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spk01: Good morning, ladies and gentlemen, and welcome to the Mosaic Company's second quarter 2022 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 of Investor Relations and Financial Planning and Analysis of the company, of the Mosaic Company. Mr. Massoud, you may begin.
spk12: Thank you, and welcome to our second quarter 2022 earnings call. Opening comments will be provided by Jock O'Rourke, President and Chief Executive Officer, followed by a fireside chat as well as open Q&A. Glenn Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wong, Senior 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. 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 press release and performance data also contain important information on these non-GAAP measures. Now I'd like to turn the call over to Jacques.
spk07: Good morning. Thank you for joining our second quarter 2022 earnings discussion. I hope you've had a chance to review our posted slides as well as our news release and performance data, which were made available on our website yesterday. I will provide more additional context before we respond to questions we received last night, and then we'll conclude with a live Q&A session. Mosaic delivered second quarter net income of $1 billion and earnings per share of 285. Adjusted earnings per share were $3.64 and adjusted EBITDA was $2 billion. Free cash flow totaled $794 million, allowing us to return $667 million to shareholders during the second quarter, including $612 million of share repurchases, bringing the year-to-date buyback total through June 30th to over $1 billion. We've continued to buy back shares aggressively through July because we believe our portfolio positions us to continue driving strong results and generating significant cash flow through the rest of the year and into 2023. As such, Mosaic's board of directors has approved a new $2 billion share repurchase authorization to begin once the current one is exhausted later this year. Before digging deeper into our business, let's discuss the broader agricultural markets. There are several issues threatening global food security. The war in Ukraine continues to create uncertainty around food supply from one of the world's most important crop producers, In addition, Europe and US have experienced very high temperatures, while southern Brazil is showing signs of drought conditions. And all of this is happening at a time of lower overall nutrient applications because of constrained supply. Each of these issues alone can have a material effect on global crop production. But together, the risk to food security is significant. This suggests global stock-to-use ratios which are already near 20-year lows, will remain under pressure. Because of this, we see a tight supply and demand scenario for global grains and oilseeds continuing through 2022 and into 2023. As we focus on the potash and phosphate fertilizer markets, the fundamentals remain quite strong. In potash, we continue to expect Belarusian exports to be down 8 million tons this year. Some of that will be mitigated by incremental supply from producers like Mosaic over the next 18 months, but that will not be enough to erase the deficit that we see lasting well into 2023 at least. In phosphates, China has continued to restrict exports as it prioritizes domestic, industrial and agricultural demand. We now believe full-year phosphate exports from China could be down as much as 5 million tons from the prior year total of 11.5 million tons. Shifting focus, we believe global fertilizer demand in the first half of 2022 was down about 10% from the same period last year, which aligns with the shortfall we've seen in supply. Grower sentiment has grown more cautious, but supply constraints are supporting global prices and margins well above historical levels, a situation we believe will continue at least through the rest of the year. North America and Brazil have been well supplied thus far in 22, but much of the rest of the world is continuing to see unfilled demand of both phosphates and potash as a result of limited supply. In North America, a compressed planting season, macroeconomic headwinds, and volatile crop prices impact spring season consumption. First half applications were down from the record year in 2021, but remained in line with historic levels. Looking forward, we expect normal demand leading up to fall application. In Brazil, we saw first half demand in line with historic levels. Channel inventories were built in country by importers, driven by concerns over supply availability stemming from geopolitical events. Significant customer prepays, though, indicate farmer demand will ramp up as the safra season gets underway. In India, we've begun to see importers enter the market and take advantage of the recent price pullback in phosphates. India's phosphate inventories are low, and concerns over availability persist. Farmer demand for nutrients remains very strong, and the government continues to indicate it will ensure adequate supply for domestic consumption. In China, port inventories of potash sit below 2 million tons, and in Southeast Asia, shipments of potash appear below historic levels. We see these dynamics impacting demand beyond 2022, as reduced application this year will require a catch-up in future years when supply availability improves. As we look at our business in the context of today's global markets, we remain optimistic. The investments we've made over the last decade have positioned