The Mosaic Company - Q2 2024

Transcript

Operator (participant)

Good morning, and welcome to The Mosaic Company's second quarter 2024 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 Jason Tremblay. Jason, you may begin.

Jason Tremblay (Head of Investor Relations)

Thank you, and welcome to our second quarter 2024 earnings call. Opening comments will be provided by Bruce Bodine, President and Chief Executive Officer, followed by a fireside chat, then open Q&A. Clint Freeland, Executive Vice President and Chief Financial Officer, and Jenny Wang, Executive Vice President, Commercial, 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 Bruce.

Bruce Bodine (President and CEO)

Good morning. Thank you for joining our second quarter earnings discussion. Before we begin, I want to acknowledge that we have recently experienced some serious safety incidents. We take safety extremely seriously, and we are working to further improve our culture to ensure our people go home safe after every shift. Moving on to our earnings discussion. This morning, I will add some color to the information we published, and then we'll get to your questions. This was another solid quarter for Mosaic, both in terms of our results and our operational progress. For the quarter, Mosaic delivered adjusted EBITDA of $584 million on revenues of $2.8 billion, compared with adjusted EBITDA of $744 million and revenues of $3.4 billion a year ago.

Adjusted earnings per share for the quarter were $0.54, compared with $1.04 in 2023. We're making good progress across our strategic initiatives, both to grow the company and manage costs, and our market outlook remains constructive. I'll start with the actions we're taking to strengthen the business for the long term. We are hyper-focused on managing costs, and we're making good progress across SG&A, operating, and capital expenditures. Since the announcement of our $150 million expense reduction program between SG&A and cost control measures implemented in Brazil, we have already achieved more than one-third of the annual run rate cost savings target. This does not include phosphate fixed cost absorption, resulting from higher production volumes in the second quarter.

We have also executed phase I of our third-party contractor reduction plan in Brazil and expect to begin seeing the benefits in the second half of this year. With several projects winding down and careful CapEx management, we are on track to achieve our targeted $200 million reduction in capital expenditure. Our work to improve our operations and driving operating efficiency is paying off. Phosphate production volume in the second quarter increased by almost 100,000 tons over the first quarter. This is a significant improvement on an annualized basis. Efficiency improvement is also seen in our Potash and Mosaic Fertilizantes segments, where unit production costs improved meaningfully across the board. Our growth projects are proceeding well. Our MicroEssentials expansion at Riverview is operating and ramping up.

Our potash compaction project at Esterhazy is complete, and the new Palmeirante blending facility in the northern region of Brazil is on track to be completed in 2025. Our Mosaic Biosciences business is making significant progress. In fact, we have launched our biological products in North America, Brazil, China, India, and nine other Central American markets. Our products are now in use on 5 million acres in North and Central America, which highlights the competitive advantage our brand, customer relationships, and distribution strength provide as we introduce new and innovative products. We completed and successfully launched our global digital acceleration program, which is driving improved customer service, cost reductions, and many other benefits. The strength of our business and our cost controls have allowed us to continue to return significant capital to shareholders.

We have returned almost $300 million to shareholders, including $160 million of share repurchases in the first six months of this year. Our business improvements are complemented by the positive signs we're seeing in fertilizer and broader agriculture markets. Strong global phosphate demand drove higher prices through the second quarter as seasonal sentiment improved. We believe the long-term outlook for phosphate, with increasing demand for food, fiber, fuel, and industrial use, is compelling. Potash contract settlements in China and India established a price floor and brought buyers back to the market. In-season fertilizer demand in Brazil is strong, and we continue to execute well amid the recovering ag environment there.

Mosaic's Q2 results are solid, and our cost position demonstrates improvement. Let's take a deeper look at our progress in the U.S. phosphate business, where our goal is to return to a run rate of 8 million tons per year by the end of 2024. We're making good progress, as demonstrated in our second quarter production volumes, which advanced 98,000 tons from the first quarter. On a run rate basis, some of our facilities, specifically Bartow and New Wales, have achieved about 90% of the production levels we need to reach our system-wide goal. Our turnaround work is clearly paying off. For example, in New Wales, following the turnarounds we executed in March and April, we saw a significant step up in production for the second quarter.

