending relative to last year as well as your ammonia mix? Just any insights on how that should affect phosphate margins throughout the balance of the year would be incredibly helpful? James O’Rourke: Chris, if we look at how we're projecting, I guess, stripping margins for the rest of the year, you will have seen that the raw material prices have declined in the last while. And obviously, I think I've talked before, the sulfur, it takes 0.4 of a tonne of sulfur basically to make a tonne of DAP and about 0.2 of a tonne of ammonia. So those moves, which have been quite material, have allowed -- even though the price of phosphates has come down in time, the actual margins have stayed relatively constant throughout that period. And we see those margins staying relatively constant through the rest of the year. If we look at our cost of our actual inputs, rock and conversion, our rock costs were driven a little higher this quarter basically because of a lower volume throughout the quarter, probably due to both -- well, more than anything due to the grade of the area we've been mining through. And then if we look at conversion costs, those have been impacted by higher variable and fixed costs such as electricity and process chemicals. For the balance of 2023, we believe our maintenance and capital assets that we've invested in should really improve both volumes and costs as we move forward.

Our next question comes from Steve Byrne from Bank of America. .

Your price for potash for the second quarter looks like it's roughly $75 a tonne more than historical levels and yet it sounds like Jenny's comments would suggest that potash is the one that is going to be more curtailed in supply in 2023 as opposed to your FOB DAP forecast is a couple of hundred dollars higher than historical prices. So my question is, what is fundamentally different here between P and K that would lead potash pricing to be generally weaker? Is it a reflection of second-tier price coming out of Russia? James O’Rourke: Okay. Thanks, Steve. Yes, let me go through a couple of points there. I think what I said earlier in the prepared questions or whatever the early questions still holds, which is when we were setting up the quarter and doing our preparation for this, you're talking a couple of weeks ago, we hadn't seen fully the impact of what we would see in April and May -- or sorry, March and April. We're seeing that come in better than we expected. So from a volume perspective, we're pretty confident that, that guidance is at least very realistic and probably even we could see upside on that. In terms of pricing, it's all about combination of what's going to watch market. For instance, it's product mix, whether we're selling the standard-grade product to some of the foreign markets where the prices are, a, lower and the transport is higher. But then secondly, how much is coming from North America, which is a strong market and a good -- both good pricing and a relatively lower transport. And then Brazil, which really hasn't started yet. So as we end the North American spring and move into the -- or wind down the North American spring and move into the quarter, our question is going to be, does Brazil come in to replace the higher cost -- or the higher priced North American product? Or do we get more of a balance on other exports? In which case, it just makes it a little hard to come up with a real good forecast for those prices. But I think that the comment you make is more than valid. There is definite tightness in the potash market. We're seeing it probably strongest through North Africa. We're seeing it strong in Europe. And I think we're going to see the impacts of it in Asia. So our view is they have to step up soon and start buying and the price will follow.

Our next question comes from Ben Theurer from Barclays.

Actually, a good follow-up just on the price development and like long term versus short term. So if you think about all the comments you made around the structure challenges and obviously, the tightness, potash, you just reiterated, but still prices are not coming up that much. So maybe help us understand a little bit that in context prices being soft, but then at the same time, you do consider some of capacity increases towards the back half of the year. So just to understand a little bit the rationale behind the volume you plan to put in additionally, given where prices are? James O’Rourke: Yes, sure. So if I'm going through potash, again, it's the same story. First, we're going to see North America. We didn't see a strong -- although we don't sell to it, we didn't see a strong European market. But very quickly, we're going to turn over to Brazil and Latin America, that market should start moving. The softer season starts basically at the start of the third quarter, if you will. So they have to be moving product towards the end of this quarter. So June, let's say, it's things have to start moving to get product in place in time. Now we're coming into the year. And I think one thing that has to be understood is there was some pretty severe overshoot last year. Price went high, usage went way down. And I think we're seeing an overshoot downwards right now. And so it's not following fundamentals. But long term, it has to. So Brazil and the rest of Latin America will start moving. China is a very similar season to North America. And while they are getting more product from Belarus and Russia across from rail, they're still going to have to buy potash. So all of that stuff starts moving. Asia has to move. They need their staples like rice to grow. Indonesia, Malaysia needs the palm oil. So all of those start moving. We think it's still a constrained market. And the short-term -- sentiment drives short-term, fundamentals drive the longer term. So we think right now, it's just sentiment driven.

