The Mosaic Company

Thank you, and welcome to our first quarter 2020 earnings presentation. I'd like to start by reminding you that the Q&A portion of this call will be available beginning at 11 a.m. Eastern Tuesday, May 5th, and our full slide content, including modeling assistance, is available on our website. We will be making forward-looking statements during this presentation. The statements include but are not limited to statements about future financial and operating results. They are based on management's belief 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 and in our reports filed with the 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 8K filing also contain important information on these non-GAAP measures. Now, I'd like to turn the call over to Jacques.

Thank you for listening to our first quarter results discussion. Because we are all working from home due to the coronavirus pandemic, we're taking a different approach this quarter. We've made this script and all our earnings materials available at the same time. and we'll record answers to questions you submit to Laura. As always, Laura and Lucy will be available to answer your questions. I'll start by expressing my hope that all of you and your families are safe and healthy. By now, the pandemic has touched and taken a great many lives, and we all know people who have been affected, whether by the virus directly or by its huge economic impact. Mosaic has been fortunate with COVID-19 having had minimal impact on our employees, operations, or suppliers. I will cover three topics today. First, the current strong conditions in the fertilizer markets. Second, COVID-19, its impact on our markets and agriculture now and going forward. And finally, our continued progress on our strategic initiatives. Fertilizer markets are strong. And we continue to expect a good year. We expect growth in global shipments for both phosphates and potash this year. While our expectations have been modestly lowered due to the pressure on grain and oilseed prices, we expect good growth in line with the steady growth in demand we've seen for decades. We are in the peak spring season in the northern hemisphere and demand is running high. In fact, our retail customers are reporting that demand is outpacing even their high expectations. Our April shipment volumes were robust and prices are beginning to respond. While sentiment around biofuels and low grain and oilseed prices have dampened fertilizer price increases, Midwest DAP is up $36 per metric ton from the beginning of the year. Corn belt MLP prices softened in the quarter as the market awaited a new China contract. But we've seen a significant change in sentiment with the signing of the China contract. Last week, Brazil's CFR MLP price was up $20 per ton following the contract announcement. The impact of COVID-19 in North America has pushed our customers to accelerate deliveries where possible. But otherwise, the season is playing out like a normal spring. Several factors have brought phosphate and potash markets into better balance. First, while last fall's North American application started late due to weather, it lasted longer than usual, which brought down fertilizer inventories. Second, inventories across the channel are low for the first time in a couple of years, and our tons on barges in the river are down by 80% compared with a year ago. We're refilling warehouses quickly to meet very strong, fast-paced spring demand in North America, driven in part by high application rates to replenish nutrient-depleted soils. Third, phosphate supplies from our competitors has been impacted by COVID-19 and unrelated operational issues. In fact, compared with last year, we believe phosphate production is down by over 500,000 tons, excluding changes in China. Fourth, demand in China remains strong during the spring season, and India continues to import record amounts of DAB. Much of India's domestic production declines have been offset by finished product shipments into the country. But total global supply is down. While Chinese exports are down almost 500,000 tons compared with a year ago, we expect China to make up some of, but not all, of those tons in the second half of the year. And finally, phosphate imports into North America are down year over year by approximately 250,000 tons through April. After the severe demand shock resulting from bad weather in spring of 19, importers seem to be finding homes for their tons elsewhere. Last week, the signing of a new potash contract with China helped form the base on which global prices can build given strong demand. The published contract price of $2.20 per ton is for red standard, and prices are higher for white and granular. As is typical, we believe the granular price is $15 premium to current Brazil spot prices. We believe we will continue to see potash volume and price increases from here. Slide 5 in our presentation shows the strongly positive market reaction to the contract signing in 2016 in a similar pricing environment. Much of North American Spring was planned and executed before the full effect of COVID-19 occurred, and the pandemic is clearly impacting sentiment in every sector of the economy. I'll spend a few minutes providing insight into impacts on our market and our best view of how the season ahead will play out broadly and for MOSAIC. As you can see on slide six, we've highlighted not only the risks that we are actively monitoring, but also opportunities that we expect and have seen. USDA planting expectation. currently at 97 million acres of corn and 84 million acres of soybeans this year, are likely to be revised as growers adjust to shifting markets, and especially to ethanol production expectations. We believe that the reduction in biofuel demand may be up to the equivalent of 5 million acres of corn. Some of the actual acres that would have grown corn will migrate to soybeans, and at Mosaic, we are agnostic. Corns and soybeans both require significant amounts of potash and phosphate. There is potential for much of the biofuels-related demand destruction in North America to be balanced by increased corn demand in China as the nation continues to rebuild herds following the African swine fever outbreak last year. Elsewhere, we could see impacts to potash demand resulting from weak palm oil prices, which could take longer to rebound. As it relates to our business to date, we've seen very little direct impact of COVID-19 on our financial performance. with the total combined margin impact of outages at Miski Mayo and Patrocinio under $10 million in the quarter. That said, we have seen more cautious sentiment from our buyers. We are closely monitoring the very dynamic situation in our markets, as well as logistics and supply chain risks. Our goal is to be ahead of potential scenarios, be flexible, and to quickly adapt to any changes. This means maintaining a high degree of optionality in our logistics and sourcing, and constant communication with our teams, suppliers, and service providers. Some of the actions we are already taking include finding alternative sources for phosphate rock, to protect against the Mesquimayo outage extending longer than currently expected, as well as finding new sources of sulfur and sulfuric acid to ensure we can continue to meet our production needs through this period of uncertainty. It is important to note that we are finding opportunities as well. For example, we're seeing more rail and truck availability as other industries' demand has fallen. which increases our flexibility and capacity to move product to market and lowers our fuel and freight costs. Also, while the availability of sulfur around the world is being impacted by lower refining activity, we have taken advantage of opportunities to purchase inexpensive sulfuric acid shipments that were in transit to other buyers who no longer had a need for it. In addition, we are seeing reduced G&A expenses as we've curtailed travel and we expect a more moderate level of spend longer term as employees over the last couple of months have embraced various tools and technologies that promote face-to-face collaboration without having to travel. We've also seen positive developments in cash taxes, recent past legislation will accelerate cash tax refunds that we had anticipated collecting over the next few years. As a result, we have updated our cash tax expectations for the year to reflect a net inflow of approximately $15 million from refunds versus a net outflow previously. When it comes to our operations, we've been fortunate. Our supply chain partners continue to operate well, and we maintain the ability to move product by rail, truck, barge, and ship. Our employees have been exceptional. Only a handful of our employees have tested positive for the virus, and none has been critically ill. We responded to the pandemic by adapting quickly to keep our people healthy and safe. We managed shift schedules to keep people at safe distances from each other. We kept office workers engaged while working from home, and we ensured that we were equipped with appropriate supplies of personal protective gear. We fundamentally shifted how we worked in just a few days. We're also doing our part to help society deal with the pandemic. We've invested over $1.5 million in the communities where we operate to help with those communities' most urgent needs, including medical supplies and food relief. Beyond COVID-19, Mosaic continues to execute well and responsibly so that we can maximize the benefit from improving markets. Our plants and mines are operating efficiently and at high production rates, and our safety performance continues to improve. In Brazil, we've achieved transformational savings of $17 million in the quarter, and we are well on our way towards our new $50 million additional savings target for 2020. Our K3 project continues to gain momentum with the third minor placed into operation in March and the fourth minor due to be completed within the next month. Our newly combined North American business is identifying significant cost and other efficiency opportunities. And our SG&A expenses are down considerably, primarily from lower long-term performance-based incentives. Now I will turn the call over to Clint to discuss the quarter. how we think about our liquidity and financial strength, and the scenarios we've considered. Clint?