In Louisiana, our production run rate has improved after several unplanned outages last year and has reached 85% of the target production level. Several projects are scheduled for the remainder of the year, which will further close the gap to the target rate. Riverview performance in the quarter was lower than target rate due to the outage caused by a brush fire earlier this year and a normal pace of production ramp-up after a major capacity conversion, which was completed in May. The outlook for the rest of the year is solid. All in all, we are pleased with the progress we have made in our production ramp, and our hard work will continue to pay off for the remainder of the year. Higher production brings lower unit costs, as you can see in our second quarter results.

The majority of our turnaround activity will be complete by the end of the year, resulting in significant production improvements and a $20-$30 per ton conversion cost savings. Now, let's move on to a brief look at the markets. Ag commodity markets have diverged around the world, with corn and soybean prices softening and other crop prices, notably for palm oil, rising. The important factor for Mosaic is that crop nutrients remain affordable for most of the world's farmers, which leads to strong fertilizer demand and application. In phosphate, our long-term positive outlook continues. Rising demand for grains and oilseeds to support both increasing food and fuel demand, combines with soaring demand for industrial uses to create competition for limited phosphate supply. Chinese exports remain subdued and major new supply is years away.

In the short term, the seasonal price reset that we saw in the first and second quarters of this year was shorter and less severe than expected. Prices have rebounded given strong demand and tight supply. North American demand is particularly strong, with buyers seeking summer fill after emptying their bins this spring. Brazil demand is also good, with growers concerned about limited availability. In India, where grower demand is very strong, importers are still awaiting a more compelling government subsidy. While Chinese exports have resumed, recent news indicates that government restrictions could tighten given rising in-country phosphate prices. Due to the positive dynamics and sentiment, as well as subdued raw material costs, stripping margins remain well above historical averages, and we expect strong margins to continue. The potash market remains balanced. After a very strong North American spring planting season, our summer fill program was very well received.

In fact, the recent contract settlements in China and India signaled a floor for prices and as usual, stimulated buying activity all over Asia, resulting in Canpotex being sold out through quarter three. We restarted Colonsay in early July to make sure we have enough product to meet our customer commitments while Esterhazy is in turnaround. Keep in mind, we need to run Colonsay for approximately five months to offset one month of Esterhazy production. We will continue to flex Colonsay as needed. Now, I'll provide some color to our segment results. In phosphate, we reported Adjusted EBITDA of $308 million on revenue of $1.2 billion. Sales volumes were solid and higher than first quarter and prices were strong. Margins were up from the first quarter due to strong pricing, fewer tons purchased from third parties, and our lower conversion costs.

We expect sales volumes to increase sequentially in the third quarter. Potash adjusted EBITDA was $271 million on revenue of $663 million. While second quarter prices declined from the first quarter, sales volumes were solid and costs were down. We remain highly efficient in our operations. In fact, production unit costs improved again in the second quarter, with MOP cash production costs per ton declining 11% from the first quarter. Our third quarter pricing expectations reflect a higher mix of international sales compared with the second quarter. In Brazil, we recorded adjusted EBITDA of $96 million and sales volumes of 2.2 million tons. Our results were solid due to our strategy of prioritizing margin and cash flow over volume.

Our distribution margin was within our normalized $30-$40 per ton range, and we expect similar margins in the third quarter. Our production margins improved from prior year. Cash unit costs of mined rock and phosphate and potash production all came down due to our focus on cost reductions. In addition, we had another strong quarter in co-product sales. Finally, a brief word on capital allocation. Our strategy has not changed. We're investing in the business, conserving capital where we can, and returning excess cash to shareholders. To conclude, Mosaic is executing well across our strategic initiatives, and we are generating solid results, and our outlook for the remainder of 2024 and beyond is positive. Now, let's move on to the first set of questions.