us well for today's environment. In Brazil, our 2018 acquisition of the Fertilizantes business has driven significant shareholder value. We've seen EBITDA grow from less than $70 million in pro forma 2017 to $1.2 billion over the last 12 months. And we've completely recapitalized the business, having now bought back all of the shares issued and repaid all of the borrowings to fund that deal. Looking forward, Mosaic Fertilizantes will continue to benefit from its market position as the country's largest producer and second largest distributor. We are seeing inflation in our cost structure, but believe ongoing optimization should offset much of the impact. In potash, we are realizing the benefits of K3, one of the world's most efficient potash mines, and we're actively working to optimize that asset. We've reached our initial operating run rate target of 5.5 million tons per year at the end of the first quarter and plan to continue our optimization of the complex with the addition of three new underground miners over the next year, resulting in an incremental 1 million tons of production capacity. At Kalonze, we've begun the process of restarting the second mill, which should expand output to 2 million tons per year by the second half of 2023. In phosphates, we continue to benefit from our advantage position in ammonia, and we're now seeing an improvement in sulfur costs that should begin to flow through to our production costs later this year. We've seen prices moderate down to levels we believe are sustainable for the rest of the year. As a result, we expect our stripping margins will remain well above historic levels. Given the outlook for our business and the free cash flow we expect to generate, Capital allocation remains a key focus for us. First, we continue to invest in our business. For 2022, total capital expenditures remain unchanged at $1.3 billion. We remain open to modest, high-returning projects and small bolt-on acquisitions, especially in Brazil. But we are not interested in large-scale greenfield projects. Second, we're committed to ensuring a strong balance sheet. and plan to retire $550 million of long-term debt in the second half of 2022, after which we see no need to further deleverage. The third pillar of our strategy is returning capital to shareholders. Year to date, we've returned $1.1 billion to shareholders through buybacks and dividends, and we expect that pace to continue, if not accelerate, as the year progresses. In total, we expect to return essentially 100%, of our free cash flow after the commitments to the business and the balance sheet we've discussed. Because we're approaching the end of our current authorization, our board of directors approved a new authorization of $2 billion that begins once we've exhausted the current authorization. At today's valuation, buying back our own shares provides better economics than any other use of cash, so we expect to take advantage of this as long as the opportunity remains. We may also consider supplementing share repurchases with special dividends over time, depending on market conditions. As we've said in the past, we will not build cash on the balance sheet just for the sake of it. Before going into Q&A, allow me to summarize. Mosaic delivered very strong results in the second quarter, and we expect favorable dynamics as we continue through the year and into 2023. We're continuing to help the world grow the food it needs by ensuring customer demands are met and we're returning significant capital to shareholders while still investing in the business and strengthening our balance sheet. Now with that, I would like to move on to the Q&A portion of the call.
spk12: As we've done in past quarters, we'd like to address some of the most common questions we received after we published our earnings materials last night. Jack, just to start, I think it might be helpful to provide an update on potash and phosphate supply constraints. What are we seeing in the market today?
spk07: Thank you, Paul. Let's start with potash. The Belarusian and Russian exports together we expect to be down by about 12 million tons this year due to the effect of sanctions. Now, we do expect recovery from both Russian and Belarusian exports as we move into 2023, but the world is going to need those tons if demand snaps back in any way over the next year. What do we see? Russia? Probably easier to come back. They're finding ways into the market. We're seeing their tons, particularly in countries like Brazil, India, and Central America. Belarus has had very little comeback. They are probably moving 100,000 tons a month through to China by rail. But other than that, we're seeing very little of Belarusian product in the market. So we expect between the two of them, like I said at the start, 12 million tons. In phosphates, the biggest player, of course, is China in terms of export restrictions, and those have been extended into the second half of the year. Our projection for Chinese exports this year is down to 7-ish million tons from 11.5 million tons. So we're seeing a good 5 million ton reduction of exports. And again, because of the structural changes in China, we really don't expect them to come back in a big way even after the restrictions end. So in 2023, we expect domestic ag and industrial demand to continue to restrict Chinese exports.
spk12: Given the dynamics we saw in the second quarter, we received several questions on the resiliency of potash and phosphate demand. Can you discuss how you see the second half playing out?