Thank you, Jock. As we look back on the first quarter, there were a number of dynamics that we saw in the business, specifically around sales volumes, finished product prices, and currencies. First, volumes in our three operating segments were up 14% compared to the first quarter of 2019. as an extended North American fall application season benefited potash and phosphate volumes, and market strength led to higher activity at mosaic fertilizantes. The combination of this strong demand and industry curtailments led to a rebound in phosphate spot prices during the quarter, and this dynamic has accelerated into the North American spring season. Recall, however, that there is a lag between market price changes and realizing those prices in our results, so we would expect to realize more of these market price improvements in the second quarter and beyond. Global currency volatility also had an impact on our business and financial results. In Brazil, the REI depreciated by 22% versus the dollar during the first quarter, and as we've discussed in the past, depreciation of the REI is directionally a benefit to Mosaic and Brazilian farmers as it lowers our production costs in dollar terms and improves farmer margins. With that said, we are mindful that this may create credit risk for certain customers with U.S. dollar obligations. However, we have seen minimal impact from this to date. While the currency volatility has been less than Brazil, the same dynamics apply to our business in Canada, where the Canadian dollar depreciated by 8% during the quarter. Recall, however, that we have a rolling currency hedging program that smooths out short-term volatility, so the effect of the currency movements on our financial results will be somewhat delayed. As a result of these currency movements, we recorded $295 million of unrealized foreign currency losses during the quarter. Of this amount, $239 million is related to accounting for U.S. dollar-denominated liabilities, including intercompany balances, at our foreign subsidiaries. When those liabilities are converted from U.S. dollars to local currency as part of the normal accounting process, that impact is reflected on the income statement. However, when the subsidiary balance sheets are subsequently translated back into U.S. dollars as part of the normal consolidation process, There's an identical and offsetting adjustment to the balance sheet in the other comprehensive income account. The remaining $56 million is the unrealized mark-to-market on our normal course hedging program. We treat all of this as notable in calculating our adjusted earnings and adjusted EBITDA. I would also note that approximately $30 million in realized gains that relate to balance sheet hedges have been treated as notable items as the benefit of these hedges had no corresponding offset on the income statement. As outlined on slide 10, MOSAIC's reported net loss for the first quarter of 2020 totaled $203 million, or 54 cents per share, which included $295 million in non-cash foreign currency losses that I just mentioned and normal FX hedging, particularly in Brazil. Adjusted EBITDA for the quarter was $214 million, and adjusted EPS was a loss of six cents. At our potash business, adjusted EBITDA for the first quarter was $175 million, down from $256 million in the first quarter of 2019. Sales volumes during the period were up 2% compared to the previous year, as improving North American sales were mostly offset by lower international sales due to the lack of a China contract. Adjusted gross margin per ton totaled $69 during the quarter compared to $100 per ton last year, as the reduction in average sales price more than offset the improvement in cash cost of production. It is notable that that during the first quarter, cash costs of production were $70 per ton, including $11 per ton of cash brine management cost. This brings our cash cost of production, excluding brine cost, to $59 per ton, which is below our 2021 target of $62 per ton, while operating at a reasonable and sustainable 85% operating rate. While depreciation of the Canadian dollar contributed $1 per ton to the benefit, Most of the cost improvement has resulted from active portfolio management and the success of the K3 project. In the phosphates business, first quarter adjusted EBITDA totaled $8 million compared to $168 million in the first quarter of 2019. Finished product sales volumes were up 7% year-over-year, reflecting the surge in late fall applications in January and a strong start to the spring season. However, these higher sales and lower sulfur costs were more than offset by weaker average sales prices. With that said, we have seen average realized at-the-plant DAP prices strengthened by $8 per ton in the first quarter and would expect that to accelerate into the second quarter as more recent pricing trends are realized into results. While some of this improvement is masked in results by the normal shift away from higher margin microessential sales in the first quarter, We expect this to correct itself in the second quarter as strong microessential sales into North America are occurring. We continue to make significant progress on costs. For instance, our cash rock cost reached $36 per ton with our Florida mining operations delivering one of the best quarters in years and below our 2021 target of $39 per ton. While our cash conversion cost rose to $67 per ton due to the impact of curtailments, These should return to more normal levels in the second quarter as those facilities are back up to full operation. And finally, we've seen substantial benefits in our raw material costs, primarily sulfur. While sulfur prices have increased recently to $54 per ton under our second quarter contracts, they are still well below average 2019 levels. Mosaic Fertilizantes had a strong first quarter in terms of volumes, gross margin, and adjusted EBITDA. with adjusted EBITDA totaling $68 million compared to $62 million in the first quarter of 2019, despite the year-over-year finished product pricing trends, reflecting the impact of the company's synergy and transformation programs. Similar to the phosphate operation, cash rock costs at Mosaic for Lizanche has improved meaningfully to 312 ri per tonne, down 9% compared to the fourth quarter of 2019 and below our 2021 target of 320 riyal. In dollar terms, with the weakness in the local currency, cash rock costs were down 16% over the same period to $70 per ton. Cash costs of phosphate conversion were up 7% in riyal from the fourth quarter due to a shift in production from TSP to higher cost, higher margin MAP. However, reported costs in dollar terms were down 8% over the same period after factoring local currency weakness. We've shown slide 11 before, and we're making progress toward achieving the $225 million in incremental EBITDA this year. In the first quarter, plant city closure costs were $10 million less. Potash production cost, excluding currency benefits, delivered $35 million versus the $70 to $80 million target, and Brazil transformation efforts realized $17 million of the $50 million total. For the $80 million benefit we expect to see related to dam remediation in Brazil, recall that those costs did not become material last year until the second quarter, so we would expect to see those benefits throughout the balance of this year. As reflected on slide 12, consolidated liquidity totaled $2.7 billion at March 31st. As previously announced, we believe the current environment makes holding more cash than normal prudent. So during the quarter, we accessed both our committed revolver and uncommitted working capital facilities to raise the amount of cash on the balance sheet. At the end of the quarter, unrestricted cash stood at $1.1 billion, with an additional $1.6 billion available under Mosaic's committed revolver and $50 to $100 million available under uncommitted working capital facilities, depending on the available borrowing base. The company's liquidity position improved further in the month of April as cash balances continued to build. Cash from operations during the first quarter was positive $190 million, a $366 million improvement over last year as a result of continued management of both cost and working capital. As is normal for Mosaic, net debt rose during the quarter by $415 million, less than last year. I would also note that during the quarter, our structured payables balance in Brazil, which is not part of net debt, declined by $241 million. As we look to the balance of the year, we're expecting up to $170 million in additional cash inflow from both domestic and international tax refunds in excess of our previous estimates and the unwinding of an interest rate swap. In fact, we've already received over half of this amount in the second quarter. As we look to manage our liquidity, we view these kind of cash-enhancing steps as constructive and preferable to other options such as cutting CapEx as it allows the company to remain on target with value-enhancing projects such as K3 and the Brazil transformation. With that said, we do retain the ability to adjust our spend profile should circumstances warrant. As we move forward in the year, we intend to maintain an elevated cash position However, should uncertainty around COVID-19 diminish, we would expect to return some, if not all, of the cash accessed under our lines and return to a more normal liquidity profile. With that, I'll turn the call back over to you, Jack.

