The Mosaic Company - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to The Mosaic Company's second quarter 2023 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 FP&A of The Mosaic Company. Mr. Massoud, you may begin.

Paul Massoud (VP of Investor Relations and Financial Planning & Analysis)

Thank you, and welcome to our second quarter 2023 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat and then open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang, Senior Vice President, 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 published 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 Joc.

Joc O'Rourke (President and CEO)

Good morning. Thank you for joining our second quarter 2023 earnings call. Mosaic delivered revenues of $3.4 billion, adjusted EBITDA of $744 million, and adjusted earnings per share of $1.04. First, I'd like to discuss the broader agricultural market, where fundamentals remain constructive. Global demand for crops is very strong and supply is struggling to keep up. Geopolitical events are having a major impact. The war in Ukraine continues to restrict supply from one of the world's most important agricultural regions. Last month, the UN Black Sea Grain Initiative collapsed and was followed by the bombing of several grain terminals. As a result, we expect Ukrainian exports of corn and wheat to be down by as much as 30% versus last year, which was in itself a down year. Conflict is only one part of the supply problem.

Around the world, weather extremes are having a profound effect on crop production. North American yields this year could be negatively impacted by dry conditions, and El Niño is hurting production across Southeast Asia and Australia. This situation is exacerbated by under-application of nutrients, especially potash, which is crucial for drought resistance and crop resilience. To maximize yields and meet global consumption needs, growers need to increase cropping intensity, which will mean increasing fertilizer applications. The world can't afford multiple years of under-fertilization and crop production shortfalls. Today, China is importing record levels of soybean, wheat, and beef. Roughly 5 million tons of China's corn imports over the last 12 months were sourced from the Black Sea grain deal. This is supply that must be replaced by other regions. The shortfall extends beyond China. Countries across Europe, Africa, and Asia will need to replace lost Ukrainian supply.

In India, the focus remains on food security and affordability. Recently, the government responded by banning the export of non-basmati white rice to ensure adequate domestic supply. Constrained supply and strong demand will continue to put pressure on global stock-to-use ratios, which are already at multi-year lows. All these dynamics together continue to support a constructive ag market. The strong ag fundamentals should lead to strong fertilizer demand for the next several years, and we're already seeing robust demand in several of our key markets. Since the spring, improved affordability, channel inventory, destocking, and sustained demand for grain and oil seeds have brought customers back to the market. In North America, a strong spring application season depleted fertilizer inventories, which customers are now looking to replenish.

Logistical constraints associated with low water levels on the Mississippi River and limited trucking capacity persist, but favorable grower economics are leading retailers to secure supplies early to avoid any backups. In Brazil, the market is beginning to move as we expected. Like we saw in North America, demand was deferred late into the typical window, but customers have returned to the market. In-country inventories are well below the level seen earlier this year, and growers are trying to secure tons ahead of the fast-approaching Safra season. In India, monsoon rains have been strong enough to drive grower demand for fertilizer. Phosphate imports are expected to be strong throughout the rest of the year. Switching to potash supply, sanctions continue to restrict Belarusian exports. After a surge earlier in the year, rail volumes to China started to level off.

We continue to expect Belarusian potash exports to be in the range of 7 million-8 million tons, which is well below their historic 13 million tons. In North America, port terminal capacity has been constrained by multiple events. Repairs at Canpotex's Portland terminal are ongoing and should be completed by the end of the year. In Vancouver, a 13-day strike resulted in a temporary curtailment of the Neptune Terminal, work continues to finalize a new labor deal, and we hope this will be resolved shortly. Canpotex is making use of alternative ports in Canada and in the Southern and Eastern United States to mitigate some, but likely not all, of the impact on international shipments. We expect constrained phosphate supply as well. Over the last several years, changes to China's environmental policy led to the permanent closure of 25% of their domestic capacity.

China is also focusing on food security by ensuring adequate domestic supply, while also meeting rising industrial demand, both of which are expected to limit exports for the foreseeable future. Industrial demand, particularly in China's lithium iron phosphate production, is expected to grow dramatically over the next several years. Last year, LFP production more than doubled to 1.1 million tons of finished fertilizer equivalent, and production is expected to grow by an additional 500,000 tons in 2023. This new market will continue to take phosphate volumes away from fertilizer production. We expect China's exports to be in the range of 7 to 8 million tons this year, or roughly 35% below 2021 export levels. Overall, the fertilizer market recovery is playing out as we expected. In a tight market, volumes are moving and prices are following.

