The Mosaic Company

Good morning, ladies and gentlemen, and welcome to the Mosaic Company's second quarter 2020 earnings fireside chat. At this time, all participants have been placed in a listen-only mode. After the companies complete their prepared remarks, the lines will be open to take your questions. Your host for today's call is Laura Gannon, Vice President, Investors Relations of the Mosaic Company. Ms. Gannon, you may begin.

Thank you. And welcome to our second quarter and 2020 earnings call. Presenting today will be Jack O'Rourke, President and Chief Executive Officer, Clint Freeland, Senior Vice President and Chief Financial Officer, and Rick McClellan, Senior Vice President Commercial. We will host a prepared question and answer session addressing the questions received last night, followed by a short live Q&A session, time permitting. All of our earnings materials released yesterday after market close 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 and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our second quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing, as well as our commentary on the quarter posted to our website, also contain information important on these non-GAAP measures. Now I'd like to turn the call over to Jack.

Good morning. Thank you for joining us today. I'll start with very brief comments, then we'll get straight on to your questions. This was a very good quarter for Mosaic, and our momentum is increasing. The key points about our performance are our cash flow generation this quarter is the result of the past five years of work by our team to transform our cost structure and strengthen our franchise. We're succeeding even earlier than we expected. We've already achieved five of our seven 2021 cost targets. Even with realized potash prices down $20 per ton from the first quarter and realized phosphate prices up just $13 per ton in the quarter, we generated over $800 million in cash from operations. We delivered adjusted EBITDA 25% higher than consensus expectations even before our adjusted EBITDA definition change. We paid down $500 million in short-term debt and structured payables in the quarter, while retaining cash on the balance sheet above $1 billion. In potash, we continued to invest in the accelerated K3 project, hitting a major milestone of connecting the K3 shafts to the K1 mill. We continued to reduce our brine management costs, and we achieved the lowest cash cost per ton of production in over a decade. Mosaic Fertilizante had an excellent quarter, hitting both Rial-based cost targets and achieving further cost benefits from the weakening Rial, as well as realizing over 80% of our targeted full-year transformation benefits. Phosphates drove the cash costs of rock below the target and lower than last year, despite increasing distances from mining to beneficiation. And with all of these efforts, we've reaffirmed our commitment to you, to our shareholders, our employees, our customers, and our communities to act responsibly. We announce new, aggressive, broad-based environmental, social, and governance targets, and we will use these targets to drive performance across the business. We are continuing to transform. The quarters, accelerating earnings, and cash flow clearly reflect our efforts today, and we are driving additional future savings. We expect to deliver another $700 million in savings above the 2019 base as we continue to execute our strategy. Mosaic is more competitive than ever before, and with fertilizer markets improving, we have significant earnings leverage to the future. Now, we'll take your questions.

Josh, I'm going to start with some questions we received on cost. Adam Samuelson from Goldman Sachs asks, In the second quarter, Mosaic was ahead of its 2021 targets on a number of its key cost KPIs. How much incremental opportunities do you see on each key metric to further reduce costs? And if so, what level of incremental capital spend would be necessary to achieve those outcomes?

Thanks for your question, Adam. As we've said earlier, We have new targets that include $700 million of additional improvements across the company, 200 million of those coming from our Brazil operation, and 500 coming from our North American and administrative. Some of the areas where we believe we can make big gains as we go forward, obviously, are in Brazil, where we continue to improve that business. In North America, where automation is allowing us to drive efficiencies in both phosphates and potash. And then, of course, our K3 operation, which as we ramp it up will eliminate a lot of costs and improve our brine management costs. So as we look forward, we see a lot of opportunities still. And importantly, in September, when we bring our – all of this to our analyst day, we expect to be able to give you more color and detail on what that's gonna look like.

Chris Parkinson from Credit Swift asks, you're clearly comfortably ahead on numerous cost initiatives, including your K3 shaft, Brian info. phosphate rock costs in the US and Brazil and for the Los Angeles platform. But would you take a step back? How are you thinking about your structural cost base in a normalized environment and how much more could actually be done, especially in phosphate?

Yeah, thank you, Chris. It's important to keep in mind that these cost improvements certainly are somewhat driven by high utilization. We've had a good quarter where we're able to use our assets fully. And we've had some benefits from exchange rate, particularly in Brazil, but also in Canada. Over the long term, though, the real differences have been structural, and those are going to stay with us, and those are going to continue, and we're going to continue to improve those. So if we look at our major projects, which include Esterhazy K3, NextGen Mining, and the Brazil Transformation, those are not temporary differences. Those are true structural changes that will be delivering value for the long term.