Thank you, Clint. Overall, we believe 2020 and the years ahead hold major promise for Mosaic and our shareholders. Our products are recognized globally as a priority, fulfilling a critical need for food security. FODASH and phosphate markets are moving into better supply and demand balance, with very strong global demand and limited new supply coming to market. We expect the market strengthening to continue as we move through 2020 and into 2021. The spring in North America is shaping up to be the best in several years, and Mosaic is delivering across the organization. Our plants and mines are running efficiently. We are maintaining our strong financial foundation And we are reducing costs all while adapting and managing the impacts of COVID-19 on our operations, supply chain, and customers. Most importantly, our ultimate market continues to grow. Demand for food will persist, and we will be there to help the world's farmers meet that demand. Thank you again for your attention. We wish you all good health. Good morning. Thank you for listening in on our first quarter virtual fireside chat. By now, you've seen our earnings release and the commentary, and so we would like to spend an hour or so answering the questions we received last night. We'll do our best to answer every question, and we've consolidated questions where they're similar to each other. Before we begin, I would like to reiterate our key themes. First, our markets are holding up well, and global fertilizer demand is strong. COVID-19 has obviously made for a very dynamic business environment that agriculture must and will continue to produce. And secondly, we're delivering strong operating performance and making real strategic progress across the company with lower costs, increased efficiency, and created leverage for the years ahead. So now, Laura, let's take the first question.