Phosphate prices have risen over the last month, while potash prices have stabilized and are now beginning to move higher. This sets the stage for a constructive second half of the year and into 2024. We believe our business is well positioned to capitalize on this recovery. Over the last several years, we've invested in our business to maintain our position as a reliable supplier to customers. In addition to the work we've done on our production assets, we've also invested in the infrastructure necessary to deliver that product. A few examples include the overhauling of our rail fleet, revitalizing our in-country distribution facilities, and our purchase of the remaining share of Gulf Sulphur Services to secure logistics around our sulfur supply. These investments are integral to our results.

In potash, sales volumes for the second quarter reflected the benefit of a strong North American spring planting season, while prices reflected the bottoming of the global market. Markets are improving, a trend we expect to continue throughout the second half of 2023. Over the last year, Mosaic has met demand by carefully managing production and inventory. We have built a flexible, low-cost system that's able to capture market opportunities as they become available. Last month, we temporarily restarted our Colonsay Mine to replace Esterhazy production, which is currently undergoing its summer turnaround. In the third quarter, we expect total potash sales volumes of 2.1 million-2.3 million tons. This guidance reflects the results of a very successful Summer Fill Program in North America, which was oversubscribed by 30%.

We currently expect MOP prices at the mine in the range of $250-$300 per ton. In phosphates, we reported strong sales volumes in the second quarter. Our average realized price was at the high end of our guidance range, and our stripping margin benefited from lower raw materials costs. As we discussed last quarter, we are pushing ahead with increased investments in our phosphate business, targeted at improving reliability. This may require short-term increases in maintenance like we experienced during the second quarter. Looking ahead to the third quarter, we have a solid order book with 70% committed and priced today. We anticipate total sales to be in the range of 1.7 million-1.9 million tons, and DAP prices at the plant in the range of $475-$525 per ton.

In Brazil, we reported sequential improvements in our operating results. Our distribution margins are recovering. We expect that trend to continue in the third quarter as Brazil demand moves higher. 90% of our third quarter volume is already committed and priced. Finally, I'd like to spend some time on our capital allocation strategy. Our approach has not changed. We remain committed to investing in our business, maintaining a strong balance sheet, and returning capital to shareholders. In potash, an independent audit of the K3 mine and K2 mill expansion was recently completed, which verified a total nameplate capacity of 7.8 million tons at our Esterhazy Potash Complex. Esterhazy is now the largest potash operation in the world. Certainly one of the most efficient.

In addition to the underground optimization, we've also began debottlenecking the K2 mill at Esterhazy by installing a new HydroFloat flotation process. This will add up to 400,000 tons of incremental production capacity with minimal additional operating costs. We're investing $55 million in this project, which has an unlevered after-tax IRR in excess of 75%. In phosphates, we continue to move production away from commodity products and towards differentiated value-added products through the expansion of MicroEssentials capacity at our Riverview facility. Following the expansion, which is expected to be complete by the end of the year, about half of our North American phosphate sales volumes will be higher value specialty products. This is a $34 million investment with an after-tax unlevered IRR in excess of 50%.

This expansion comes just ahead of next year's launch of MicroEssentials Pro, which is the next generation of MicroEssentials. Our field trials in Brazil indicate that growers will see a yield bump on soybean acres of 3% or roughly 2 bushels per acre versus current generation of MicroEssentials. Against traditional MAP solutions, MicroEssentials Pro provides an 8% yield advantage or nearly 5 bushels an acre. The patent on the new formulation extends through 2038. We are very excited about the launch of MicroEssentials Pro, which builds on an already strong foundation of value creation for the growers, our customers, and for our shareholders. In addition to higher-grade phosphate fertilizer, we're also exploring entry into purified phosphoric acid for the lithium iron phosphate battery market.

Our initial work has validated this opportunity, together with constructive and developing discussions with OEMs and battery manufacturers, our board of directors has approved an additional $60 million to commence engineering work on a commercial plant. In our Mosaic Fertilizantes business, we're building a 1 million-ton blending and distribution facilities in Palmeirante, in the state of Tocantins in northern Brazil. We currently don't have much presence in this region, the facility will extend our distribution footprint into an attractive, high-growth area. This is an $80 million investment with an after-tax unlevered IRR in excess of 20%. In total, our capital spending expectations this year remains unchanged at $1.3 billion to $1.4 billion. Our balance sheet is strong. During the quarter, we entered into a $700 million credit facility, which gives us additional flexibility to manage our capital.