The next question comes from Andrew Wong from RBC Capital Markets.

Just a couple of questions on phosphate for me. What are your expectations for Phosphate segment production run rate? Can we get back to what -- historically, we've seen kind of 2 million, 2.2 million tonnes per quarter coming out of that segment. And then just a question on the Q2 pricing guidance. Yesterday, we kind of saw U.S. NOLA DAP prices drop down to kind of like the low 500s. How does that factor into the price guidance for Q2? James O’Rourke: I'll let Jenny talk a little bit about summer fill and whatnot. But let me start by the run rate. I think, realistically, our run rate has probably been a lot closer to 8.5 million tonnes per year since we shut down the Plant City operation. So 2.2 is probably at the top end. I think a good quarter for us will now run probably 2 to 2.1, but we would expect an average probably in that range as we go forward if everything is running well. We've had -- as I mentioned in my prepared remarks, we have had weather-related issues. Hurricane Ian shut us down for a fair bit, caused some real problems. So we think that, that number of, say, 8.5 is a better run rate than, let's say, 9 to 9.5 with all things sort of settled and looking at the possibilities. Let me talk -- get Jenny to talk a little bit. I think what you're talking about is summer fill pricing on phosphate. So let me get Jenny to talk about that.

Sure. Andrew, I believe the numbers that you talked about was DAP NOLA barge price. We noticed that as well. And as some of the trade publications reported, the lower prices may be driven by the incoming import vessels the traders play on the index setting. So that's what we learned, and that happened many times in the past. It does not necessarily represent the real market value. As we go through this index setting, we will see the real value to be reflected for summer fill. Having said that, it is very normal for the market like North America, after spring season, we will see -- we might see a price reset. It happened usually in every year, but the price eventually is going to be supported by fundamentals as we discussed earlier. Lastly, we want to remind ourselves, when we say phosphate market, it is a very constructive margin environment. As the raw material prices coming down, there are some pull through to the phosphate prices as well. James O’Rourke: And just don't forget the ever -- never ending logistics issues. I'm not convinced that product coming in through NOLA certainly isn't going to get there in time for most of spring. So it is about summer fill, not about spring demand. And as you know, the flooding in the Upper Mississippi has meant that's actually been shut down for a while or was.

Our next question comes from Joel Jackson from BMO Capital Markets.

I did a bit of history, and I went back to some of the presentations you gave in November of 2020 when you're presenting kind of your look of all the segments going forward. So look at the Fertilizantes one. And the you talked about transformation 1.0, transformation 2.0, where you can maybe add $200 million to $300 million of earnings to Brazil to Fertilizantes by a different synergies, transformations, whatever. Now -- and that was off the base you're achieving, you were achieving $30 to $40 a tonne margins in 2019, 2020 already, and that's the guidance you're giving now a steady state. So I guess my question is, what's happened to all those opportunities to where you're now guiding to a $35 tonne margin, the same margins you achieved in '19 and '20 before you launched all these initiatives? James O’Rourke: Let me start -- thanks, Joel. Let me start by saying that is the distribution margin that we're referring to there. And it's important to kind of think about that in terms of the overall. If you think last year, I think, in distribution, we sold approximately -- was it 6 million tonnes of distribution tonnes? So 6.5 million tonnes of distribution tonnes at -- I think it was about $60 on average. So if you think about that, that's contributing $200 million of the $1 billion. And I know I'm probably adding to the confusion of how hard it is to estimate what Brazil looks like. But the distribution business itself is a pretty small piece of the overall. We make about $100 million a year of co-product sales, and we make the majority from our actual production business, selling our MAP and feed, TSP and SSP. So those are the ones that are really -- and right now, that market is moving pretty slowly. We're in an off season. And so what we're seeing is a more than usual impact on margin by that distribution business, if you will. So I don't think anything is inconsistent with what we said in 2020.

Our next question comes from Richard Garchitorena from Wells Fargo.

Just wanted to touch on the guidance for pricing in the second quarter. The range reflecting a higher percent of lower-priced export sales. Any reason for that in terms of why more lower-cost sales if demand is picking up in April and you're seeing it as well in May? James O’Rourke: Yes. Thank you, Richard. Do you want to take that, Jenny?