Jock? We've received similar questions from Rick and Patel at Barenburg and Chris Parkinson at Credit Swift. Given your progress on per ton costs, can you comment on any updated projects versus your initial goals in all three segments? How sustainable are these cost levels going forward, and could there be further upside considering that it's only first quarter 20? Is there any scope to accelerate some of the company's cost reduction plans that were meant for 2021 into this year?

Thank you for your question. Look, as we continue to pursue transformational opportunities across our business, we are looking at what are the critical few projects that we can continue through this COVID-19 that really will make a difference over the long term for Mosaic. In potash, the first of these, of course, is the K3 development. Today we have three miners running, soon to have four, and by the end of the year we'll be close to eliminating the need for the K1 mine. That's a big step forward in this project and really a nice segue into having no need for brine inflow costs and pushing K3 to being the most efficient mine in the world. In terms of fertilizantes, whether it's the optimization of freight or cost reductions through energy and our beneficiation or driving our rock costs lower, we're well on track towards our 2020 and 2021 cost reduction targets there. And of course, if we can accelerate those, we will. In phosphates, whether it's our next-generation mining initiative or our next-gen processing initiatives, we're using technology and automation to drive costs and drive efficiency in that business. So across the business, despite the interference of COVID, we are really pushing on those critical ones that will make a difference in the long term to Mosaics.

Jack, PJ Juvicar at Citi asks, how are you thinking about your EBITDA covenant, and what happens if EBITDA continues to fall?

Thank you, PJ. We are comfortably above our EBITDA to interest rate covenants, but what I will do here is I'll let Clint give you some details on that.

Okay, thanks, Jack, and thanks, PJ, for your question. As Jack said, you know, I think the question that you have really focuses in on our interest coverage ratio. which uses adjusted EBITDA. And as Jock said, we have plenty of room in that ratio right now. It is calculated on a rolling four-quarter basis, so certainly keep that in mind. The other thing is, as you're calculating that, to keep in mind is that similar to our reported adjusted EBITDA, the covenant does adjust for things like foreign exchange gains and losses, share-based compensation expense, and losses for asset write-down. So just be sure that you're adjusting your math for those items as you're looking at that ratio.

Josh, this next question comes from Jonas Oxgaard at Bernstein. You spent $264 million on CapEx in Q1, but you're still guiding to $1.2 billion for the year. Run rate for Q1 is $1.05 billion. Are you picking up spending in quarters two through four? And if so, why?

Thank you, Jonas. Yeah, we did make a conscious effort to conserve cash in Q1. And we normally do that as that is our lowest cash flow quarter. So we try not to spend as much capital in that quarter if we can help it. And with COVID, we were even more focused in the first quarter. But we do expect some acceleration of spending as we go through the year, particularly in the summer months in Canada. As you know, K-3 is our biggest expenditure, single expenditure area. And on that, a lot of that work is going to go this summer. But we believe that that work is necessary. And as we've said previously, will drive lower costs and more efficiency in the long run. In terms of other capital, yeah, by all means, we're going to try and minimize what we do throughout the end of the year. But at the same time, we still have to look after the quality of our assets and the safety of our people. That is always our first focus.

Jack, this next question comes from Chris Parkinson at Credit Swift. How should we think about transportation and logistics costs in terms of both inland and seaborne freight Is it safe to say rates could be a minor tailwind to FOB netback prices?

Thank you, Chris. Yeah, we're definitely enjoying lower transportation costs right now, which is providing a bit of a tailwind. Of course, the cost of fuel is helping us from a rail and ocean freight perspective. And on rail, there's an extra efficiency in that we're not transporting as much of other products, so it adds a lot more availability to us. In terms of ocean freight, while ocean freight is helping us, it's also helping the whole industry. And so the bigger impact there is it'll probably change the trade flows rather than make a real difference to our competitiveness.

This next question comes from Jonas Oxgard at Bernstein. Can you talk about the drivers of differences between rock cost per ton in Florida versus Brazil? What is the long-term goal for Brazilian rock costs? And

what is the rock cost per ton in peru thank you jonas for the question in in terms of our rock mining costs we have a very different mining method in florida versus brazil and the main reason for that is in florida we have a sedimentary deposit where we're able to use large drag lines to move the rock in brazil it's a an igneous deposit and we have to blast and use truck and shovel to move move the ore in that situation. So Brazil will always have a slightly higher cost per ton than the U.S. will have. But the advantage, of course, is you don't have freight from the coast up to our growing regions or up to Uberaba, which is where we will use the rock. So in location, it's very competitive. Long term, We've put out our goals as having rock costs in the range of 300 reais per ton. We still see that as being a good goal. And we believe we'll achieve that goal. Matter of fact, I think we've achieved that goal this year. So we're doing well on rock costs. We expect to continuously improve. And that's a really good thing. In terms of Peru, again, it's a truck and shovel operation, but it is a sedimentary rock, so we don't have to blast. So they have pretty good costs. They're somewhere in between our Florida costs and our Brazilian costs.