Our final focus is on capital return to shareholders. All excess cash will be returned to shareholders through dividends and share buybacks. Year to date, we're ahead of our target. Over the last 18 months, we've repurchased 15% of our float and believe our shares still represent good value. Our regular dividend today is $0.80 per share, and our business positions us to consider further increases over time. To sum up, Mosaic continues to demonstrate the earnings power and resilience we have created over the last several years. Our second quarter results were strong, despite deferred fertilizer demand in many markets, and our outlook for the remainder of the year and beyond is quite positive. The world's farmers have strong incentive to maximize crop production and meet global food demand. Fertilizer is critical to their success, and Mosaic will continue to meet that need.

Paul Massoud (VP of Investor Relations and Financial Planning & Analysis)

Thanks, Joc. Before we open the lines for live Q&A, we'd like to address some of the most common questions that came in last night. Our first question is on our guidance. With fertilizer markets turning higher in the last few weeks, is there conservatism in our outlook? What are we assuming in our volume and price ranges for phosphates and potash?

Joc O'Rourke (President and CEO)

Thank you, Paul. In potash, our volume will be dependent on the ability to ship internationally. With the continued labor unrest following the 13-day strike in Vancouver and the ongoing repairs at Portland, our export capability may be limited, but the midpoint of our guidance range is in line with our historic average, which tells you how strong the North American demand has been this summer. Demand has been very strong, with our Summer Fill Program oversubscribed by 30%. Phosphate volumes could also see some upside, given the strong global demand, but we're limited on inventory. We expect production to be higher sequentially, so there is some opportunity to exceed our current guidance range. On pricing, 70% of our Q3 order book is committed and priced.

Depending on how the rest of the quarter plays out, there is an opportunity for price upside, but much of that would get realized in the fourth quarter, where we have more unpriced tons.

Paul Massoud (VP of Investor Relations and Financial Planning & Analysis)

Joc, our next question is on Brazil. Fertilizantes' recovery appears to be slower than some had expected. Were there any major surprises in the second quarter, and how should investors think about that business in the second half of the year?

Joc O'Rourke (President and CEO)

Thank you, Paul. Weaker pricing affecting our production business and demand deferral due to grower liquidity issues extended longer into the second quarter than we had been anticipating. The market did eventually turn, and at today's prices, the barter ratio for beans is very attractive, which is driving farmers to secure supply for their Safra season. Our distribution business posted a sequential improvement in Q2, and we see that trend continuing into the second half of the year. Second half distribution margins are expected to be at the high end of our targeted range of $30-$40 per ton. In production, second quarter results were impacted by unplanned outages at Uberaba and Araxá. Those issues are behind us, we expect higher volumes in the third quarter.

The other issue in our production business was working through higher cost inventories of sulfur and ammonia, which we now expect to be lower in the third quarter. Overall, with high cost finished product destocking and distribution now complete and Brazilian operational issues behind us, the business is very well set up for Brazil's busiest quarter of the year.

Paul Massoud (VP of Investor Relations and Financial Planning & Analysis)

Joc, our next question is on Colonsay. What was the rationale for Colonsay's restart? Is market demand now strong enough to keep it running after Esterhazy's turnaround is complete?

Joc O'Rourke (President and CEO)

Thank you, Paul. Yes, Colonsay will be needed for the foreseeable future. Over the last year, we have met potash demand by carefully managing production and inventories. In Q2, strong demand in North America resulted in approximately 300,000 tons of inventory drawdown. With Esterhazy's planned summer turnaround and a very successful Summer Fill Program, Colonsay tonnage is required to meet our customer expectations and needs. At present rates, Colonsay must run approximately 5 months to replace the 1-month Esterhazy maintenance turnaround. With strong demand in North America and a rebounding international market, the main determinant to future volumes will only be limited by export logistics capabilities.

Paul Massoud (VP of Investor Relations and Financial Planning & Analysis)

Joc, the last question that we want to address is on capital allocation. Is Mosaic still committed to returning all free cash flow to shareholders?

Joc O'Rourke (President and CEO)

Our commitment to return all of our free cash flow has not changed, though to reiterate, that is a commitment to return cash flow over time, not a quarterly commitment. Returns will vary from quarter to quarter based on the seasonality of our business and internal capital needs. However, keep in mind, year-to-date, we have returned in excess of 100% of our free cash flow to shareholders. That concludes the fireside portion of our call. Operator, could you please open the lines for the live Q&A?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We ask that you please limit yourself to one question. If you have further questions, you may reenter the question queue. Once again, that was star, then one to ask a question, and at this time, we will pause momentarily to assemble the roster. Our first question will come from Steve Byrne of Bank of America. Please go ahead.