Dr. Michael Paiken from Cleveland Research asks, you mentioned that you were on track to exceed your $225 million in non-market growth in 2020. which segments are exceeding your expectations and how much higher can this number go for 2020?

Hello, Michael. Let me clarify. Our $225 million were actual items that we spent in 2019 that we did not expect to repeat in 2020. So on those, some of the key items, the plant and city idling, that's happened and now is outside of our cost structure. Our Brazilian dams, we've completed the work now, and that $80 million of cost is now behind us. Equally, the ramp-up of Esterhazy, which has gotten better than we expected, we now are delivering 1 million tons a year from the K-3 project. has already flowed through to us. And then of our $50 million of transformation in Brazil that we're part of that 225 million, we're already at over 40 million. So we see that as pretty much complete and ongoing savings will be above and beyond that original 225 we talked about.

The largest number of questions seek a better understanding of our countervailing duties petition. Seth Goldstein from Morningside, Chris Parkinson from Credit Suisse, asked for an update on potential regulation changes of the U.S. import duties on Morocco and Russian supply. And if the outcome is successful in our favor, what should they expect in changes to their landed U.S. costs? In other words, what are the potential outcomes in terms of leveling the playing field?

Thank you, gentlemen. Let me start by saying we believe in free and fair trade. However, the reason we filed this petition in the first place was to address imbalances associated with unfair government subsidies on imports and to highlight unequal requirements on environmental standards. We believe our competitors benefit from access to artificially low rock cost and energy while not having to meet adequate and proper environmental standards. We also will say that what we have done is put this forward to the Department of Commerce and the International Trade Commission. They will judge on the merits and as such, determine what level of duties, if any, need to be put in place to create a fair trade situation. And Quinn, do you have anything to add to that?

Yeah, no, Jock, I think you're right. We certainly are ahead of schedule on the realization of the $225 million in non-market benefit this year. Keep in mind that the $80 million that we spent on dam remediation last year was spread really through the second through fourth quarter. So we realized about $36 million in benefit in the second quarter and should realize the balance throughout the rest of the year.

Dr. John Roberts from UBS would like to know, can you review the basis for your phosphate countervailing duties position? And have you had any response from customers or competitors?

Thank you, John. Our basis for the petition is clearly laid out in the public documents. And I would ask that you go to those. Also, the comments from any of our competitors or competitors customers or the other concerned groups is clearly laid out in those public documents. So I would suggest you go there. Our position is clearly that the Department of Commerce and the International Trade Commission really are the ones that will decide what are the merits of this case. Now, clearly, as we talk to our customers, some are concerned mostly about how they're going to get their supply. We believe that this has opened up new opportunities for outside competitors to come in and make up some of that supply. But in the end, I think all people understand why we put it forward, and we'll have to wait to see what the ITC says in terms of its merits.

Doc, we received several questions asking about trade flows and implications to other markets. Specifically, Adam Samuelson and seven others asked, over the next six to 12 months, how do we think about the net impact of potential trade flow impacts of potential U.S. countervailing duties on Morocco and Russian phosphate? Do you see risk of market share competition rising in other major import markets, notably Brazil?

Thanks, Mike and Joel. Let's answer their last question first. No, we don't think this will impact global supply and demand. All we will do is probably change trade flow. The current market and resulting pricing is reflective of a tight market. And if anything, the countervailing duties only highlighted to people that this market was tight. So what's causing the tight market? Favorable farm economics and lower supply, which began to take shape well before we filed the petition. However, it is reasonable to assume that the trade flows will be altered and some product will be shifted to other jurisdictions, including new suppliers coming into the U.S. and the Moroccan and Russian suppliers focusing on other markets, which could be Brazil or wherever.

Jonas Oscard from Bernstein asked two more technical questions with respect to the petition, namely, if the Mosaic trade complaint is upheld, will there be a retroactive benefit to Mosaic? And what is the timeline for final decision on the complaint?

So, look, thank you, Jonas. Let me first clarify. Whether duties are applied retroactively will depend on upon the level of imports from these two countries from the filing of the case until the DOC preliminary ruling. We expect the case to be finalized in Q1, 2021. And at that point, if there has been excessive imports, they will look at assessing a retroactive duty.

Jack, I'm now gonna move on to questions about phosphate operations. Ben Isaacson from Scotia asks, On the cash cost of mine rock in Florida falling to $36 per ton from $40 year over year, how much of that would do to transformational efforts versus favorable geology? And how much more wiggle room is there to bring that down? And how sustainable are these cost improvements?