Jack, the next question comes from Vincent Andrews from Morgan Stanley. Can you provide some additional detail related to how Mosaic will realize the sales from the new China contract? And how much Chinese potash volume will your second quarter results reflect? When will you recognize the volumes in the bonded warehouses in China?

Thank you, Vincent. The way we deal with potash sales outside of Canada is through Campotex, and we follow Campotex's revenue recognition standards. So those tons in bonded warehouses have largely been recognized, although I will say there will have to be an adjustment for changes in price that we will recognize in Q2. Now, in terms of a lot of those tons, they are actually going to be directed to our own distribution business, and so they are sitting today in our corporate segment in profit and inventory. And so that will move as we make the final sale of those products.

jock we have a multi-part question from seth goldstein from morningside research and this all retains to k3 what is the expected effective production capacity for 2020 what is our total expected production as a percent of total or in tons and should mosaic decide to reduce potash production would any of it come from k3 thank you seth as we look at 2020 and k3

By the end of the year, we expect we'll be running in that two and a half to three million tons per year of actual potash produced coming out of K3. As I said earlier, that will allow us to virtually eliminate the K1 mine and have all the K1 plant be fed by the K3 mine. In terms of this year, we expect to exceed the 1 million tons that we've previously announced, and we should produce somewhere between 1 and 1.5 million tons of actual production from the K3 mine. If we have to turn down production, certainly it will not be from K3, which is by far our most efficient underground production today.

Doc, our next question comes from Vincent Andrews at Morgan Stanley. How much volume in North America was actually pulled forward from Q2 into Q1?

Thank you, Vincent. In fact, if we look at the volumes, probably the bigger impact on volume was what would have been Q4 volume last year coming into Q1. We had a late fall, but it continued well into the late fall and into the winter months. And so the revenue recognition in Q1 was impacted by funds that would have normally moved earlier in the year in Q4. In terms of moving tons from Q1 from Q2, I think that effect will be minimal as although we got acceleration of people ordering and taking delivery, there is a lag for revenue recognition. And so from a revenue recognition perspective, many of the tons that might have been shipped in March will actually be recognized in the second quarter.

Jack, the next couple of questions retain to Mosaic Fertilizante. Steve Byrne from Bank of America wants to know, what is the long-term growth potential for the Fertilizante's business? Is it becoming a bigger producer or a larger distributor or to expand into full-service retail?

Thank you, Steve. As you're well aware, there is great long-term potential for Mosaic Fertilizantes. This business gives Mosaic a real first-mover advantage in Brazil. And as such, we think there's tremendous opportunities to become either a bigger producer through organic or inorganic means, It allows us an avenue to distribute our value-added products like micro-essentials and continue to grow that market. In terms of whether we would move into a more retail base at this stage, that isn't really our strategy, and we don't believe that that's where this business should go in the long term.

Scott, the next question comes again from Vincent Andrews at Morgan Stanley. With the significant devaluation of the REI in 2020, how much will that impact Mosaic's gross profit, and how much will it impact the FCNA line?

Thank you, Vincent. We have provided sensitivities to changes in FX rate in the appendixes. However, what I will emphasize is these were done on an unhedged base. So when you think about it, you have to think about the fact that we have hedged about half of our rei-based exposure. In terms of SG&A, about a third of our costs in SG&A are actually rei-based, so that gives you an idea on the impact to Brazilian SG&A.

The next few questions, Doc, pertain to our phosphate segment. So both Adam Samuelson from Goldman Sachs and Mark Connolly from Stevens are interested in hearing Mosaic's perspective on the outlook for sulfur over the balance of 2020, given the curtailments in the global energy sector and the implications for input costs. Can and would you carry higher than normal sulfur inventory through the course of 2020 and into 2021?

Thank you, guys. Certainly the oil industry disruption is having a knock on effect in terms of sulfur. At Mosaic, there's two things we're doing to really help our sulfur situation. One, as you suggested, we are moving to a higher level of inventory to make sure we have a better buffer. And then secondly, we've actually been sourcing cheap or cheapish sulfuric acid to supplement our supply. Now, that has worked out quite well because other industries have slowed down. But in terms of the overall world sulfur market, one of the things I will say is Mosaic is probably better positioned than most because of our position in the U.S. Gulf. And remember, in the U.S. Gulf, while the production is down, they're using more heavy crude right now, which produces more sulfur. Certainly, there is going to be periodic and localized production sulfur deficiencies around the globe. But I think in that, Mosaic will be positioned best to weather the storm.

Jack, both Mark Connelly from Stevens and Steph Goldstein from Morningside have questions related to our microcentral products. First, what are the main things Mosaic needs to do to reach its microcentral sales target for 2021? is there a trade-off in application between soy and corn planted acres how would crop prices remain at or near current levels affect the pace or probability of reaching that target and finally how much do you expect brazil to contribute to microsoft's growth in 2020. thanks folks i'm going to hand this one straight to rick because i think he can give a more complete answer

Yeah, thanks, Jock. And for us to kind of achieve the goals we have for micro essentials, we need to continue to provide the agronomic support that we're doing to customers and to dealers that distribute the product, as well as we need to help them focus on maximizing the returns of their crops. And in years where Where crop prices get difficult, we see that people focus on maximizing the return, and we've seen good growth in microessentials. As far as the corn and soybean ratio, we've got microessentials products that are specific to corn, to soybeans, to canola, and we'll match up the needs of the farmer and the needs of the crop.