Stephen Byrne (Managing Director)

Yes, thank you. Joc, I'd like to hear your view on what you think is a, an appropriate potash price in the market right now, given you, as you highlighted, the reduced production at Belarus, you got tight inventory levels in most of the world, lower nutrient levels in much of the soil, and yet, you know, you're, you're expecting pricing in the high $200s mine gate. Does that seem appropriate to you, or is there something that's causing potash pricing to be weaker than maybe we would have thought? Some second-tier pricing out there that's coming from, you know, perhaps Russia or Belarus, is there some of that that's causing this?

Joc O'Rourke (President and CEO)

Good morning, Steve. You know, it's a really good question, and I think you have to start with the aftereffects of last year, where I think in some key markets there was panic and then overpricing, and then, you know, the reflection or the shadow of that was a complete walk away from, from the market by farmers. You know, we, we talk about a potash holiday or whatever. I, I think as we move into particularly this third quarter, I would say that we have probably overcorrected significantly to the downside now based on, you know, the basic facts. The, the market is not going to be demand-limited. The market is definitely going to be supply-limited in potash.

Our expectations from the former Soviet Union, Belarus, we're expecting it to still be in the range of $7 million, down from $7 million-$8 million, down from $13 million. The Russian producers themselves are down as much as 4 million-5 million tons this year. I, I definitely think that mine gate prices are probably, you know, arguably at least $100 below what they could easily move to in, in probably the near term. Do I believe the prices are appropriate for where we are today? No, at the same time, I will reiterate that from a first perspective, the volumes have to move. Those volumes are now moving, and they're moving strongly. Brazil is moving strongly as we move into Safra. Our North American Fill Program, extremely successful.

We're starting to see not only volume move, but price move in China. India still has its problems, but I think that they need product. I think all of those things lead to a very strong rebound, and I'm hoping it doesn't create too much of a rebound that it can't happen in a more orderly way. Overall, I would say, you know, the fundamentals point to something that should be quite bullish.

Operator (participant)

The next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson (Managing Director)

Good morning, Joc and team. On phosphate, could you talk a little bit about, in your release, your comment that says, for phosphate in the third quarter, you expect margins will benefit from lower raw material costs in the third quarter. Does that imply that you think third quarter phosphate margins will be up sequentially? Then just in general, you know, phosphate rock costs have been higher for several quarters. Should we expect that to continue? When would phosphate rock costs maybe go back down to more normalized ranges, or is this new normal?

Joc O'Rourke (President and CEO)

Yeah. Okay, thanks, Joel. Assuming the phosphate prices hold, clearly lower raw materials prices will result in a better margin. We see actually a divergence. We're still seeing the, at least the sulfur prices has remained low and has gone even lower. Ammonia, on the other hand, is starting to tighten up a little bit. We might expect ammonia to be flat or even up a little bit over the, over the rest of the year, depending obviously on markets. Overall, we think that raw material costs will help our margins this year or this next six months. What we're seeing is, we're seeing price movement. Jenny, do you just want to clarify price movement on phosphates, particularly, I guess, Brazil right now?

Jenny Wang (SVP of Global Strategic Marketing)

Yes, Joc. Phosphate price, well, moved upwards as since the since the beginning of July. In North America, the DAP and the MAP price moved up over $50 per ton, and Brazil followed over the last few weeks as well. We, we should see the price upward impact, not only in Q3, but also into Q4.

Joc O'Rourke (President and CEO)

The second half of your question or the, the second part of your question was the rock cost in mining. I guess there's a couple of issues within mining that are relevant. Our new area, we're mining in, in Four Corners, we have run into, which isn't surprising. As we start a new area, we've run into variations in the rock quality and the rock, and what we're running into as we mine. Then in South Fort Meade, we're running into, we're in a new area in the eastern extension of that mine. In both those cases, we've, in the second quarter, we were moving into new areas.

As we get into the new areas and we're in the main, main ore bodies, we expect those costs will come down as the, as the grade and the ease of mining increases.

Operator (participant)

The next question comes from Richard Garchitorena of Wells Fargo. Please go ahead.

Richard Garchitorena (Managing Director)

Great, thanks for taking my question. Looking at the slides, when you look at global shipments, looks like you took your potash shipments down, as well as phosphate assumptions for the year. I was just wondering, is that a function of the limitations you're seeing at on the port level, demand, solar demand firm, you know, you're talking about strong demand in North America as well as in Brazil? And then just what's, you know, driving the reduction on the phosphate side as well? Thanks.

Joc O'Rourke (President and CEO)

Sorry, Richard. Mic problems there. Thanks, Richard. In terms of our phosphate volumes, if we look at the first half, they've probably been a little lower than what we might have expected. The markets have been good. The limitation has probably been, in general, starting inventory at the start of the year was low, and then, you know, running, I would say, hand to mouth would be the way to say it. Every ton that we make is going straight to market, and that means, you know, if anything, any hiccups, you have, you get delays. It puts risk on the timing for particularly the end of the year. In that case, I think the market is strong. Whatever we can produce, we'll be able to sell.