Thank you, Ben. Clearly, our cost improvements are a combination of several factors. We've certainly been running our assets at elevated utilization rates, and that's helped. But our efforts to centralize mining operations, streamline processes, and automate have also helped reduce our costs. As previously mentioned, the establishment of a central control center for our mining and collapsing all of our mining operations basically into one large operation, which should begin operation by the end of the year, will really further enhance cost savings. And as we introduce new management structures, incorporate automation for certain mining functions, and accelerate savings from adjustments to transportation, we start to see real long-term improvements in our cost structure.

With the recent rise of over $50 per ton in DAP pricing, have you ramped up your production at the mine? And what could be the benefit of better cost absorption from higher tons in the third quarter?

Thanks for the question, PJ. High utilization rates have a beneficial impact, but that's really only part of the story, as we've mentioned. But I will say that as we look at Q3 going forward, we can expect those high tonnage and high utilization rates to continue. So we do expect to see better costs throughout the rest of the year, both structurally and because of high utilization.

In fact, we also have a question from Adam Samuelson from Goldman Sachs. The specialty percentage rose to 48% of shipments and marked a new quarterly high in phosphate, coincident with micro-essential shipments to Ferraganti being substantially above recent quarters. Is this sustainable? Why or why not?

Thank you, Adam. The sales of MicroEssentials and Aspire hit record highs, and KMAG came in close to the record in Q2 2020. Among these growths, MicroEssentials' shipments to Brazil has been a major driver. Now, we believe that the growth of MicroEssentials will continue over the next quarter, driven by Mosaic, Fertilizante, and also North America. I have to reemphasize the value that micro-essentials brings to the growers is showing positive returns for them on their investments. So these are bringing real value to the growers and to our customers, the distributors. So we do believe that as more people start using micro-essentials, this is very sustainable, and they're going to see the benefit, and they're going to keep using that product.

Doc, three analysts submitted multi-part questions related to our potash operations. So first, Chris Parkinson's asked, the demand environment in potash appears to be modestly improving, while spot prices are well off their first half lows. Can you talk about your thought process for the second half of 21 operating rate assumptions and how that may drive changes in your mind map?

Thanks, Chris. As you know, we've accelerated the development of K3, and this has an obvious impact on costs, both now with declining brine management spending and in the future as the mine ramps up. Beyond K3, we continue to see strong results from Bell Plain, which recorded its lowest cost position in more than a decade. As we move forward, we're going to take advantage of owning two of only seven mines in the world with annual production capacity of over 3 million tonnes. and with some of the lowest costs in the industry. So as we look to the future, we intend to optimize the production coming from K3 and from our Bell Plain operation and only see running higher cost mines like Kalonze if the market really requires it in the future.

Doc, another question comes to you from Jonas Oxgaard of Bernstein. In potash, you lowered your cost per ton a fair bit, but how much of that was simply spreading fixed costs over a 20% larger volume? On a fixed volume basis, what would your cost reduction be?

Good question, Jonas. There is no question that the larger volume helps spread out our costs. However, we believe there are structural changes that are fundamentally changing our costs over the long term. We think one area of clear savings is the accelerated reduction of brine management costs as we shift to K3. K1 underground mining will be completed this year. Brine management accounted for $8 a ton in Q2, and that will continue to decline as we move into 2021 and will be eliminated completely by 2022. So as you can see, a lot of our cost reduction is actually structural and should be with us for the long term.

from Citi asks, what kind of savings do you expect from sending K3 potash ore to the K1 mill? And what is the updated timeline now to shut down K1 and K2?

Thank you, PJ. We expect to be sending potash to K1 and actually be shutting down our K1 shafts from a production perspective early in 2021. That will start meaning we're only going to be operating two shafts. And then by the end of 2022, only operating the one big K3 shaft. At that point, the project will be complete. We'll eliminate brine inflow. And that really will be the end of our K1 and K2 mines from a production perspective.

Now, Vincent Andrews is interested in how he should think about our potash shipments in the second half of this year, given how strong shipments were in second quarter. Also, can you remind him of the accounting for the Chinese contract shipments that were already in a bonded warehouse prior to contract agreement?

Thank you, Vincent. Yes, we did have strong shipments in quarter one. Referred to our discussions with Campotex, I think they have a fairly full order book for Q3 and even going well into Q4. So I believe the shipments internationally will be strong in the second half. And domestically, we're expecting a good fall in North America. So we're expecting strong shipments there as well. So from our perspective, our second half is looking pretty strong from a potash perspective. In terms of the... I'd just like to throw it over to Clint to explain a little bit about our China shipments to bonded warehouse that we revert in the first half of the year. Clint, can you discuss that?

Sure, John. And good morning, Vincent. So to start with, on a consolidated basis, we don't recognize revenue until that product is sold to a third party. On a segment-level basis, we do recognize a revenue when Campotex sells product to our distribution business in China. And when they sent that product to our distribution business in China, the segment recognized revenue, but that was based on an estimate of pricing since the contract had not been completed. Once the contract was completed and the price for that transaction was set, that gave rise to the adjustment. But again, that's an adjustment on the potash segment only because we won't recognize revenue on that product on a consolidated basis until it's finally sold to a third party.