Thanks, Rick. And let me add, because North America is a mature market, the growth there is somewhat slower than in other markets. And in Brazil, we expect up to 60% of our growth will come from that market.

Jack, we have another micro-essentials-related question. What is the expected mix shift between commodity products and micro-essentials or other specialty products, and would this impact the margin mix?

Thanks, Joel. Our 2021 goal continues to be achieving a final micro essentials sales number of about 3.7 million tons. And that normally gives us an average premium of about $40 a ton over DAP and MAP. So it is certainly our best margin product in phosphate. And in terms of Brazil, you know, we take not only the producer margin, but we also get the retailer, the distributor margin there. And so, you know, in Brazil, it's by far our most profitable and really adds to our margins.

Doug, Joel Jackson from BMO asks, what levers does Mosaic have to ensure phosphate doesn't continue in negative margin territory under the current pricing environment?

Well, thank you, guys. Let me answer those one at a time. Certainly our next-gen mining and next-gen processing will improve both our recovery rates and our costs in the phosphate business. Also, we're doing other things, like considering the integration of our phosphate and potash business, which takes significant costs out of those businesses. So it's not just the technology. It's all the other day-to-day stuff that goes with it. In terms of phosphate processing, production reductions, we've always said we will match the needs of our customers with our production. At this stage, we believe that we are matching that effectively, and there will be no need for production reductions. And we believe that the demand is there today, and so prices should follow in time. In terms of our overall costs, These have been pretty much constant in phosphates for up to 10 years, and we're able to each year improve in such a way that we're taking the impact of inflation out of our costs, which I think is actually making us much more competitive in the long term.

Jack, Chris Parkinson from Credit Suisse asks, what is your forecast for long-term stripping margin assumptions based on your outlook for raw materials and the view on marginal cost of production out of China.

Thank you, Chris. As we look forward and we look at the raw materials, we believe those basically are passed on to the consumer. So if we look at a balanced market for phosphate, we would look at probably what we've said before, which is a net global price in that range of $285 to $310. Obviously, at times, it's going to be below that,

and above that at other times but if we look to the long-term average i think that's where we would where we would post it jock i'm going to move on to the market related questions many of them were multi-part and i've done my best to summarize those the first question comes from ben isaacson at scotia seth goldstein at morningside and rick and patel at bayernburg they've all asked about new chinese contract pricing including When do you think the seaborne trade to China will pick up again, given the amount of potash and bonded warehouses? How did the price compare to your expectations, and how frequently do you expect these contracts to reset? In another 12 months or 18 months? And what is the outlook for volumes contracted to China and India?

Thank you, guys. Let me take these one at a time. First of all, We expect that the actual shipments to China will start almost immediately. Yes, there is material in bonded warehouses, but our expectation is that will go and start filling up the NPK plants and the retailers very quickly. And what will come behind will be the refill for the fall. How does the price compare to our expectations in that, you know, certainly we're disappointed in a price as low as came in. But I will emphasize, China is still an important base contractor. And, you know, the thing there is to get the volumes moving. We've already seen the ability to move prices up in Brazil since we got that contract settled. So the big thing there is really get it done, move forward, and work on moving prices up in the rest of the world. The third piece, in terms of volume for China and India, we do expect imports to China will be down slightly to, I think, around 8 million tons. And in terms of India, they'll be up maybe half a million tons to four and a half million tons. So basically, the two of them kind of balance off, and we see a fairly flat year for those two big contracts.

Doc, the next question comes from Vincent Andrews at Morgan Stanley, specifically addressing slide five. Slide five argues that the 2020 Chinese potash contract could set off a similar potash price run as the settlement did in 2016. What are the similarities and differences to S&D, U.S. dollar, and soft commodity prices that both support and refute such a comparison? And in particular, given the substantial volume sitting in Chinese bonded warehouses today, will the potash market really be able to have a near-term price upswing if the industry is not actually shipping material, incremental potash, to China in the next quarter or so?

Thank you, Vincent. Let me hand this straight over to Rick, and he can give you a good answer on that one.

Yeah, thanks, Jock. And, Vincent, it really is amazing how much this year lines up to what we observed coming out of 2016 and the settlement from China. You know, the industry sentiment at the time after entering through a period of prolonged oversupply, The expectation was for the prices to remain soft, but the fact that the China volume occurred and the contract occurred almost immediately we saw the market kind of step up. And I think one of the questions that you need to ask yourself are what are the similarities that are happening today that happened at the last time? You know, generally speaking, the dollar is not much different than it was three to four years ago, with the exception of Brazil, which frankly is positive for commodities. Ag commodity prices, for the most part, were weaker today than they were in 16 and 17. But if you remember, we also saw corn futures bouncing around the low $3 range then as well. And the other current uncertainty is the COVID-19. But we think overall this is a very good analogy to look at and to understand. And to the question of can we see price upticks, we're already seeing that in Brazil where we've sold potash at a much higher level.