spk07: Let me start by saying because of the lack of supply in both phosphates and potash, demand had to be rationed. And what we saw was that rationing of demand meant lower use in different areas, but specifically lack of supply in some areas. So it's very regional how this played out. In North America particularly, a compressed season, because of weather in the spring, led to very late and very limited ability to add fertilizer to the ground. So this, combined with growers being willing to mine their soil because of the higher prices, probably led to lower use in the United States and Canada. But remember, any of this missed or curtailed application will have to be made up in the next couple of seasons. So we do expect a very robust, normal fall application. Now, again, caveat there being it will be late because the planting was late, so the harvest will be late. So it could cross quarters from the third quarter into the fourth quarter. But if I look at the overall application, second half of the year, we expect it to be very much in line with a normal year here in the United States and in Canada.
spk12: John, we received a few questions on elevated inventory levels in Brazil, specifically around potash. How do you think this will affect new sales and how might this also impact pricing?
spk07: Thank you. As we discuss Brazil, we have to start by understanding that 85% of fertilizer into Brazil is imported. And at the start of the year, there was a huge concern with the constrained supply over whether or not the country could get the fertilizer it needed for its planting. To put it to a point, the Minister of Agriculture and the President of the country both traveled the world to ensure that imports would be available for Brazil. As such, Brazil led pricing in the first half of the year for around the world. Now, because of that, imports were up about 30% year over year in the first half. So as we move into the second half of the year, inventories are high. And because inventories are high, farmers believe they can defer. But ultimately, solid economics for both soybeans and second crop corn are going to drive the farmer to apply fertilizer. And when they start applying, we believe The ramp-up of buying activity will consume the inventory, and we will end the year at a normal place. The best evidence from our perspective of this is the high prepay that we have seen in the last quarter, which indicates that the farmers are getting ready to buy. The farmers are getting ready to apply. They are just waiting for the right time.
spk12: We received a few questions from analysts about our third quarter sales volume guidance, especially for phosphates. Can you provide some context around our expectations for both potash and phosphates over the next three months?
spk07: Yes, thank you. Let me start by saying this is mostly a timing issue. In North America, the late spring and late planting is going to lead to a late harvest. Now, that means that the second half demand, while it should be in line with expectation, could come in the fourth quarter rather than the third quarter due to this delayed harvest. So while we expect a very normal second half, where exactly it plays out in terms of the timing is yet to be seen. In Brazil, planting for the second crop corn or the soybeans won't happen until November, December. As such, there is time for them to delay their purchases until the last minute. Now, again, in Brazil, just like North America, we expect normal application in the second half of the year. But as always, with higher prices, people are deferring the purchase as late as they can. However, good economics will mean that in both cases, we believe normal application will occur. If you do note, the high range for the phosphate guidance does align with more typical sales historically. But again, we could see those slipping into the fourth quarter.
spk12: Clint, this question is for you. We received a question on our working capital needs in the last few quarters. How do you see that playing out going forward?
spk11: Thanks, Paul, and good morning, everyone. As we look at working capital, there are a number of dynamics to keep in mind. First, the overall market pricing levels and seasonality that impact our income statement also impact our balance sheet, particularly around working capital. As we've seen, the pricing levels in the overall market increase over the last couple of years. that has caused an increase in our core working capital accounts of receivables, inventories, and payables. So those tend to follow directionally what's happening with the overall pricing environment. And again, over the last couple of years, as a result of that, we've seen the overall working capital needs of the business increase. Now, in addition to the impact of the pricing environment that we're operating in, we also have the seasonality of our business that plays out. And so you see some meaningful changes from quarter to quarter based on which season we're either in or entering into. First quarter, we tend to see preparation for the spring season. So we typically see inventory bills. We typically see our accruals and payables from the previous year get paid out. And then as we move into the second quarter, we tend to see receivables build. We tend to see other impacts on working capital. So we can see, you know, as we move through the seasons, it certainly will play out in our working capital accounts, particularly the seasons in North America and Brazil. Two things I think are good to focus on or to recall, particularly as it relates to Brazil. One is our growing distribution business in Brazil. does tend to hold quite a bit of inventory particularly as it moves into the season and then it tends to liquidate throughout the season so that can be a driver of some of our overall working capital the other element of the brazil business is around prepayments prepayments tend to build in the first half of the year and then reverse out in the second half of the year just to give you a sense of order of magnitude first half of this year we saw prepayments in brazil increased by about 830 million dollars Again, that's another factor that's influenced by the overall pricing environment. But again, we would expect to see the vast majority of that, if not all of it, reverse out in the back half of the year. And specifically in the third quarter, I would expect somewhere between 50% to 75% of that number to reverse out of working capital. So again, just keep in mind as you look at our working capital, overall pricing environment impacts it, but also the seasonality of our underlying business.