Jason Tremblay (Head of Investor Relations)

Thanks, Bruce. Before we move on to the live Q&A, as we've done in past quarters, we'd like to address some of the most common questions received after publishing our earnings last night. Our first question is related to the markets. What is your view on the demand outlook for fertilizers, given the recent weakness in corn and soybean prices?

Bruce Bodine (President and CEO)

That's a great question. So let me start first with the ag commodity market, which is very constructive with global grain and oil seed stock-to-use ratio still well below historical average. While no doubt corn and soybean prices have softened, other grain and oil seeds and specialty crops are favorable, especially for crops like palm oil and rice. And I want to remind investors, as we've said in the last couple of earnings calls, that only one-third of phosphate and potash consumption is related to corn and soybeans, and the demand pull from the remaining crops continues to support constructive fertilizer fundamentals. On a higher level, phosphate demand is strong across all the key markets we sell in. For potash, demand has definitely come back significantly, particularly in Southeast Asia, given the favorable weather conditions, pent-up demand for multi-year under application, and the current attractive prices.

The recent settlements of the China and India seaborne contracts are gonna further stimulate demand all over Asia. With that, I'm gonna pass it over to Jenny to talk a little more details about the near-term demand.

Jenny Wang (EVP of Commercial)

Thanks, Bruce. There's no doubt that growers in the U.S. and Brazil are watching the futures corn, soybean prices, along with any news about weather development, which might impact the yield projection and its prices. In terms of near-term demand, in North America, we had a very strong summer fill program. In fact, we have sold out all of our Q3 available phosphate and 80% of our available potash tons in North America market. In Brazil, Safrinha season is in full swing. The demand is robust. We expect 2024 shipment is going to be at the record or going to set a new record. We are having a very full sales book to execute upon. We have sold 100% of our available tons for Q3, with a very strong customer prepayment.

In India, with favorable monsoon, growers need their fertilizers to maximize their production on rice, wheat, and other crops. While it's the program, in order to get more DAP into the country. In China, we have seen very strong, domestic shipments for both phosphate and potash in the first half of the year. We are seeing 20% growth year-over-year, supported by very strong ag fundamentals and supported by their policies to ensure, food security.

Jason Tremblay (Head of Investor Relations)

Thanks, Bruce and Jenny. For our next question: What is the latest on phosphate exports out of China, and how do you see that evolving over the rest of the year?

Bruce Bodine (President and CEO)

Well, this is something we pay attention to a lot, and we anticipate limited exports of phosphate out of China, which bodes well for global phosphate prices. First half exports were approximately 1 million tons below the same time in 2023 due to strong in-country demand for both fertilizers and industrial uses. China's domestic prices continued to move up, considering that demand, and we believe the export restrictions will likely remain or potentially even be tightened to limit further domestic price escalation. With that, I'm gonna ask Jenny and pass it over to her to share some additional details.

Jenny Wang (EVP of Commercial)

Thanks, Bruce. As Bruce mentioned, the first half export in China reduced by 27% or over 1 million tons. That is the result of the changes in Chinese local S&D for phosphate. On the demand side, Chinese phosphate domestic shipment increased over 20% in the first half of the year, which is probably the record. They're driven by several factors. First, strong ag fundamentals, supported by ag policies to ensure food security. Second, meaningful growth of vegetable and fruit planting acreage over the last 5 years. Third, the introduction of high-tech seeds technologies have required more balanced fertilizer to maximize the yield. And lastly, we also recognize there are some earlier seasonal pull for the fall demand. As a result of it, the demand of Chinese phosphate domestic shipment has increased significantly in the first half of the year. And then let's look at the supply side.