In potash, is exactly what I said earlier, which is the logistics constraints, particularly for our exports, will be the main limitation.

Operator (participant)

The next question comes from Christopher Parkinson of Mizuho. Please go ahead.

Christopher Parkinson (Managing Director)

Great. Thank you so much. Just on the potash rock costs, just given the shift in mine mix, at least temporarily, towards, you know, Colonsay versus Esterhazy, how should we be thinking about, you know, cash costs during the second half of, you know, 2023 based on your projected operates? Any preliminary views once Esterhazy is, you know, back up and presumably Colonsay stays back online, just what would be kind of the, the, the normalized run rate that we should be considering, you know, into 2024? Thank you so much.

Joc O'Rourke (President and CEO)

Yeah. Thanks, Chris. if I think about this from a, a macro level, if you will, which is probably the easiest, I think the costs at Colonsay, cash costs at Colonsay, so we'll, we'll look at those with the way we're running, are probably coming in $30 higher than Esterhazy. For the 1 month of Esterhazy downtime that we're replacing in the, say, the next 5 months of Colonsay running, that incremental, you know, 100,000 tons a month will be at a $30 increase in cost. Again, highly profitable still, and again, part of our thinking is always, you know, we want to be selling a, a highly profitable ton.

Once Esterhazy is up and running, again, Esterhazy will be up and running probably in a month after we finish the maintenance turnaround, then we'll be looking at continuing to run Colonsay because we'll need to make up that ton, plus the tons from a month of downtime in the Esterhazy complex, plus the 300,000 tons that we didn't start up Colonsay until we absolutely had to, and now is the time we absolutely had to. It'll run for a while, and during that time, 100,000 tons a month will come out at a $30 higher cost than probably what our average would have been prior to that.

Operator (participant)

The next question comes from Edlain Rodriguez of Credit Suisse. Please go ahead.

Jenny Wang (SVP of Global Strategic Marketing)

Thank you. Good morning, everyone. Quick question on potash shipments again. You have it at 60 million-65 million tons. Like, do you see it going back to that 70 million range over the next, you know, year or two? Part two of that same question, part of the reduction was due to fewer tons out of Belarus and Russia. Like, why can't the other producers who are in pub,

Christopher Parkinson (Managing Director)

To replace those lost tons from, Eastern Europe if the issue is not lower demand?

Joc O'Rourke (President and CEO)

Yeah, thanks, everyone. again, I just want to reiterate, the 62 million-65 million tons is not demand-driven this year, it is supply-driven. I'm gonna give over to Jenny to just walk through the, the details, but, but let me say, you know, the market was slow to start at the start of the year, so there were constraints in terms of, you know, a slow start to Brazil, a little bit later, China contract or whatever. So it took some time to get product really moving this year. but as, as we go through that, like we said earlier, the limitation is going to be logistics. I, you know, I think what will allow the other producers to make up the gap is gonna depend on if you can actually move it.

I would imagine that most of the other producers or most of the other sources, other than maybe Canpotex, are actually supply limited, and Canpotex is likely going to be logistics limited. Jenny, do you want to just go through the supply and demand balance?

Jenny Wang (SVP of Global Strategic Marketing)

Yeah, I think you, you covered well on the supply side of the limitation from Belarus, Belarus and Russia earlier, and also the limitation on the logistics side for the Canadian producers. On the supply side, we are seeing a wide range of the recovery in the global market, firstly led by the North American market. We are seeing North American potash demand are growing back by 20%, or more this year versus last year. This has been proven from a strong spring, application and a very strong Summer Fill Program. We're seeing the rebounding of the demand in Brazil as well, and also, similarly to the other Latin America market.

How this demand is going to recover this year, even greater than the, our current estimation, which is 64 million tons, it is really supply-driven. Back to your question, when we will see this number, a shipment number to go back to 17 million tons? Probably next year, the supply is unlikely going to go back to 17 million tons. We, we, we are forecasting in 2025, when the FSU producer's shipment could be recovered back to pre-sanction, that number might be achieved. Once again, the shipment for potash at a global level is really constrained by supply.

Joc O'Rourke (President and CEO)

Yeah, just, just to reiterate, and I, I, I think, and this also answers part of where Steve Byrne was coming from earlier. Until there's resolution of the Ukraine war and until there's resolution of the Belarus sanctions, you know, this is gonna be a supply-constrained market. I don't think any of us can really say when either of those issues are gonna get resolved.