spk12: That concludes the fireside chat portion of the call. Operator, let's open up the line to follow-up questions.
spk01: Thank you. If you do wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. A voice front on the phone line will indicate when your line is open. Also, please state your name before posing your question, and please limit yourself to one question. Again, it is star 1 to ask a question. We will now take our first question.
spk10: Paul, your line is open. Please go ahead.
spk00: Hi, Steve Byrne, Bank of America. I'd like to get your view on where do you take fertilizantes from here? Jock, you mentioned you were looking at potentially some small bolt-ons down there. What businesses are you largely looking at And can you also comment on how the gross margins in that business differ between product you produce versus product that you buy and then redistribute? Do you see that split changing going forward as perhaps you expand your capacities?
spk07: Okay. Thanks, Steve. Look, let me start by saying probably as we look at Brazil, The northwest or northeast kind of section of Brazil, as you go towards but not into the Amazon, obviously, seems to be the area that's growing the fastest. It's growing probably at 10% plus per year. We have plans to build a hub that would allow us to be more participative in that region. So as that market grows, that's one area where we would expect to expand our distribution business. And then in the areas of production, we've got plans for optimizing our existing operations. We're looking at plans to expand and extend the life of our potash facility down there because we think it's a niche area where it can supply. So there's a number of opportunities we're looking at down there that we think are going to have very quick paybacks and relatively limited capital requirements. In terms of the margins, clearly producer margins are better at this type of market than distribution margins. But on the other hand, the benefit of our distribution business is that the margins stay very constant year on year. What I'll say, though, not to be too explicit about our actual margin split, is that our best margins are seen for things like microessentials, where we pick up the production margin in the U.S., and then both the distribution and retail margin down in Brazil. So those margins are pretty fantastic. And then the other place where the margins are really good is our production B2B business where we sell it through our own distribution and we capture both of those margins. But overall, I think right now two-thirds of our earnings are probably being driven by the production business.
spk10: And we can now take our next question. Caller, your line is open.
spk01: Please go ahead.
spk05: Hi, Joel, Jackson from BMO. Just going up on the Brazil margin question, or Fertilizante margin question, obviously margins have been all over the place the last bunch of quarters in a rising fertilizer price environment. I mean, how should we see margins there? I'm assuming some of the peak margins we're seeing right now have to go down. Inventory gains, commodity prices can't stay here forever. So how do you see the next couple quarters, and then what will be kind of the mid-cycle margin guidance to think about?
spk07: That's a pretty detailed question here, Joel, and one which I'd be making some pretty big forward-looking statements. Look, I think the one thing to say is where we're expanding mostly has been in our distribution business. Those margins have been pretty stable for for a long time um and again um without getting into too many details of exactly where those sit but I don't think those are going to change mid-cycle a whole lot from where they are today obviously we've had some positioning gains that have helped us but um and those come and go a little bit but I think our overall strategy of how we buy raw materials including you know UAN and others for our business. Because we buy those fairly carefully, I think we're going to continue being well positioned in that market. In terms of mid-cycle though, in our original prospectus to buy the business, we talked about a $350 million a year. And I would say between the benefits of our integration and then the benefits of our changes since then, I would argue that we've probably added at least $400 million to that business, and we would be more likely in the $700 million to $800 million per year range mid-cycle.
spk01: We can take our next question now. Caller, your line is open. Please go ahead.
spk17: Hi, it's Vincent Andrews from Morgan Stanley. Good morning, everyone. Chuck, maybe just give us your latest thoughts on capital allocation. Obviously, the $2 billion buyback, but you did also mention potentially doing special dividends. So maybe you could just layer in how you're thinking about the common dividend from here and what might cause you to do a special dividend and how large it could potentially be.