Thanks for that clarification, Glenn.

Jack, I'm now going to move on to questions about Mosaic for lasages. We had four analysts including John Roberts from UBS and Mark Connolly from Stevens ask similar questions about the timing of volumes in Brazil. Brazilian farmers are having an outstanding year so far and have been widely reported to be buying inputs well ahead of last year's schedule. How much do you think has been borrowed from the third quarter and are we likely to see an offsetting reduction in third quarter margin to reflect those lower volumes next quarter and specifically within the quarter? April and May were significantly higher than the prior year month, while June appeared to be much closer to a year ago. Is that just timing, or are the trends decelerating into July?

Great question. The strong volumes in the first half of the year did reflect some forward input purchases as a result of generally favorable farm economics. But year-over-year demand is expected to be up slightly to 37 million tons. And in that figure, we believe we are beginning to take market share as farmers gravitate towards higher analysis products and high-value products such as our micro-essentials.

Mark Connolly at Stevens asks, How did the dramatic improvement in cost in Brazil break out between volume-driven cost improvement and operational structural cost change that should repeat with normal volumes?

Thank you, Mark. Let me start by saying last year operations were negatively impacted by the change in regulations that required us to shut down a couple of operations for dam improvements. That reduced volume and impacted our raw materials access. This year, we're benefiting from running at full operations rates. And this also has allowed us to have more access to our own rock supply. So overall, that has helped a little bit. So about a third of those costs are probably volume related. The others are improvements to our freight, our inventory management, our overall planning, and, of course, structural changes to our cost structures. I think overall, though, we're seeing long-term changes to how the Brazil business is running, and we're starting to see full benefit of the $330 million or so of integration benefit that we announced at the end of last year.

P.J. Juvacar has a question about currency. The Brazilian RIAI versus the US dollar was down significantly year over year in the second quarter of 2020. How did that volatility impact you, and what specifically was the impact in the quarter on Mose for Los Angeles?

Thanks, PJ. I'd like to talk about two aspects of the Brazilian REI that really has changed things. And the first of those, of course, is the impact on farmer economics. I think that is actually the bigger improvement. Their ability to buy fertilizers and the continuous growth of the Brazilian agriculture industry segment is largely driven by great economics for the farmer. And so, you know, that's the first place we want to talk about where the Brazilian REI has helped us. In terms of our cost performance, you will see that we tend to put our targets in REI base. So that allows us to understand what's the real underlying improvement. Obviously there was some positive impact. I think we saw definite improvements in our overall cost because of the REI, but I would say we focus more on what is the REI base cost, because that tells us whether we're really improving the business or just taking advantage of currency. In the back, you'll notice, PJ, I'd also like to point out that if you look at the back of our stuff, you'll see basically our sensitivities. And a 10-cent move in the REI amounts to about $20 million a year unhedged. So if we think about us as being about 50% hedged, it's fairly easy to do the reconciliation to last year's REI costs.

Jack, we have another question from Ben Isaacson with respect to Mosaic for Lausanne. Mosaic for Lausanne sales volumes have been notably higher year over year. Can you walk through the strategic strength of this business and how it relates to your mix between commodity and micro-essential tons?

Thanks, Ben. Again, I've said this before, but I'll repeat. The volume growth really was a result of improvement in farm economics in Brazil. The strengthening of the U.S. dollar versus the REI, excellent barter ratios, and anticipation of a strong summer crop demand. So both commodity and performance products have shown robust increases in Q2 of 2020 versus a year ago.

Chris Parkinson asked for a COVID-19 update. His question is, Brazil is in the midst of a fairly complex COVID-19 outbreak, which has periodically been affecting the port and logistics system. Can you give us an update on the demand environment, as well as any logistical headwinds you foresee during the peak fertilizer application season?

Thanks, Chris. Look, let's start from our own operations in Brazil. And although we've had a number of cases because of the high level of community transmission, we have not been impacted on our operations to this point. And we've instituted a number of procedures to make sure we mitigate the spread. And then from an overall country logistics perspective, We believe that in general, we have been unaffected by COVID. Now, obviously, there's going to be local places where that impacts us, but in general, we've been able to work around that and kept the product moving to the end customer. And from a demand perspective, despite COVID, we've continued to see strong demand, again, driven by favorable farm economics, and we have got our product to our customers with relatively little impact.