Continued shift from fertilizer production to industrial products like PPA, LFP, has reduced availability of fertilizers, especially DAP. The production of LFP in the first half of the year has reached to over 1.1 million tons, which is an increase of 82% year-over-year. That represents over 90% compound annual growth rate from 2020 to 2023. So in the first half of 2024, over 1 million tons of DAP products are shifted to LFP. So the growth of domestic demand, the reduction of production, plus rising prices, have had Chinese government tightly controlled the export of phosphate out of China. We expect the restrictions is going to continue in the second half and going forward.

Jason Tremblay (Head of Investor Relations)

Sticking with phosphates for our next question, how's the production ramp-up going, and how do you see the rest of the year playing out from a volume and cost perspective?

Bruce Bodine (President and CEO)

We are making significant progress in our phosphate production ramp-up, and as a result, we're seeing good fixed cost absorption benefits, especially in the past two months. You can see the progress in our second quarter production volume and unit conversion costs. Our volumes were up close to 100,000 tons sequentially, which is a significant achievement, and our cash conversion costs were the lowest since the end of 2023. We have certain sites, for example, Bartow and New Wales, which are performing particularly well and are contributing at the rates required for the business to return to our historical production objectives. We'll undertake several maintenance turnarounds in Louisiana and Riverview to further improve our production run rate in the second half of the year.

Note, we will always see some variations from quarter to quarter due to the normal turnaround schedule, the scope of those turnarounds, and the decisions we make on finished product mix from the phosphoric acid we produce. So we expect annual production to be in the range of 7.8 million-8.2 million tons once we get back into a normal routine on turnaround activities. Unit costs are expected to demonstrate continued improvement as we increase production, and we're on track to achieve $20-$30 per ton in cost reduction from higher operating efficiency.

Jason Tremblay (Head of Investor Relations)

Now, switching over to potash. What's the thought process on restarting Colonsay?

Bruce Bodine (President and CEO)

Well, thanks for that question. I know it's on a lot of people's minds, but for Mosaic, and we've been consistent with this, Colonsay is an important component of our potash portfolio. It gives us the flexibility to meet our operating objectives. One objective is to ensure we meet market demand. Now that the settlements of the China and India potash contracts are behind us and a price floor is established, our focus is to produce enough product to meet customer commitments. We have maintenance activities and turnarounds scheduled for our assets every year. And in fact, Esterhazy is scheduled for one in the third quarter of this year. In order to have enough product on hand to meet our commitments with Canpotex, which we just mentioned was sold out for the third quarter, we must restart Colonsay.

Just as a reminder, it takes approximately five months of Colonsay operating to replace approximately one month of Esterhazy production.

Jason Tremblay (Head of Investor Relations)

Our next question is related to Brazil. The market has been challenging for several quarters in a row within your industry. What is the latest situation from your perspective?

Bruce Bodine (President and CEO)

The operating environment in Brazil agriculture has been challenging for the past year, and it has taken a toll on many participants in the market. I will highlight that our deep expertise and strong brand in Brazil market, with over two decades of distribution experience, has allowed us to mitigate the market-related risks and deliver strong results. Our assets, which include in-country production, ports, warehouses, and blending facilities, provide us with the required scale, geographic diversification, and cost efficiency to succeed in this geography. Our strengths have allowed us to gain further advantage as others have exited the market or reduced their footprint in country. Retailers and large growers have turned to us for reliable supply, and we are here to meet that demand.

Jason Tremblay (Head of Investor Relations)

Thanks, Bruce. For the next question: You previously announced targets related to cost savings and CapEx reductions. Are you on track to meet those targets?

Bruce Bodine (President and CEO)

We've made significant progress on our cost and CapEx initiatives. There are three categories. The first, operating efficiency. In phosphate, higher production volumes have significantly improved our fixed cost absorption. We had very good results in the past two months, as I previously mentioned, and as you can see, our cash conversion costs have decreased 15% from the high point in the end of last year. We do expect further improvement in the remainder of the year as production volume continues to recover. Operating efficiency is not just in the phosphate segment, however. Costs came down in the potash and Mosaic Fertilizantes segments as well. Our unit cash costs of mined rock, phosphate conversion, and potash production declined across all three segments since the same time last year. Second, our cost focus is not exclusively on operations.