Yes. I think it's -- I just want to remind what Joc mentioned. The guidance for the second quarter for potash price, it is a mix of different markets between North America and export market. And in the export market, there are a mix of different grades for different destinations. So for example, the price to Brazil are -- can be very different than the price to go to India because of the freight differences and also the grade differences. So as we forecast the second quarter, this is a combination of different price, different product grade and different market. Very strong North America price, we believe it is going to be carried over into our second quarter. The mix of the market will have impact in the guidance. James O’Rourke: Yes. Let me reiterate. I think somebody may have been Steve Byrne mentioned that is this the aggressive behavior of the Russians and the Belarusians? And yes, in a very -- in the -- in a less robust market, which we've been in for the first part of the quarter, they have a bigger impact. So in the export market, right now, they're being quite aggressive. And they're having a bigger impact. But recognize they can't keep producing enough to impact the markets once they really start moving.

The next question comes from Edlain Rodriguez from Credit Suisse.

I mean, Joc, a quick question on philosophy. In the past 12, 18 months, I mean, potash prices have peaked and have come down really hard. Like is there anything that Mosaic or Canpotex or the industry could have done to mitigate that volatility? I mean this is something that has happened before where potash prices get to those high levels only to come down really hard very quickly. Like is there a better way to "manage the pricing?" I mean, yes, potash is a commodity, but it doesn't really have the same cost push aspect like nitrogen does with natural gas. I mean, potash is supposed to be different. Any insight you can provide in there like what's going on there? James O’Rourke: Yes. Thanks, Edlain. And look, from our perspective, the huge price peak, the quick drop back down is certainly not how you'd like to see the markets perform. We were saying that last year, and I wouldn't change my view on that at all. If you think back to -- and you got to almost think back to the start of the Russian invasion of Ukraine, where you had -- for instance, President Bolsonaro of Brazil was in Canada asking for more product, you had him in Russia talking to Putin looking for more potash. You have this huge almost panic run on potash and phosphates as they're trying to make sure they had enough for the season. And the price got to the point where it was literally, at least from a psychological perspective, unaffordable. So people talked about as a potash holiday. Well, now you're seeing virtually the opposite where you still in some markets and some of the retailers are trying to sell their high-priced product. They're resistant on dropping their prices to the market. So now you see overshoot on the downside. And yes, unfortunately, it's kind of that system. It's a -- the highs were too high and now the lows are probably too low. It will balance out again just like it did in '09, but we have to get through the first phase of it. What could we have done differently? We were aware of the risk. And we've -- I think we talked about that risk in some of these meetings even. So what can you do? Do you try and send more to those markets to make sure they're well supplied? We did that. But then, of course, when things slowed down, there's no way around it. So I'm not convinced that anything that the suppliers could have done would have changed the overall outcome. Now this year, again, we're trying to supply. And as people buy, that will start balancing out.

[Operator Instructions]. Our next question comes from Joshua Spector from UBS.

This is Lucas Beaumont for Josh. I just have two quick ones. Firstly, so on your potash volume guide for the second quarter, you're talking it sounds like you think North America is going to be up year-on-year. So if that's the case, and I kind of split out like what Canpotex is doing then in the second quarter, what's applied it's implying that's kind of down 15% to 20% year-on-year. So I guess, is that right? Why would it be down that much taking less allocation there? And secondly, just wanted to follow on from Joe's question on Fertilizantes. So maybe how do you kind of see the normalized mid-cycle EBITDA in Fertilizantes now? And could you split that between distribution EBITDA and production EBITDA for us, please? James O’Rourke: Yes. Okay, Lucas. Yes, potash volume, I think I said earlier, we have taken a relatively conservative view of international sales. And so yes, our portion of exports is a bit lower. And when I say this, I mean, we're looking right now. And I think what I would say is if North America keeps performing as it does, we'll be at the higher end of our guidance. And if the international market comes back, we'll be at the higher end of the guidance. All I can say at this stage is probably there's -- we try to keep a balance, but there's probably a little more upside potential than there is downside risk. At this point, it looks like. Although, again, supply chain and everything else can become a risk in this. You can only move so much product. Now the second question, Brazil, yes -- and again, let me -- so let me kind of highlight Brazil, if you will. I think you can look at Brazil as being -- 50% of their earnings are going to be a production kind of economics. Now you have to take into account the fact that the producing right in the market. So I think that one is probably 50% of Brazil's earnings come from that. 30% come from the distribution business, and the rest comes from other things like co-products and whatnot. So that's kind of how we look at it, and that's how we've tried to portray that business.

Our next question comes from Jeff Zekauskas from JPMorgan.

