Mosaic Company (The)

Good morning, ladies and gentlemen, and welcome to the Mosaic Company's second quarter 2021 earnings conference call. At this time, all participants have been placed in a listen-only mode. After the company completes their prepared remarks, the lines will be open to take your questions. Your host for today's call is Laura Gagnon, Vice President of Investor Relations of the Mosaic Company. Ms. Gagnon, you may begin.

Thank you, and welcome to our second quarter 2021 earnings call. Opening comments will be provided by Jack O'Rourke, President and Chief Executive Officer, followed by a fireside chat, as well as open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer, Jenny Wang, Vice President, Global Strategic Marketing, and other members of the leadership team will also be available to answer your questions. We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release furnished 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 8K filing also contain important information on these non-GAAP measures. Now, I'd like to turn the call over to Jack.

Good morning. Thank you for joining our second quarter earnings discussion. I hope you've had a chance to review our posted commentary and slides, as well as our news release and performance data, all made available on our website yesterday. Today, I will provide some additional context before we respond to questions we received last night, and then we'll conclude with a live Q&A session. Mosaic delivered excellent financial performance in the second quarter, and the second half of 2021 is set up to be one of the strongest periods in over a decade. Our earnings are driven by two key factors. First, strong underlying agricultural markets, coupled with tight fertilizer demand dynamics are driving fertilizer prices higher. Second, and just as important, are the results of our effort to optimize our business to fully realize the benefit of these market trends. Throughout our long-term and ongoing work to reduce costs, we have created significant earning leverage, as this quarter's performance demonstrates. Looking ahead, we expect further upside. Our third quarter book is now 90% committed and priced, As a result, we expect a sequential increase of $90 to $100 per time in realized FOSA prices and $25 to $35 per time in realized FODASH prices. Beyond the third quarter, we are seeing buyer appetite for fourth quarter commitments as well. All of this implies higher earnings in the third quarter and very strong results in the fourth and into 2022. The dynamics fueling the agricultural markets point to a period of strength that we believe will extend well beyond 2021. Grain stocks remain limited, and global corn and soybean demand is growing, driven in part by surging Chinese demand and biofuels. As a result, agricultural commodity prices remain high, and the outlook is promising for continued strong farm income. and that is what drives higher fertilizer demand. Demand in the Americas is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set records for fertilizer shipments. Across the Americas, we saw a big recovery in 2020 and expected the demand growth to moderate this year. The opposite has happened. Demand for potash and phosphates is up substantially compared with last year, and nearly all of the fertilizer delivered this year has gone to the ground, which means channel inventories in most regions remain below historic norms. In North America, demand continues to be strong. Following the completion of our CVD petition, U.S. phosphate prices now trade at parity with global benchmarks, and the domestic market is benefiting from elevated imports from a more diverse pool of suppliers. This is reflective of a healthy market that's responding to the market's signals. In India, Farmer demand remains very strong, but importer economics have negatively impacted available supply in the country because of the disconnect in government subsidies. As a result, it is difficult for the Indian farmer to get the phosphates they desire. It is clear that more work needs to be done to rectify the imbalance, but we continue to see other regions absorbing fertilizer supply. Given how depleted Indian inventories are, we see India as a source of pent-up demand for the future. Southeast Asian fertilizer demand is benefiting from the strength in palm oil, and China is incenting its farmers to maximize yield. While the demand dynamics for potash and phosphates are similar, driven by the strong underlying agricultural markets, the supply outlook is slightly different for the two products. In phosphates, new supply is limited, and any new greenfield supply additions are several years from completion. Recently, Russia requested producers prioritize domestic demand to stabilize in-country pricing. And while supply from Chinese phosphate exports during the second quarter was elevated to meet global demand, Chinese exports are expected to decline in the second half of the year as in-country seasonal demand increases. This was reinforced by news last week that China's National Development Reform Commission has begun requesting the export of fertilizers to ensure adequate domestic supply. In potash, demand growth continues to exceed new supply from higher operating rates, recently announced by producers. As a result, prices continue to rise. In fact, price increases have largely offset the financial impact of our early closure of K1 and K2 shafts at Estherhazy. We recently resumed production at Kalonze and now expect our net production loss to be approximately 700,000 tons per the year. down from our original 1 million ton estimate. This also brings the sales impact down to approximately 500,000 tons as we draw down available inventory. Our earnings are leading to significant free cash flow generation, which has allowed us to proceed with the early retirement of our $450 million in long-term debt later this month. We are currently evaluating additional actions for capital deployment. Capital expenditures are expected to total $1.2 billion in 2021. This includes accelerated K-3 spending to speed up our ability to bring K-3 to full production, as well as approximately $75 million in additional high returning opportunities within our businesses. Given the strong cash generation, we continue to evaluate opportunities that also allow us to further strengthen our balance sheet, grow the business, and share with our investors.