We have a focus on reducing costs in all areas of the company. As mentioned last quarter, we have had plans to reduce headcount, mostly third-party contractors. I'm pleased to announce we have implemented the first phase of that reduction. We will start reaping the benefits in the second half of 2024. The full program will be complete by mid-2025 and result in run rate savings of approximately $20 million-$30 million. Our other cost controls in Brazil and SG&A reduction are also on track. Since the inception of the initiatives, we have achieved about $50 million in run rate cost reductions, about one-third of the total $150 million target. Finally, on the CapEx front, we finished several growth projects in the past six months.

As these projects continue to wind down, we're on track to reduce CapEx by $200 million this year.

Jason Tremblay (Head of Investor Relations)

Thanks, Bruce. With that, we'll now move on to the open question and answer session. Operator, please open the line for follow-up questions.

Operator (participant)

Thank you. We will now begin the question and answer session. And to ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, we will limit everyone to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Ben Isaacson from Scotiabank. Please go ahead.

Ben Isaacson (Managing Director of Equity Research)

Thank you very much, and good morning, everyone. Question on the phosphate side of the business. You have high prices against low crop prices, but it doesn't sound like you're worried about demand destruction in the Americas. It doesn't sound like you're worried about trade flow becoming an issue out of China. So if we put our bear hats on, what's gonna break this phosphate cycle right now? Is it new supply coming on? Can you address that? And then just as my follow-up, can you talk about where you expect LFP demand to be in DAP equivalent terms in 2030? Thank you.

Bruce Bodine (President and CEO)

Well, thanks, Ben. I'll take the first part of your question and then maybe pass it over to Jenny for any commentary on the LFP. But, we agree. I mean, phosphate prices look very constructive for the near term, and, as far as what is out there to change something, we don't see a lot of new capacity come on, which historically has been, you know, something that could influence, you know, kinda outlook on price, and the fact that that's not there is significance. We're very optimistic about how prices are gonna play out.

If you look at, you know, our stripping margins well over $400, we kinda continue to see that in the back half of the year in that kinda mid-400s range. No doubt there's, you know, affordability issues, but if you look at total crop affordability, I think Jenny talked about that earlier in the fireside chat, it is still very constructive. Although, you know, no doubt pressures on, you know, certain areas on corn and soybeans as an example, but, you know, again, 30%, 33% of overall P and K demand is in corn and soybeans, and then, you know, the other 67% is in other grain and oilseeds, which, you know, quite honestly, is very constructive and healthy. For example, palm oil, sugarcane, coffee, you know, other things like that.

But, I don't see right now a big catalyst to change that in the, you know, for coming future. But you never know what could come out, you know, geopolitically or something like that, but I think that's what it would take. With that, I'll turn it over to Jenny to maybe answer the LFP part, or Jenny, if you've got anything else to add on the, the market itself.

Jenny Wang (EVP of Commercial)

Sure. Thanks, Bruce. Ben, probably to your question on LFP, just want to remind ourselves, at this point of time, LFP is mainly used in China and mainly used both for Chinese producers and also for Tesla. So the LFP have been used as a battery for EV. Adoption in Chinese productions was already up to 69%, meaning 69% of the EV batteries are using LFP. Longer-term projection, there are very big range of the projection on LFP growth, globally. We believe going forward, the global EV battery adoption for LFP is going to be somewhere between 35%-55%. We don't believe it is going to ever reach to the level as it of in China today.

The other bigger driver on LFP adoption is really on the storage, energy storage, ESS, stationary battery, and the adoption of that part on LFP is already over 80%, and that battery being produced in China mainly and shipped to, rest of the world and by Tesla as well. And we believe that is going to be the major driver for LFP, going forward. So, very wide range and, if you use China as a proxy for EV, the future growth from rest of the world is going to continue. And lastly, people don't pay a lot of attention on the storage, stationary battery, which is probably going to be a bigger driver. Thanks.

