Mosaic Company (The)

Good morning, ladies and gentlemen, and welcome to the Mosaic Company's third 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 Paul Massoud, Vice President, Investor Relations of the Mosaic Company. Mr. Massoud, you may begin.

Thank you and welcome to our third quarter 2021 earnings call. Opening comments will be provided by Jacques 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, and Jenny Wang, Vice President of Global Strategic Marketing, will also be available to answer your questions. We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release furnished yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our third 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 Jacques.

Good morning. Thank you for joining our third 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, which were made available on our website yesterday. I will provide some additional context before we respond to the questions we received last night, and then we'll conclude with a live Q&A session. Mosaic delivered excellent financial performance in the third quarter, with EBITDA reaching its highest level in more than a decade. Our business continues to benefit from the strong markets we've been discussing since the second half of 2020. With our North America production recovering, and a strong order book, we'd expect the momentum to continue through the end of the year and into 2022. Before we get into our strong outlook, I want to briefly give you an update on the production issues we faced during the third quarter. As you'll remember, in June, our Esterhazy K1 and K2 potash mines experienced accelerated brine inflow, and we made the decision to stop operations approximately six months ahead of schedule. To help mitigate loss production, we further expedited the ramp up of K3 and restarted Kalonze. The second shaft at K3 is now operational, which paves the way for us to reach full production in the first quarter of 2022. And at Kalonze, we hit our targeted run rate in October. In phosphates, the damage from Hurricane Ida and the equipment failure at New Wales resulted in a 300,000 ton production loss in the third quarter. Thanks to the efforts of our team, the fourth quarter production shortfall has been reduced to 100,000 tons and operating rates should be normal by the end of the year. In both phosphates and potash, our team has worked diligently to ensure any shortfalls resulting from issues outside of our control were temporary. As we head into the end of the year and into 2022, we are well positioned to take advantage of the current market. Shifting now to agricultural markets, we continue to see strength extending well into 2022. Grain stocks remain limited and global corn and soybean demand is elevated, driven in part by surging Chinese demand and rising global biofuel demand. As a result, agricultural commodity prices remain high. and farmer income remains well above historic norms. That strength in crop markets combined with global industry supply constraints are the key drivers pushing fertilizer prices higher. In the Americas, demand is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set a record for fertilizer shipments in 2021. Grower economics remain profitable despite the latest surges in nutrient prices. And this has been reflected in the significant order book into the end of the year and into the first half of 2022. In North America, demand continues to be strong and prices have followed, reflecting a healthy domestic market benefiting from imports from a diverse group of suppliers. Grower economics remain favorable in North America, although not quite as favorable as during the first half of the year. However, persistently low inventories and capacity constraints are underpinning the tight supply-demand balance, as well as pricing. In India, while farmer demand remains strong and the government has recently acted to improve importer economics for phosphates, availability is still lagging. Recent moves by the governments will likely help in the recovery of Indian imports, which lagged most of 2021 because of the disconnect between domestic subsidies and global prices. Given how depleted Indian inventories are, we see India as a source of pent-up demand, which should return to the market in 2022. In Southeast Asia, fertilizer demand is benefiting from the strength in palm oil prices, and China is incenting its farmers to maximize yields through subsidized crop prices. New supply of phosphates is limited. Chinese exports are expected to decline significantly in the fourth quarter and in the first half of 2022, reflecting the directive from China's National Development and Reform Commission that major producers halt all phosphate exports to ensure adequate domestic supply. In potash, demand growth continues to exceed new supply from higher operating rates announced by producers, and prices continue to rise. Putting this all together, we expect further upside in realized pricing for phosphates and potash. Our fourth quarter order book is now about 90% committed and priced. As a result, we expect to see a sequential increase of $55 to $65 a ton in realized phosphate prices and $110 to $130 a ton in realized potash prices. We are seeing buyer appetite for first quarter commitments as well. All of this implies higher earnings in the fourth quarter and a very strong results continuing into 2022. Our earnings are leading to substantial free cash flow generation, which has allowed us to make significant progress towards several commitments we've made. Earlier this year, we raised our regular dividend target by 50% to 30 cents a share. In October, our board approved an additional regular dividend target increase of 50% to 45 cents per share effective in 2022. In August, we repaid $450 million in long-term debt towards our target of $1 billion of debt reduction. Also in August, we announced an expanded share repurchase program of $1 billion. Since that announcement, we have repurchased more than 950,000 shares. In addition to strengthening the balance sheet and returning capital to shareholders, we continue to evaluate further investments in the business. Capital expenditures are expected to total $1.3 billion in 2021, of which roughly $450 million is growth related. We continue to evaluate every opportunity that allows us to further strengthen the balance sheet grow the business and return capital to our investors. Now, before I conclude my opening remarks, I want to take a moment to recognize the many contributions of Laura Gagnon and what she has made at Mosaic. As head of investor relations for the last decade, Laura has been an invaluable advisor to me and to the entire leadership team. We are very grateful for her service and wish her all the best in her retirement. Paul Massoud, has been promoted to lead IR, and Laura will stay on through the end of the year to help with the transition. Please join me in wishing her well. With that, let's move on to questions. Paul?