Operator (participant)

The next question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Andrew Wong (Associate Director)

Hey, thanks for taking my questions. Just a question on Esterhazy, capacity figure. What does that mean for your normal operating capacity? Does that mean that the mine can just, you know, it can produce a lot more than what it was doing previously? What does that mean for the Canpotex allocation?

Joc O'Rourke (President and CEO)

Thanks, Andrew. Well, first of all, let me say the way that the nameplate capacity, if you will, is determined, is an independent audit with a, a short run to demonstrate that the unit operations are capable of the design. That is complete. We are now working with Canpotex to figure out what that means from an allocation perspective, and we'll, we'll update you on that when that is complete. In terms of the actual operating rate, you have to remember that that is the... I'm gonna call it a, a peak capacity. There would be a, probably a further, you're not gonna run that every day, and then you're gonna have your yearly downtimes and stuff like that. It's a theoretical number. We'll run Esterhazy, you know, probably reasonably hard, but I wouldn't expect it to run at those rates.

I would, I would downgrade it from that. Although, once we put the new HydroFloat process in place, it may well run over 7 million tons.

Operator (participant)

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Vincent Andrews (Managing Director)

Thank you. Good morning, everyone. Just a quick clarifying question, would be, one, Joc, did you say that Colonsay, you anticipate just sort of running for, until you make up for the, what you're losing, having Esterhazy down, and then you intend to probably turn it back off? Or is your intention to keep it running perpetually? And then my real question is whether you could talk about the MicroEssentials Pro product a little bit more and just help us understand how you're gonna price it versus that incremental yield value you talked about. And then over what period of time do you think MicroEssentials 2 replaces MicroEssentials 1, and how we should be thinking about all that?

Joc O'Rourke (President and CEO)

Yeah. Thanks, Vincent. Yeah, let me start with Colonsay. For now, Colonsay needs to run to reestablish our inventory levels to where they would have been previous to the Esterhazy shutdown. As you're well aware, these, these operations shut down pretty much every summer in Canada. We've managed our inventory such that, you know, we don't have a bunch of excess coming into the summer. Now we'll run Colonsay first to fill that, then to make up the gap of what we had in, in extra we had in Q2, and, and what we're seeing for the Summer Fill in Q3. I would say, you know, for the sort foreseeable future, we could see Colonsay running. Again, I'm not going to run an operation for the sake of running it.

We, we're gonna manage our inventories, managing our working capital carefully, and part of that means using the production capacity at Colonsay to manage that, that function. In terms of MicroEssentials Pro, and, you know, as I said earlier, this is a pretty exciting piece of progress. First of all, you know, the, the very fact that it takes the patent level out to 2038 gives us a nice, a nice protection for a long time. Equally exciting is, it appears that what we're seeing is real agronomic benefit. We don't have a pricing strategy or an implementation strategy, a launch strategy quite finished out yet.

I will say, our philosophy has always been that we would share the benefit from the new products, basically equally between the grower or either farmer, the retailer who is selling it, and ourselves. Our pricing strategy will be such that we can do that. You know, again, the economics should be fairly strong because the gain is fairly strong as it was for MicroEssentials.

Operator (participant)

The next question comes from Josh Spector of UBS. Please go ahead.

Josh Spector (Executive Director)

Yeah, hi. Thanks for taking my question. I just wanted to ask within Potash, you know, when you're talking about making up most of the disruption within the logistics in Canada to get material out, I, I assume that's gonna have a higher shipment cost. One, I'm wondering, can you quantify roughly how you're thinking about what that could be? Two, is that a cost that you would have to eat, or is it something that you can get potentially buyers to kind of back in on it? I assume it's gonna impact your cost structure, but wanna clarify that. Thank you.

Joc O'Rourke (President and CEO)

Yeah, Josh, thank you. We are using both New Brunswick and Thunder Bay, and looking at even some southern U.S. Gulf to move the product, and obviously those come with higher prices. I can't give you the exact. As we would, those flow through Canpotex, which is a, you know, a marketing organization that we use, and what we talk about when we talk about our at mine site return, incorporates those extra logistics costs. You know, it's very much dependent on which, which country or which market these are going to. It depends on whether it flows through, like I say, New Brunswick. But yes, you can assume there will be some extra costs. Whether the, whether the buyer will absorb those costs or ours is really a supply and demand issue rather than a...

You know, we don't price per se. We follow a global market, and we have to take what the global market gives us. You know, in a sense, we're a price taker. If the market is tight and supply and demand drives price up, those will absorb the expenses. If the supply and demand is not, then probably it'll come to the suppliers. We think the market is tight, so we think that that probably gets absorbed by the end user.