The last question we received on Molde Cotelizantes comes from Joel Jackson. Cotelizantes the second quarter growth margin was more than double the results from the prior two years. How much of that gain was market conditions versus foreign exchange tailwinds versus share gain in the market versus a pull forward of Q3 because of COVID related logistics concerns?

Thanks, Joel. I would summarize our results in the second quarter in Brazil as a couple of factors. First of all, if we looked at the exchange rate, it's probably offset almost perfectly the change in pricing. So what we see in actual results is almost solely the result of our own actions and the reversal of some of the down costs that we saw last year.

Doc, we received a handful of questions on the balance sheet, primarily focused on uses of free cash flow. John Roberts asked, what are the capital allocation priorities moving forward? And can you please discuss your growth, debt level, dividend and potential share repurchases? And TJ Juvicar asks, beyond paying down some debt, what could be uses of cash, especially with improved free cash flow in the second half of 2020? Would buyback be approved use of cash or would the countervailing duty decision prevent you from buying back stock? Josh, can you talk about capital priorities to address both of these questions?

Yeah, thank you, gentlemen. Our capital priorities are unchanged, and they continue to be what we've said in the past. Our first priority is to maintain the business. Next priority, maintain investment-grade metrics. And to do that, we have to continue our normal capital plan as we've had. We expect to lower debt by about a billion dollars over the next few years, doing so when our bonds come due in the next couple of years, and then continue some of the key projects like the Esther Hazy acceleration, K3 acceleration, and then what we have after that, returning capital to shareholders. All freely are dependent on future cash flow generation and capital allocation will not be impacted in any way by the countervailing duties.

We've also had a couple of questions from a buy side analyst and they include, can you describe what's included in the 610 million of short term debt that you indicated will be paid in 2020? And does Mosaic still plan to keep about a billion-dollar cash balance and pay down its 2021 maturity?

Thanks for the question. At the start of this year, we did increase our cash balance to a billion dollars by, first of all, taking out... some money from our revolver and executing on some of our inventory financing debt. Since that time, we've paid down the revolver and we will continue to pay down the rest of the $600 million in short-term debt throughout the rest of this year.

Before we move on to market-related questions, Ben Isaacson asked about our tax rate outlook. Why is your effective tax rate expected to be in the mid to high 50s? And how should we think about this rate under a Trump or Biden presidency?

Thank you, Ben. Let me start by saying the first part of this is, and the reason for the tax rate being higher, is our income mix between our three jurisdictions, Canada, Brazil, and the U.S. The details of that, I'm going to actually hand it over to Clint to explain why the negative earnings in the U.S. will create a higher tax rate overall.

Yeah, thanks, Jock. And Ben, that's right. It really comes down to an earnings mix phenomenon for us. If you recall, the tax rate is based on gap results by jurisdiction. And when you look at the United States, not only is our phosphate business incorporated into that, but also our corporate G&A. or interest expense and so forth. So there are times when that pre-tax income in the US turns negative and that can begin to skew the rate When you then start to factor in things like some of the foreign currency moves that we've seen and how it affects our mark to market and some of the notable items that we have on our schedule, that begins to skew it. And then as you've seen Brazil improve this year, that's our highest rate tax jurisdiction. So that begins to influence that rate as well. So really the combination of all of those things that's resulting in an unusually high tax rate for this year. And then I'd add two things. One, on a longer term basis, we would expect that effective tax rate to be somewhere in the mid to high 20s. But then I would also call to your attention that our cash tax rates and payments are much different than that. Matter of fact, this year, we expect to end up with a small cash tax refund. So very different than the effective tax rate in our financial statements.

Now let's move on to market related questions. Mike Piken asked if he could comment on our summer fill programs in the US and where we see downstream inventories in the US at this point.

Thank you, Michael. I think we've had fairly successful fill programs in both phosphates and potash here in the U.S. Recent discussions that we've had with our customers suggest that they're probably in the range of 60% full for the So there will be increased buying towards the fall season, but for the most part, our customers are in reasonably healthy shape going into that fall.

Steve Byrne is looking for insight into future volumes. How are you trending in each of the segments through the month of July on a year-over-year basis? Do you see volumes higher in the third quarter? Any expectation for volumes for the rest of the year?

Thanks, Steve. I would characterize Q3 as largely having our order books full for both phosphate and potash, and so it'll be a matter of delivery and revenue recognition that will determine where we are for quarter three. But we expect a reasonably good fall in the U.S., and global markets are running well. So for both phosphates and potash, we expect relatively normal growth two, three volumes in both. And then for the rest of the year, we should also see a good stable volume.

Josh, Mark Connolly would like insight into grain and oilseed price implications. How important to Mosaic's earnings outlook are higher grain and oilseed prices? If the current price of corn is sustained through 2020 and soybeans stay at or near their current prices, do you think there is any material room for higher P and K prices in the market?