Chris Parkinson at Credit Swiss and PJ Juvicar from Citi both asked questions on the potash cost curve. So, Jock, can you discuss your views of the global potash cost curve and who might be profitable at a $215 per metric ton CFR Brazil price? In particular... What is the benefit of the depreciation in the Russian ruble for Russian producers? And do you think $220 per ton marks the near-term score?

Thank you for your question, guys. There's no question that even at $215, the players on the far left of the cost curve, particularly the Russians and the Belarusians right now, will be cash positive at a $215 CFR Brazil price. But remember... that does not include the cost of sustaining those businesses, replacing reserves, et cetera. So I don't think it's a long-term sustainable cost, but I believe the lower-cost players will be reasonably comfortable at those costs for a short period of time.

Jack, the following question comes from Mark Connolly at Stevens. Why is it to any producer's advantage to place any significant tonnage at or near the Chinese market?

Thank you, Mark. The question about why we would put product into bonded warehouses when there isn't a contract, it's a delicate balance between continuing to keep production going, product flowing. If there's an anticipation of a contract in the near term, I think it certainly makes some sense advance some product to those markets. However, I would agree that in this case, that was used more than probably was helpful, and it did delay the ultimate settling of the contract.

The following question comes from Adam Samuelson at Goldman Sachs, asking more broadly about the potash market. Mosaic lowered its global potash shipment forecast by 2 million tons relative to its February forecast versus a downwardly revised 2019 level. Given that at least 1.5 million tons of fourth quarter 2019 production curtailment and 1.5 million tons of new capacity coming on stream in 2020, Do you expect similar production curtailments in the second half of 2020 as we saw in the second half of 2019? And is Mosaic now planning for lower production and shipment than it was in February?

Thank you, Adam. Yeah, there's no question the production will be down from what it was. Previously, and we've seen reduced operating rates carried through from last year into 2020. For example, nutrients Vansquay facility is down and you're aware earlier this year we decided that we would keep Kalonze down indefinitely. So that coupled with a few, albeit small production cuts due to COVID-19 issues around the world, we don't see a market being particularly burdened by supply. This is also supported by our view that there will only be about a million tons of incremental production coming on this year between SQM, K plus S, and Eurochem, and with the commissioning of the Petroskovsky mine in Belarus. As for Mosaics production, we continue to maintain. We will match our production with our customers' requirements. So, you know, we will continue to monitor global demand, and we will make adjustments as it's required.

Ben Isaacson from Scotia asks if you're seeing any abnormal demand patterns related to weather, farmer economics, or COVID-19 in either potash or phosphate.

Thank you, Ben. Let me start by saying weather is always a factor in our business. And right now, weather is actually probably helping us because we have a very normal year in the North American market, and it looks like we're going to have pretty strong spring season. So overall, weather is always plus and minus, but this year I think it's probably helping us overall. In terms of farmer economics, certainly, or COVID-19, certainly at this stage we have not seen any impacts from either of those, although as we look to the long term, they certainly will become a factor if farmer economics become weaker. One area where all this turmoil is helping us is in places like Brazil and India, where solid farmer economics and positive farmer sentiment is actually driving purchase activity.

Jack, the next question comes from Steve Byrne, Bank of America. In your opinion, what is the primary reason phosphate and potash prices declined throughout 2019, and what will be the mechanism for reversal?

Thank you, Steve. If we look back on 2019, I think the biggest thing there was actually the demand shock of the North American market. North America had a bad fall in 2018, a bad spring in 2019, and really a late fall in 2019. So more than anything, this was not a supply-driven occurrence. It was more of a demand shock. driven occurrence, and mostly through the U.S. bad spring. Other than that, it should be a relatively normal year this year. So what we believe the mechanism for reversal will be is a good North American spring, which we're seeing today.

We have another question from Steve Jock. The upper end of your phosphate volume forecast range for 2020 is not even up to the 2018 level, and the upper end of the potash forecast range is equal to the 2018 level. What happened to the thesis that missed applications in 2019 would be applied in 2020?

Thank you, Steve. In phosphate, the primary driver for shipments not reaching the 18 level is China. And in that market, the demand has declined, and as such, so has production. Now, as we get into 2020, we see that demand level in interior China has stabilized as such. We can see further growth as we go forward. In potash, we've certainly seen demand rebound in places like North America, India, and continued growth in Brazil. The one area where we haven't seen great demand has been Southeast Asia, and particularly Indonesia, Malaysia, where palm prices have given us some concern about ongoing demand this year.

Jeff Tsoukasas at J.P. Morgan, P.J. Juvicar at Citi, and Adam Samuelson from Goldman Sachs all asked questions on the Chinese phosphate exports. First, what is your outlook for Chinese exports in 2020? Can Chinese exports catch up after COVID-19? And what is a break-even price for Chinese export producers?

Thank you, folks. As you're well aware, production from Hubei province was low in the first quarter. And then once production restarted, it was really refocused on the domestic market. As we follow through the year, We expect that production shortfall and, as such, some of the 500,000 tons of deficiency in terms of their exports will be made up. And we expect to end the year with somewhere around 9.5 million tons of Chinese exports.