Operator (participant)

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson (Managing Director)

Yes, thank you. Good morning, everyone. I was hoping to maybe dig in a little bit more on Brazil and Fertilizantes and maybe just try to calibrate on the production side. Certainly, you gave some, a clear view on, on the distribution business. But as I think about profitability improvement in the second half on production, can you just help maybe dimensionalize the benefits that come from the lower inputs that you've been buying that can finally flow through the PNL, size maybe the conversion cost improvement or rock cost improvement that comes from operations running more efficiently?

Is there anything to think about from a product mix perspective if competition on TSP and SSP has maybe been more kind of intense than from MAP that might be influencing your realized price and sales mix? Thanks.

Joc O'Rourke (President and CEO)

Yeah, there's a lot to digest in that one. I might just throw it to Jenny and ask her to talk a little bit about raw materials pricing and pricing strategies and what we see with competition, particularly on the different.

Jenny Wang (SVP of Global Strategic Marketing)

In Brazil.

Joc O'Rourke (President and CEO)

Grades in Brazil, yes.

Jenny Wang (SVP of Global Strategic Marketing)

Yeah. Yes. So, you're right, that in Brazil, when we sell our phosphate product, we do have the competitions on TSP and SSP. Similarly to MAP, over the last few weeks, we are seeing the price rebound across the whole portfolio of phosphate. Therefore, the price increases that which is much more visible for MAP, that is actually the same for TSP and SSP. We are going to see a higher price for all range of the phosphate products that we're going to sell in Q3. On raw material prices, similarly to the raw material prices lacking, in term of the reflection in our margin, the lower priced sulfur and lower priced ammonia is going to take time to really be reflected in Q3.

We will see a lower cost of sulfur and ammonia, in comparison with the market benchmark, probably the, the speed of that comparison probably going to be a little bit lagging.

Joc O'Rourke (President and CEO)

Yeah. Thanks, Jenny.

Operator (participant)

The next question comes from Aron Ciccarelli of Berenberg. Please go ahead.

Speaker 15

Hello. Hi, good morning. I have one on potash imports in Brazil. First half, industry figures suggest that imports in Brazil were down 10% year-over-year, after being down in 2022, around 10% again. This would, if this trend continues, would put Brazil potash imports at around 10 million tons, which should be a reasonably lower, low level. Maybe can you comment on the behavior now you see from farmers in Brazil and how you see demand picking up over there, please? Thank you.

Joc O'Rourke (President and CEO)

Thanks, Aaron. Yes, in fact, Brazil imports have been lower this year, you know, what we-- last year, for that matter. If you look overall, you know, there was a buildup of inventory in Brazil because actual application last year was, particularly in the second half of the year, was quite low as prices probably drove, drove that. Potash imports have been lower. We've actually lowered our expectation for overall Brazil fertilizer use to, I think it's 42 million tons now, Jenny? Thank you. 42 million tons from what was probably peaked at about 46 million tons a couple of years ago. You are down a good 10% on overall fertilization.

You know, the one thing I want to highlight what that means, though, is it doesn't I don't think that's indicative of a decreasing market per se, because Brazil has had very good harvests, and Brazil, as a tropical depleted soil, needs to fertilize every year. Brazil double crops. In other words, it takes two crops a year, off that land every year. The carryout of fertilizer in the crops is high, and they have to add that fertilizer back every year. They have not been doing that for the last two years. That will not continue without having some sort of agronomic impact on yields. Jenny, do you want to just talk about that a little bit, of the Brazil market and the balance?

Jenny Wang (SVP of Global Strategic Marketing)

Yeah, I think you covered well, Joc. I, I just want to say for potash, overall shipment last year reduced by 10%, you're right. This year, we are actually saying that the, the, the shipment, total shipment, in country is probably going to be flat, and we do see the potential upside in the rest of the year. I just want to reiterate, if the potash or other nutrients are under applied in that kind of market, you will see the yield impact. The, the, the Brazilian farmers, they know that very well, and that has been reflected in the very recent buying activities.

Operator (participant)

The next question comes from Jeffrey Zekauskas of JPMorgan. Please go ahead.

Jeffrey Zekauskas (Managing Director)

Thanks very much. As your potash prices have come down, your Canadian resource taxes have also come down. Is there a way to gauge what Canadian resource taxes are going to be over the next couple of quarters or into next year?