Thank you, Mark. Clearly, oilseed and grain prices do have implications for us. But in general, the farmers tend to work a lot more on their needs too. So what's a lot more important to us is planting intentions, number of acres planted. And remember also that grain and oil seeds are just a few of the products that we fertilize. So it really depends on what does the whole global market look like and what is the demand for P and K and what is supply balance there as opposed to something on the grain and oil seed. It has an indirect impact, but I would say no direct impact on our pricing.

Vincent Andrews from Morgan Stanley wants to know about our market forecast. Given that the last 10 years of P&K shipments show some pattern lumpiness, why not forecast lumpiness going forward rather than just CAGRs?

Thanks, Vincent. We tend to forecast on annual growth simply because some of the other factors that go into the lumpiness of our business are impossible to forecast. And those are, you know, really inventory movements globally and, of course, weather. You saw in 2019 the weather impacts in the U.S. made a fundamental difference to the growth rate of both phosphate and potash products. on a global scale. So we really have to look at it on averages, but recognize that there will be lumpiness as we go forward.

I'm gonna move on to some questions on phosphate. This one is from Ben Isaacson. The benchmark NAP selling price fell by $16 to $314 per ton, yet Mosaic's average finished product selling price fell by almost three times that amount, fell by $44 to $308 from $352. Why? How should we think about this relationship going forward?

Thanks, Ben. The answer here is simply that the average selling price in Fort Lauderdale is based on all the components we sell, including urea and potash in the blends, both of which are down significantly. So when you look at that relationship going forward, you have to take into account all three products that could be in our blends that we sell.

Ben also asked, fast shipping margins have started to improve in July after remaining largely flat throughout the second quarter. Are you seeing this flow through to the phosphate segment's margins?

Thank you, Ben, again. That stripping margin, we track that because that really is what do we get after the cost of raw materials and transport as revenue. So, of course, this flows directly into our margins. An improvement in stripping margin really is almost directly related to our overall profitability.

Adam Samuelson would like to know, what does Mosaic see as the equilibrium prices of U.S. NOLA DAP and MAP versus key offshore benchmarks?

Thank you, Adam. All I can really say there is if you look at it historically, other than the last, say, three years where there's been a real increase in imports, we have seen NOLA prices being similar to other global prices. And I would expect that under a more fair trade market, that's what you would see is you would see the NOLA price being – equal to what the prices in other markets adjusted for the transport cost. And that's exactly what we expect will happen after a countervailing duty case if they readjust that market.

Jack, Steve Byrne would like more insight into our global phosphate demand outlook and its relationship to inventory swings specifically. What is your estimate of underlying global consumption of phosphate in 29? And was it below the shipment for 71 million tons? Did it reflect channel inventory builds?

Thank you, Steve. If we look at 2019, there was no question that there was buildup of global inventory, particularly in the U.S. I mean, in the U.S., there was... Poor season and the imports in particularly kept coming in. We shut down our Louisiana operation for a number of months last year, and still the inventory build in the U.S. was very high. Likewise, the Brazilian inventory was probably slightly above normal coming into this year for maybe some of the same reasons. But what I will say is in the first and second quarter of this year, we have largely cleared out all of that inventory and probably have moved from an area of high inventory to very low inventory in phosphates as we move into the third quarter of this year.

Josh, in a related question, he also asked, are normalized inventory levels the reason for the increased phosphate shipment forecast in 2021?

Thanks, Steve. Yeah, in terms of 2021, what we really see is the inventory levels should be pretty much leveled off, and we expect normal growth in the market as per any other year, so that 2% type annual growth in 2021.

Vincent Andrews would like our opinion on farmer economics. He asks, given the recent run-up in DAP prices, are you at all concerned about U.S. farmers deferring fall applications?

Thanks, Vincent. Look, our experience has been, and if you look even at the spring with the COVID uncertainty, that farmers will put fertilizer on their fields according to their needs. Frankly, today with precision agriculture, they're more likely to put the right amount of fertilizers on every year. And phosphate prices, frankly, also are a very small piece of the overall cost of running a farm. So I don't believe that most farmers will look at phosphate pricing and have it change their application. I'd also highlight that phosphate prices are still very affordable when you look at where grain and oilseed prices are. As with most fall seasons, we would expect that weather will be the main arbitrator of demand. With expecting an early crop maturity this year, we expect we should have a good fall.

Josh, we have three questions related to China and phosphate. First, Vincent Andrews asks, what do you anticipate will be the Chinese DAP exports in the second half of 2020? And what second half 2020 DAF price does that assume? If DAF prices are higher or lower than your assumption, what would happen to Chinese exports?