Doc, the following question was raised by Ben Isaacson at Scotia and Rikken Patel at Barenburg. What are you seeing in demand growth for China this year, and what is the impact of COVID-19?

Thank you, guys. Preliminary indications on the spring season show that phosphate demand has stabilized, with DAP demand likely ending up slightly higher year over year, while MAP demand is probably down modestly. In terms of COVID-19, it just doesn't appear that it's had too much of an impact on domestic phosphate consumption. And I think the reasoning is simple. First of all, the Chinese government is focused very much on food production. You know, as a good example, support price for corn is up 9% to $7.50 a bushel. So that really is a good incentive for the Chinese farmer to plant.

Jack, both PJ Juvicar at Citi and Chris Parkinson from Credit Suisse asked about the supply in phosphate. Longer term, what is your expectation of the cadence of new supply in 2020 through 2022? And shorter term, with global competitors curtailments behind them, do you expect more phosphate imports into the U.S. post-planting this year?

Thank you, folks. I'm going to hand this one straight over to Rick to give you the detail on our expectations of longer-term S&Ds.

Yeah, thanks, Jack. You know, this week we'll be providing in our investor presentations an update of the S&D outlook. But, frankly, once we get through 2020 and the expected OCP ramp-up and de-bottlenecking activities continue, along with the ramp-up of several smaller facilities in Egypt and Turkey, we expect the market to be much more balanced as we go into 2021 with most of the production additions behind us. And as for the near term, there are two or three vessels that are arriving, frankly, too late for the rapidly advancing spring season. and those will not make it into the north to be worked into the supply. Those are going to provide near-term price pressure, but we believe it to be transitory.

Jack, we have two related questions from Vincent Andrews at Morgan Stanley and Adam Samuelson at Goldman Sachs. Why is potash demand benefiting from the strong Brazilian farmer economics more than phosphate? and this pertains to the global shipment forecast we included in our deck. And second, can you bridge the difference between strong farm-level economics and the tempered shipment outlook?

Thanks, guys. We believe that strong Brazilian farmer economics has helped both phosphate and potash this year. If there's any difference in the growth between the two, it is simply our estimate of channel inventory as we enter the year. So, in some cases, Boss State may have had a higher channel inventory. And as such, that has to be worked down before we get expected higher shipments. Other than that, we really believe that Brazil will be a highlight in the whole global for both phosphate and broad ash. And as you've seen from our results, certainly from a volume perspective, the first quarter highlights that.

Jack, the following question was raised by Rick and Patel at Berenberg. As the Brazilian planting season draws closer in the second half of the year, are there any mitigating factors you can put in place to lessen the impact of logistical issues exacerbated by COVID-19? And if so, what would those be?

Thank you, Rickon. We've already taken a number of actions with respect to COVID-19. And as such, you know, we've seen very little impact to our business. And we believe a big piece of that is these precautions we've taken. We've taken those in Brazil and in North America and all our production facilities. But we're also protecting all our supply chain partners as best we can. We're practicing all the CDC guidelines. We're changing shift schedules. We're making sure that we don't bring our carriers into our plant from a perspective of truck drivers, et cetera. So we're trying to make sure that we do everything we can to protect ourselves. In addition, we have an advantage in that we are generally using private ports in Brazil. We think we can do a lot and have already done a lot to allow for us to continue uninterrupted through this COVID issue. And let me add, you know, we're taking some extraordinary steps, like even having our kitchens prepare meals for the drivers as they arrive so they don't contact people on their trip into our plants.

The following question comes from Jonas Oxgard at Bernstein. We keep hearing reports of specialty crops being discarded or plowed under due to logistical issues or labor shortages from COVID-19. Are you seeing any negative impact on fertilizer demand for specialty crops?

Thanks, Jonas. From our perspective, we really haven't felt any impact to date. Now, there is a chance that This could be a function of there's a great strength of demand from the much larger row crop sectors, and that could be masking any negative impacts from the specialty crop sector.

Doc, the last question submitted last night comes from both Adam Samuelson at Goldman Sachs and Mark Connolly at Stevens, and it's with respect to corn acreage imbalances. Given that 51% of the corn acreage has already been planted ahead of the five-year average, what is your acreage forecast and what gives you confidence in that figure if it's different than the USDA? Also, you mentioned corn demand in China as they rebuild their herds, but we're hearing African swine fever might not be under control. Can you tell us what you're hearing?

Thank you, folks. I'll take these one at a time. First of all, we see corner acres around 94 million acres. And while the USDA was noting 97 million acres, this was based on survey data before a lot of the COVID-19 impacts were felt. We have heard from our customer base that there was some switching and there will be some switching from corn over to beans. But a lot of our largest customers have not seen too many corn acres come in below their initial USDA expectations. So we think our estimates are pretty realistic. In terms of African swine fever, there have been reports of some small scale African swine fever outbreaks over the last weeks. But thus far, it appears to be just that, small and isolated. And bear in mind that many were expecting the demise of the Chinese soybean imports last year during the height of the outbreak. And China actually imported slightly more soybeans last year than they did in 18. So likely, they sought to maximize output across all their livestock classes. With that, we will wrap up this Q&A session. I hope you take away a few key points. Our business is operating well despite COVID-19. We're delivering excellent operating performance, and we remain optimistic for the remainder of 2020. Thanks for listening. Be safe and stay healthy.