spk07: Sorry, I guess I got my mic backwards. Thanks, Vincent. Yeah, as we think about capital allocation, really our thoughts on that have been reasonably consistent, which we made a commitment a long time ago to pay the $5.50 down to make the billion dollars of payments. But once that's done, we believe that's done. We've got a very strong balance sheet. We're comfortable. Obviously, we have to do our capital. And that brings us down to the question you're asking, which is, you know, how are we going to distribute the rest? And I said just earlier, we expect to give that all back to shareholders. We don't see anything more enticing than our own business right now. So we expect that certainly at these types of share prices and our types of EBITDA to enterprise value ratios, we think our shares are very compelling and we'll continue to buy those. Now, if that If the price of our shares changes or the business changes, then we may make a decision to move towards some level of special dividends. But recognize that just says that we originally intended to have more of a balance. The special dividend would support or be in favor of the long-term holders who don't intend to sell their shares. So in some respects, I want to serve all all of our shareholders and so that might be something they would like so that would be the reason for that in terms of um regular dividends we've made the decision that we would look at the regular dividend basically annually and so our thought was we would leave that till the end of the year but you know look our share count is lower our debt level is lower so we have less money going out for on a total on a dividend basis today than we had a year ago and obviously we have less debt repayment to make so or less interest payments to make so i think all of that would go into our our dividend increases on our regular dividend plus to make sure that we're paying out what we think is reasonable for the long-term shareholder we can take our next question call your line is open please go ahead
spk14: Hi, this is Lucas Beaumont from UBS.
spk03: I also had a question on Fertilizantes. So I just wanted to talk about the purchased nutrient volumes there. So it was up kind of modestly in the second quarter, but down a bit over 10% in the first half from last year. So just given how strong demand has been in Brazil, I was just wondering if you could sort of tell me why the purchased nutrient volumes there weren't higher. And if you could give us your thoughts on how the second half has likely to shape up from a volume perspective.
spk07: Sorry, can you repeat that last bit of that? I missed the purchase volumes.
spk03: Purchase nutrient volumes in the second half.
spk14: Please.
spk15: Now we've lost you completely.
spk07: Lucas, are you still there?
spk03: Yeah, I can hear you. Can you guys hear me?
spk07: Okay, we can hear you again. We lost you completely there. You were breaking up, and then we lost you completely. I apologize profusely, but if you could ask again, I'm sorry. We're struggling with a line, I think.
spk03: Probably my accent. Infertilizantes, with the purchased nutrient volumes, they were down about 10%. year on year in the first half so i was just wondering why it wasn't stronger given how strong brazil has been and what you're thinking for an outlook in the second half on purchase nutrient volumes thanks yeah lucas i think i think that actually has a fairly simple explanation which is we as we have integrated our
spk07: B2B business and our B2C business, we've tried to focus on selling our B2B product through our own distribution sales system. And so because of that, that is an intercompany transfer and doesn't count towards, we try not to double count the volume. So I suspect what you're looking at there is although purchased nutrient volumes were down, That's because they were replaced by internal volumes from our own B2B business, if you will, or our production business.
spk01: And our next question now. Caller, your line is open. Please go ahead.
spk16: Hi. Jack, nutrients are supposed to be applied in optimal ratios, something called the Liebig's Law of the Minimum. So with potash and nitrogen more constrained than phosphate, does that reduce demand for phosphate? Even though phosphate is less constrained, people aren't going to apply as much because they can't get the nitrogen in potash.
spk07: Yeah, thanks. Sorry, I didn't pick up the name. Can I repeat your name? No, I'm not. Sorry. Oh, hi, John. Hi, John. Okay, I think I got your question. Yeah, so I think there's no question there will be a big deficit in some markets, particularly, you know, like you say, potash will be underutilized in a lot of markets, including Asia, West Africa, Europe probably, et cetera, and likewise, so will nitrogen. I don't know if that would stop people from using or make people use less phosphate. I suspect you would still try to use the right amount of the fertilizers. I know that obviously the optimum ratio is best, but I guess it's like vitamins. Not having enough vitamin D wouldn't mean you wouldn't want to have enough vitamin C, if you will. So... It's probably beyond my agronomic understanding to know if that would have a thing, but we're not looking at any kind of restricted sales because of others. The one thing I will acknowledge on that, though, is if the price of nitrogen gets so high that it takes up a lot of the budget, that has historically been a problem for the other nutrients in countries like India, where they tend to overapply nitrogen. And if it takes up a disproportionate amount of their budget, they could restrict other uses.