Joc O'Rourke (President and CEO)

Yeah. Thanks, Jeff. I'm looking curiously at my partners here to see if anybody has a good answer to that. That's probably a little more detail than I have off the top of my head. I mean, Yeah, I'm not, I don't have a forecast detailed enough to kind of give you an answer to that. We can get back to you, probably. That's probably the easiest. you know, you're right, it definitely does come down as it's been quite significantly down from where the prices were earlier, so. I apologize I can't give you much more than that. Clint, have you got any detail that you could add?

Clint Freeland (CFO)

Yeah, I, I would just say one of the, you know, factors in that, one of the key factors in that is around price. I think it's gonna, it's gonna track or, or, or follow kind of what your price expectations are. You know, I think from a percentage or a margin standpoint, it should remain, you know, fairly, fairly similar. Again, I think it'll follow your, your price expectations as you go forward.

Operator (participant)

The next question is a follow-up from Steve Byrne of Bank of America. Please go ahead.

Stephen Byrne (Managing Director)

Yes, thank you for letting me back in here. I was just curious about the difference between those two versions of MicroEssentials, and was that yield benefit demonstrated by some land-grant universities that you can back it up with? When do you think you might have, you know, versions three and four and so forth, that might have some biologics in there for your collaboration with BioConsortia?

Joc O'Rourke (President and CEO)

Well, Steve, I was going to say welcome back. We've missed you. Yeah, so the big thing we're talking really in the new generation of MicroEssentials is what we're calling a swellable granule, which means the granule is actually able to kind of control the release and increase the release of the key components.

It's a coating and how we, how we actually make the product. The key issue there is it's making both the sulfur and the phosphates more bioavailable, and the micronutrients more bioavailable to the plant at the plant root. That's kind of the layman's, which is probably as good as I'm going to get for you, but the layman's terms for what this product is designed to do. The field trials we're doing, we're working, you know, again, on our own. We normally do field trials with think groups like the University of Illinois at their Champaign campus and on our own and with our customers and in Brazil. We do them over a number of places.

You know, again, as a, as a producer and, we can't afford to introduce a product that isn't well proven and doesn't give good results to the, to the growers. We're pretty conservative on, on how we do that and how we introduce these new products. It has been in the works for a few years, and now with the patent in place, we feel comfortable we can start introducing it. It is well trialed, trialed and will continue. I think there's another season of trials that'll go next year, et cetera, et cetera. In terms of the biologics, yeah, we've been working on trying to see what the biologics might be. I think that's a little further off in the, in the future.

It is an exciting new area, again, but, we really don't want to stick our neck out too far until things are really proven. Watch this space, and I think there will be new stuff in, in the future.

Operator (participant)

The next question is also a follow-up from Edlain Rodriguez of Credit Suisse. Please go ahead.

Edlain Rodriguez (Analyst)

Thank you. I mean, yeah, let me try. To follow up on the potash shipments question again. I mean, you've made it clear that the market is supply limited. You know, that's fine. But you won't say for a fact that Colonsay will remain operational for good. Like, doesn't the market need that supply?

Joc O'Rourke (President and CEO)

Well, yeah, yes. Thanks, Edlin. For clarification, from a, from an actual supply and demand perspective, I agree with you 100%. All of our production is likely to be required in the market. Like I say, at least for the near term, we have to do two things. We have to be able to move it out, which, you know, right now has been a little bit restricted. If you, if you think there was a 13-day strike in, at the Vancouver Port, so all of the dock workers were off. I, I think there's a new ratification vote on Friday, but they are right now in labor negotiations. Even as you come out of this, the time it takes to make the system fluid again will probably be over a month.

Our main carrier to the West Coast, Canadian Pacific, has said it will take at least a month to get that system fluid again. Remember, it's not just potash, it's not just fertilizers, it's. You know, there's coal, there's grain, and everything else that moves through that port, and then there's a big intermodal as well. The pressure on the port and the rail system if it's shut down, is pretty substantial, and pretty substantial to overall the Canadian economy. In terms of us, you know, we need that. If the market comes back and stays strong, no question in my mind, we would love to see Colonsay run for a long, long time.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Joc O'Rourke for any closing remarks.

Joc O'Rourke (President and CEO)

Thank you everyone for your attention. To conclude the call, I just want to reiterate our key messages. Mosaic delivered solid earnings in the second quarter, and we have a positive outlook for the remainder of this year. Agricultural markets are strong. Farmers around the world have strong incentive to maximize crop production. As a result, global fertilizer demand is also robust, and we expect that demand to remain strong. Mosaic today is well positioned to capitalize on the ongoing fertilizer market recovery. The transformation of our cost structure, along with the investments we've made over the past decade, are delivering earnings power and cross-cycle resilience. Thank you for joining our call. Have a great and safe day.