Thanks, Vincent. Chinese exports over the first half of the year were lowered by about 800,000 tons from last year. Now, our base forecast calls for Chinese exports to end the year about 600,000 tons lower. In other words, we expect that international pricing is a little higher. We'll incent a few extra tons coming out of China in the second half. And if prices are higher than our expectations... there might be a little bit more upside, but we don't see significant upside. And part of the reason for this is domestic demand is coming in fairly strong as we move into fall. And I think the big issue there will be export availability limitations. Now, obviously, if our prices are lower than expectations, you know, the volumes could be even lower than what they are now. That's

Goldstein and Steve Byrne both asked about production specifically. What is the status and outlook for reduced phosphate production at specific facilities in China and Tunisia? And do you expect lower exports over the next several years?

Well, let me hit China first. You know, there's been a well-known shift towards shutting down some of the higher polluting facilities particularly along the Yangtze River. And we've seen some here that have resulted in production declines in the first half of the year. In terms of Chinese export volume over the next years, we maintain that Chinese exports will trend lower and will establish a new normal. I mean, we've now seen what we think is the bottoming of Chinese domestic demand and we're seeing a lowering of production. So with that will have to come a lowering of exports as they meet domestic demand. For Tunisia, it would appear that expectations for plant research and resurgence of production in 2020 were somewhat overstated. But it's also important to put Tunisia in context. They have produced an average of about 750,000 tons of DAP and TSP over the last five years. Current protests will certainly lead to shuttering of their rock production. The business has plagued them for over a decade, so which means we would expect them to stay about the same ram rate as we go forward as well.

John, the last section of questions relates to potash global markets. Steve Burn and Seth Goldstein asked about the impact of palm oil demand on potash. What is the typical lag between movements in palm oil prices and changes in potash demand in Southeast Asia? And has the rebound in palm oil pricing resulted in increased potash demand in Southeast Asia?

Thank you, gentlemen. The palm oil demand is important for potash. And what we have seen recently is an improvement in palm oil prices, and we know that for production reasons, they will be adding potash to their palm oil plantations. So we see that as a fairly direct relationship. I wouldn't say we see increased demand, but we see demand that is getting back to its normal levels. In terms of a longer term, export demand and domestic demand for biofuels is helping in terms of optimism for recovery. So all of these things mean that we should see a better demand for potash in the Southeast Asia region, particularly Malaysia and Indonesia.

Joel Jackson and Ben Iverson would both like to understand where global potash inventories stand in the various regions, particularly in China.

Thank you. gentlemen, if we look at China, there's sort of a bifurcation of inventory. We know there's about 3.5 million tons at the port, but we believe there's relatively low inventories as we move inland. And so as we're now seeing a strong demand for NPKs in the domestic market, we do expect that the movements out of the port to those NPK plants will start bringing down inventory levels, assuming that the arrivals are about at normal levels compared to last year.

Mark Connolly and Steve Byrne are both interested in potash demand growth. What is driving the acceleration in potash demand in your forecast, and are there specific geographies?

Thanks. I wouldn't say we're actually forecasting an acceleration of potash demand. Our potash demand growth from a long-term trend is staying fairly steady at what we believe to be around 3%. And if you take 2019 out of it, I think we still stay just on that trend.

And a related question, if demand ends up toward the high end of your range, Do you see increased supply balance in the market or would you expect the market to tighten?

Well, I guess this requires two things. One, the success of production ramp-ups on the new projects, particularly, I guess, Eurochem's, Volga Cali, and Yasolski. But given the delays we've seen in recent years on these ramp-ups, it would seem that the market should tighten, actually, if demand comes in at the high end of our expectations.

And the last related question also, what is the bull case for potash pricing over a three to five-year period?

Thanks. There's a number of factors that could create a bull run in potash prices. And the first I've already mentioned, which is slower ramp-up of the projects, particularly the ones in Russia and Belarus. what we would really expect is probably a higher utilization rate of the North American assets over the next, say, three to five years, and a more modest rise in prices. That would suggest prices appreciate slightly to where they were maybe in 2018, and utilization of assets goes up at the same time.

Another product-related question from Adam Samuelson and Ben Iverson. They're both asking about the disconnect between pricing trends between Brazilian MOP that rallied off lows in the second quarter versus U.S. and Southeast Asian MOP prices that have continued to leak lower. Are strong Brazilian economists enough to offset this weakness in other regions?