spk01: We'll now take our next question. Caller, your line is open. Please go ahead.
spk13: It's Adam Samuelson with Goldman Sachs. Jock, I was hoping to maybe come back to the phosphate business a little bit I know you talked a bit earlier about the volumes and improving in the back half, but more holistically, what would it take for the operating rates in your U.S. phosphate business to get back over 85%? They haven't been there in some time. Is it just demand? Is it logistics issues in Florida? I'm just trying to get a sense of, it seems like there's a lot of underabsorbed overhead and idled and turnaround costs that you're absorbing here that are maybe leading to cost and margins not as robust as they could be.
spk07: Yeah, thanks Adam. Look, I saw that you had asked that question in your pre stuff and I was thinking about it a little bit. You know, if I look back the last couple of years, we've had a freeze in Texas that restricted sulfur use, which actually restricted our ability to run We had Hurricane Ida, which knocked out power in Louisiana for, I think, three or four weeks, et cetera. And, you know, if I look at – and then first quarter of this year – so we went into the first quarter of this year with low inventory in phosphates. Then we had rail restrictions, unbelievable rail restrictions. And so while we built up inventory – It's been very difficult to move the product. We've been low on sulfur. Now we're high on sulfur. But it's our turnaround quarter that we've just gone through. And so now as we get there, I am hoping that there's no external factors that continue to push against our southern US location, if you will, and that should be what it takes to get us back to normal. There hasn't been any big internal things that have slowed us down. It's been more of this damage from the hurricane, damage from the ice storms, or not damage, sorry, restrictions from the ice storms, logistics, and actually earlier, at the start of the 18-24 months you've talked about, actually constrained because of inventory. But we had to shut down plants. But we are looking to more normal as we go forward.
spk01: We'll take our next question now. Caller, your line is open. Please go ahead.
spk06: Yeah, good morning. This is Michael Piken from Cleveland Research. And I just wanted to talk a little bit about Modin and your investment there and when we might see the trajectory of profitability increase. Are there any issues with getting ammonia there? And just overall, your outlook for ammonia costs across the business in light of some of the European and Asian curtailments. Thanks.
spk07: Yeah, thanks, Michael. In terms of modern, our second quarter equity earnings were about $34 million. Sales attributed to the business was 413,000 tons. So while not quite up to what it is ultimately going to hit, it is actually making a positive contribution to us, which is good, and helping us supply our Indian customers. customers, which is also a good thing. We want to see that going to our customers around the world. So overall, I mean, they continue to have a ramp-up plan. It's certainly been slower than we would have loved to see, but that is what it is. Having said all that, though, modern continues, in this market particularly, modern continues to be highly advantaged. With natural gas prices, they're paying in the kingdom of $1.30 you know, that represents an unbelievable sort of structural advantage to that operation. And then the other one is a very low sulfur cost. So one would expect that modern right now would have a very low actual cost per ton compared to the rest of the world and probably is now taking its place as the low cost producer. In terms of ammonia availability, our ammonia availability, I think that was the second part of your question, has been actually unrestricted. We have basically two-thirds to 75% produced between ourselves and our contract with CF and then the rest that we're buying on the open market, which we have long-term agreements and contracts that tend to make that work quite well. And I think if I look back to it, our price for ammonia was in the high 500 range compared to a 1200 plus on the market. So we're not only getting the ammonia we need, but we're getting it at a very advantaged price.
spk01: We can now take our next question. Caller, your line is open. Please go ahead.
spk02: Hi. Andrew Wong from RBC. So a similar question to Adam's, but on Fertilizante's phosphate production, I recall the business was impacted by some extended turnarounds last year, but it looks like in Q2 production was down versus Q1. And are there still any constraints in that part of the business? And, you know, are we setting up for a Q3 seasonal strength, which is typically what happens in Brazil? And then just one follow-up on some of the corporate line items. There was a negative charge there in Q2. Can you talk about that? Was it mostly intersegment sales, and does that reverse in subsequent quarters? Thanks.