A couple of questions about potash. India signed a contract for 6 months instead of a year this time in potash. Why do you think they did that? Why signed a short-term contract? Normally, China quickly follow suit after India signs a contract and maybe gets a $20 a tonne better price. And as you said, the Indian signed at 4 22 a tonne down from 5 90. But the Chinese didn't sign a contract down $20 a tonne. What do you make of that? And do you have an expectation for when the Chinese might sign a potash contract? James O’Rourke: Yes. Okay. Thanks, Jeff. Look, let me start with India. It was not India that drove the 6-month contractor. It was the suppliers, including Canpotex, and I don't like to normally speak for Canpotex, but I can tell you that we don't think the fundamentals are such that the price is going to still be at 4 22 come 6 months from now or at least we thought there's pretty good upside potential. So that was the reason that was a 6-month, not a year. In terms of China -- and recognize -- sorry, let me finish the India thing. The other thing with India though is it hasn't really taken off tonnage-wise because they haven't established the subsidy program. So while there is a contract price, the importers are still a little bit leery because there isn't a subsidy guarantee for them, which means the NPK plants are taking what they need, but they're taking it hand to mouth. So it's a bit problematic and it's more of a political and subsidy issue than it really is the -- on-the-ground demand. In China, why didn't China follow? I think there's a couple of reasons. I think the first is they had the inventory that they needed for the short term, and there's -- they're looking for when do they really need product. And recognize that some things have changed in China. With 2 million tonnes coming from the rail across from Kazakhstan with -- from Belarus, and another 2 million plus coming over the euros from Uralkali and the Russians and then 6 million tonnes coming from Qinghai Lake and that production, your seaborne needs while still there are less than they were before. So maybe we have to reassess what 2 million tonnes of inventory really means because I think it will last them a little longer because they're getting their basic needs. Now having said that, I think by about midyear, they still need seaborne tonnes. So I think there's still a place for them. But I will say, and we've been saying this for years, the relevance of the Chinese contract is becoming less and less overall because they're less and less reliant on seaborne tonnes.

Our next question comes from Vincent Andrews from Morgan Stanley.

Joc, I'm just trying to synthesize all the comments today about the market and price expectations and so forth in potash with what are the sort of thresholds that you're anticipating crossing in the back half of the year that would get you to turn Colonsay on? Is it that you're looking for a certain increase in price from here? Or is it -- you're waiting for China to come back into the seaborne market? Or what is it that you guys are watching to determine whether you're going to make that decision or not? James O’Rourke: Thanks, Vincent. If I'm thinking about Colonsay in particular, and I know there is one at least a cent question that said, why are we talking about restarting Colonsay at all? And really, it's almost been a timing issue that every month that goes by, Esterhazy increases its capacity a little bit to where I think now we're probably going to be well over 6 million tonnes of capacity at Esterhazy in the second half of the year. We're going to be 3 million tonnes of capacity at Belle Plaine. And so overall, we've got 9 million tonnes of total capacity without Colonsay. So I think -- where it is company come in? I think if the export market really heats up and you start seeing good demand from China, good demand from India, good demand from Indonesia and Malaysia, Brazil start moving and Latin America, then you're going to start to see the potential for us to not only have the need the inventory will get run down that we have at the plants, and we may not be able to keep up with the 9.5. Now if that only comes in lackluster, Colonsay probably doesn't run. So Colonsay is not really a price issue for Colonsay because I think the profitability of Colonsay would still be reasonably good at this level. But I don't want to be stuffing product into a market where there isn't a buyer or we just actually destroy the market we're in. And not unlike what happened when BPC broke up. And so I think there's a good case to be careful about how we bring that new -- that other production on. It's sitting there. Maybe we have a little excess capacity that we're -- the cost of holding is high, but there's enough uncertainty right now that I don't want to risk not having it if that market comes back, that's strong.

This concludes our question-and-answer session. I would like to turn the conference back over to Joc O'Rourke for any closing remarks. James O’Rourke: Okay. Thank you, everyone. Let me conclude our call by reinforcing a couple of our key messages. The agricultural commodity prices are still elevated. This gives farmers strong incentive to maximize their yield and use fertilizers. So fertilizer demand is robust and volumes are starting to move quite strongly. Our operations are running well, and our strong earnings and cash flow are allowing us to return significant capital to shareholders. 2023 is off to a good start for Mosaic, and we have a positive outlook for the remainder of the year. So with that, thank you for joining our call. Have a great and safe day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.