Thanks. Brazilian farm economics are really outstanding at present, which is certainly helping to underpin pricing in that market, and we expect that to continue. For the U.S. and Southeast Asian markets, I think it's important that we remember that this is a seasonally slow period for potash demand, and that will impact prices. I'd also like to highlight that our summer fill program was extremely well received, and it is typical of commodity markets to necessarily see first a rebound in demand and then prices falling after that. We have now completed our pre-submitted questions. And so now what I would like to do is open it up to the audience for live Q&A. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw a question, please press the pound key. We will limit the question to one per participant to allow the other's questions to be addressed. Thank you. Please stand by while we compile the Q&A roster. First question comes from the line of Adam Samson from Goldman Sachs. Your line is open.

Yes, thanks. Good morning, everyone. So I guess I want to just follow up on the affordability question, Jacques, on phosphates. And on your own kind of affordability metric that you publish, we're now above long-term average. And just trying to think about where you would see an upper limit to that and especially if you think about next year and farmer income risks from government support programs in the U.S. or lack thereof, given kind of the big farmer support payments that have been experienced both this year and last?

Thanks, Adam. Welcome. You know, there's certainly a relationship between crop prices and how people feel about the imports. But as you say, support payments from governments and whatnot have done a lot to keep farmer incomes at least stable. And yes, while we're pushing and potash prices, probably not potash much, but certainly, phosphate's a little bit closer to that ratio. Two things on this I'd say is, first of all, you've got to look at December 21 prices. And if you look at December 21 prices, I think we'd be looking at, what, 360 for corn and nine bucks for So, they're going to see some reasonable prices on there if they sold forward into that market. So, they'd be incented to get a good crop and use the fertilizer. But in terms of the direct relationship between the two, I'd say you can easily go a standard deviation above that ratio and not have it materially affect demand.

Thank you. Next question comes from the line of Steve Byrne of Bank of America. Your line is open.

Yeah, just wanted to hear whether or not you saw any impact on phosphate imports during the month of July following the countervailing duty petition and just asked for an update on your gypsum sales out of your gypstacks in Brazil. Any update on that?

Sure. Thanks, Steve. First of all, yeah, in July, I believe the imports were lower in July. I'd have to get an exact number and get somebody to get back to you on how much that was down. But our understanding, and we did talk to a lot of customers, and our understanding is certainly the the importers who were importing either the OCP for the Russian products definitely took a step back to understand what the risks might be in terms of them picking up some sort of countervailing duty risk. So we did see a step back in July. Whether they will come back into the market in the next couple of months, I don't know. What we have seen, however, is new product coming in from places like Egypt and Australia and Mexico. So it does say there is some change. I got to ask somebody to give me, what was the second part of your question there, Steve? I missed in my writing.

Thank you. Next question comes from the line of Chris Parkinson of Credit Suisse. Your line is open. Great.

Thank you very much. So you already mentioned you expect Chinese DAP exports to be down, I guess, 600,000 tons or so, and that you don't really expect that much on a year-on-year basis in terms of Tunisian availability, which is fair. But, you know, there have been a few mines over the last couple of years that were kind of in the process or the tail ends of their ramps, you know, in Morocco, obviously Saudi Arabia, even Turkey and Egypt. Do you believe that the phosphate market has really felt, has already felt the full effects of those previous ramps, and now we can just kind of isolate our thought process in terms of new supply on just the Moroccans and Saudis? What's your kind of aggregate assessment of the SD over the next, let's say, two to three years? Thank you very much.

Yeah. Yeah, thanks, Chris. I think, you know, materially, it is all about... what's left of the Saudi ramp up. And, you know, assuming they reach their, I think, 2.7 million tons was their target for 2020. And there is some de-bottlenecking and other projects that OCP is expecting to do. I mean, those are still yet to come. And maybe a little bit of extra coming out. I saw Fosagro has been export or has been producing a little higher number. So there could be some new tongues coming out of Fosagro. For the rest of the world, I would say basically the closures are more than offsetting any small ramp-ups that we've seen. And overall, it really is now coming down to small increases from the Saudis and then whatever Morocco brings in in the next couple of years with a little bit of addition from possibly from Pasaigra.

Thank you. No further question at this time.

Well, if there are no other questions, I'd like to first of all say thank you for the questions you brought in. We had a very good set of three submitted questions, which I thought was very healthy. But to conclude our call, I'd like to just reiterate our key themes here. Mosaic generated strong results despite low realized prices for our products. Our long-term transformation efforts are really starting to deliver substantial structural cost savings, and we expect to drive additional savings in the years ahead. Our balance sheet continues to strengthen as we've paid down debt and generated strong cash flows. Fertilizer markets continue to improve, and prices are rising. We're navigating the COVID-19 situation successfully with minimal impacts to our business. So in summary, Mosaic is more resilient and competitive than it has ever been, and we have built significant earnings leverage for a rising price environment. So we are looking forward to continued improvement and continued success on our journey towards being a very competitive company. So thank you for joining the call. Have a great day, and we hope to talk to you in person soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.