spk07: I'll leave that one to Clint, that last piece to Clint, but you might need to specify a little more which one you're talking about. But let's talk about phosphate production in Brazil. I think Brazil... probably more than anywhere, we've got out of sync with our turnarounds and some of our maintenance because of COVID. And again, these things take time to play out, but we had to delay and minimize a number of turnarounds, and particularly the plants that were impacted the most were probably our Shaw plant, where we had a couple of failures of equipment. We had the parts sitting there, but because of restrictions that the communities put on us and others, we put off the shutdown until I think it was supposed to be the third quarter of this year, and then we've had breakdowns of that equipment. And in Tapira, we had a couple of issues with respect to the conveying systems and stuff, and it's just been harder to get them fixed and longer to get them fixed, particularly in Brazil. And so there's been a bit of a hangover there in Brazil from that. But again, we look like we're all ready for strong third quarter. And like you say, that's when we're going to need the production to meet market demands that are out in that country.
spk11: And Andrew, this is Quinn. I think to the second part of your question about what you're seeing in the corporate segment, I think The driver of that is intercompany sales. It's profit and inventory, and that typically happens when one business unit makes sales to another business unit, but the final tons haven't gone to a third party yet. We had about 300,000 tons in June move from phosphates down to fertilizantes. I think that's what you're seeing in the corporate segment. We do that. so that, you know, as the results of the individual segments come together for the consolidated number, we need that offset to get all the numbers right. So I think what you're seeing is an internal shipment that occurred in June, and again, that should, you know, clear out as fertilizantes makes that sale.
spk01: We can now take our next question. Caller, your line is open. Please go ahead.
spk14: Hi, this is Jeff Tsoukaskas from JP Morgan.
spk04: Two questions. I didn't fully understand your phosphate price guidance for the third quarter. You gave an explicit number for potash. And secondly, in your cash flows from financing activities, if you exclude what you did in terms of debt pay down and share repurchase and dividends, you had a negative 672 million outflow. And, you know, the number isn't as negative for the year. But I was wondering when you net out all of those numbers, you know, for 2022, what should they be? And why aren't those numbers in cash flow from operations. So I guess those are the two questions.
spk07: Okay, thanks, Vincent. Sorry, Jeff. Sorry, Jeff. I'm one name off. Jeff, I'm going to let Clinton give the first one, or is he still trying to figure out what exactly you're... No, he's ready. I'm going to let Clinton, and then I'm going to come back and talk to you about the price forecast for phosphates.
spk11: Yeah, Jeff, I think what you're seeing... Are some of the entries associated with some of the short-term financings that we have? We have not only inventory financing facilities that we use seasonally to finance some of our working capital, but I think some of the other entries that you may be seeing are related to some of the accounts receivable securitization facilities. And those are some of our working capital funding mechanisms that we use, again, through the seasons. And one of the things in particular in the second quarter is, you know, as we look at the increase in customer prepayments, particularly down in Brazil, you know, year-to-date, as I mentioned a little bit earlier, year-to-date that's up about $830 million. And when we look at that, that is a source of working capital financing. to us. And so as that cash comes in, and that typically lands in your cash from operations line, we use that cash to actually replace other sources of working capital financing, like our inventory financing and our AR financing. And so as we use, you know, that basically cost the interest-free working capital financing from customer prepays to pay off, some of those lines that were drawn earlier in the year, what you'll see is a disconnect because the prepayments are in cash from operations, paying down some of those short-term lines are down in financing. And so what you'll see also, though, in the back half of the year as those prepayments reverse out, I think you'll probably start to see a draw up of some of those lines. probably see a reversal of what you're seeing through the second quarter. So happy to spend some more time with you and go through that in more detail offline. But I think that's what you're seeing is some of the replacing external third-party financing with customer prepays as those dollars come in, and that I would expect kind of those dynamics to reverse out in the back half of the year.
spk07: Okay. So, Jeff, let me talk a little bit about the phosphate price forecast. We didn't mean to confuse in any way. I think the challenge is, again, same thing. It depends a little bit on when sales come in. At this stage, I think we're only about 25% sold and priced for the quarter, so pretty early in the piece in terms of what we expect. I guess the way you could look at it is prices have retreated from where we were in the second quarter, slightly moderated. And I think we're now at a stable range, so you can almost look at today's price. If you take the cost of freight from today's published price, you'd be pretty close to what we're going to see for the quarter. So I think that would be the easiest way to look at it. Certainly, I think pricing has come down a bit from quarter two, moderated a little bit. But we expect it to stabilize about where we are and probably stay at about where SPOT is right now for the quarter.
spk01: And as a reminder, this is Gerwin, if you do wish to ask a question. We can take our next question. Call, your line is open. Please go ahead.
spk09: Hey, it's Chris Markinson from Mizuho. Just a quick question, just given the outlook for cash flow, and I certainly appreciate all of your comments about returning to shareholders. But just a quick question outside of some of the modest growth cap X you're planning. Are there any other meaningful projects at Faustina, Uncle Sam, or anywhere that you're currently assessing to further improve reliability or things you've been kind of looking at for years that are now of interest? Or should we just stick with the buyback and the potential for special dividends? Thank you.
spk07: Yeah, thanks, Chris. You know, certainly we're making sure in this stage that we're looking at those reliability projects. I mean, I think we just put in a new reformer in Louisiana for the ammonia plant. Those, you know, over time will make a big difference in terms of the reliability capacity of that plant. You know, we mentioned in Colons, they were going to start up the second mill, which has been idled for a couple of years. But these are all $50 million projects. I think in potash we've got a, as part of our K3, the final part of our K3, we'll be finishing off a compaction unit for that plant, which aligns the production with the needs for compacted product. But beyond that, so that's sort of where our Our needs have stayed basically constant despite the K3 number coming down is because we are taking the opportunity to do some of these high return projects, particularly when at these kind of margins the payback is so short. So, you know, whether you look at the CTV project where we're going to extend the life of the, or intending to extend the life and increase the production of our plot ash unit down there, or increasing production at Colonze, improving reliability at Louisiana. All of those things we're doing, but we expect with these prices they'll have a very good payback, and it doesn't compromise our intention to give back 100% of what remains to the shareholders.
spk01: We can take our next question. Call your line is open. Please go ahead.
spk05: Hey, it's Joel from BMO again. Maybe a bit of a tricky, sensitive question, but I found it interesting with the UAN investigation the other week indicating that there wasn't any damage to the U.S. and UAN industry from subsidized Russian gas, but that wasn't what the determination was in your own DAPMAP phosphate case. Could there be any future ramifications on your own phosphate duty situation in the States? from that.
spk07: Well, yeah, thanks, Joel. We have definitely looked at that. We have had a second hearing or another hearing from a judge on this case and we'll probably know in a month or so if he will refer that back to the ITC. But One has to look at this from the perspective of what are the differences. So the appeal is gone to the U.S. Court of International Trade, and then that goes back to the International Trade Commission to say was there original ruling, was there any... They have to have an actual error in their ruling or something like that. And so they might refer it back to the ITC to look. We actually think that the... ruling in ours was fairly uh substantive and there's not that much question that the there was damage to our industry so um you know from our perspective we still think there's not too much risk in that uh in the whole thing and you know we'll have to see but our expectation that might get referred back to the itc in the next you know two to four months, let's say, and then from what I've understood is the ITC takes quite a while to even look at that, so we won't really know any more on that for a number of months. But our belief is that the facts of each case is quite different. The timing is also quite different. If you remember, we were in 2019, which was very, very – they pushed the phosphate industry to the brink of – negative margins so a very different case if you will so we're quite confident there are no further questions I will now turn the call back to Jack O'Rourke for closing remarks okay thank you folks I know it's been a long couple of hours of listening to companies for you analysts so I appreciate your time and your attention To conclude our call, I'd just like to reiterate just a couple of quick messages. First of all, we delivered excellent results in the second quarter, and we expect these strong business conditions to continue well into 2023. We remain committed to meeting our customers' needs and meeting our mission of helping the world grow the food it needs, and at the same time, we think we can do that and be a great organization. provider for our shareholders and return significant capital to our shareholders even as we invest in our business and continue to strengthen our balance sheet. So with that, thank you for joining our call and have a great safe day.
spk01: This concludes today's call. Thank you for your participation. You may now disconnect.
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