Operator (participant)

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

Vincent Andrews (Managing Director)

Thank you, and good morning, everyone. Wondering, just to start off with, if you could give us an update on where you think industry shipments are gonna be for 2024 for both potash and phosphate, and whether those expectations have improved since the year began. Well, why don't we just start there?

Bruce Bodine (President and CEO)

Yeah. No, thanks, Vincent. Yeah, for phosphate, our projections in the range of 73-76 million tons, global shipments. For potash, that range is 70-73. I think, and Jenny, correct me if I'm wrong, our potash numbers have kinda gone up a little bit, that midpoint around 1 million tons, based on what we're seeing develop in Southeast Asia, and really all Asian markets in general, given, you know, where these contracts have settled in China and India, and kinda the sentiment that that's provided confidence in the industry that kind of the bottom set in on potash. On phosphate, I don't think that range has changed very much for us since the beginning of the year, just given that supply is limited, Vincent.

Vincent Andrews (Managing Director)

Okay. And then as a follow-up, if you could just give us a refresher and update on where the CVD situation in the U.S. is. I believe it's still under some back and forth between the different relevant agencies. But if you could just give us any pertinent update there, that would be helpful.

Bruce Bodine (President and CEO)

Yeah. There's, as we've said before, there's always a lot going on in that space. I know it's hard to track, but ITC still has, you know, appeals and rulings that they owe the industry. And then Department of Commerce, several months ago, came out with their preliminary rate adjustments for last year, 2023, and those went up, for OCP, like, 12%. They went down for PhosAgro about 10% and stayed the same for EuroChem. But again, those are preliminary. The final numbers will come out in November. So we'll wait and see, what happens between now and then.

Operator (participant)

Our next question comes from Joel Jackson, from BMO Capital Markets. Please go ahead.

Joel Jackson (Managing Director of Equity Research)

Hi. Good morning. Some of Fertilizantes. Can you talk about... You know, normally, we're obviously gonna see seasonality in Q3. The business earns more in Q3 versus Q2. You're talking about normal. Can you talk about, like, what you're seeing in that business? Are volumes normal, or are we seeing either destocking or just in time in Brazil? Are margins gonna be similar in Q3 versus Q2, to the point where maybe you'd see a smaller Q3 seasonal earnings bump than normal Q2s? Because Q2 was pretty good for margin. Thank you.

Bruce Bodine (President and CEO)

Yeah. Hey, thanks, Joel. I'll start just at the high level, maybe Jenny can get into some of the details on seasonality. But, we're pretty pleased overall with the performance of Mosaic Fertilizantes. And, you know, I know in this space, there's a lot of other players are not having as good news and success. For us, that could be an opportunity, but, we do see margins staying pretty steady in that $30-$40 range for our distribution volumes. And don't see that really changing much. You know, on the volume side, overall in Brazil, still see very good overall volumes and total fertilizer demand for the year.

Maybe there's some risk at the end of the year due to some things, but still see, and Jenny can get into that, still see at or near historical fertilizer shipments in that market for the full year. Jenny?

Jenny Wang (EVP of Commercial)

Sure, Bruce. Probably just want to provide a little bit color on the seasonality and where we see the market as of today. The Safrinha season is in full swing. We are seeing very strong demand, and which is basically the ongoing Q3, is the delivery for the Safrinha season. The farm economics were very solid, and the farmers are selling their own crops. Our soybean are actually ahead of last year and at five years average, though their selling of the corn are a little bit slower than five years average, but they're same as of last year. So farmers are really keeping pace on selling their crops, which are really improving the liquidity in the system. And specifically for fertilizer, they call commercialization.

If we assume the full year is going to set a new record for the shipment of the year, 82% of the fertilizers for the full year has been sold. This number is slightly lower than last year. For Mosaic, we are tracking the same pace as of last year, so we are selling ahead of the market trend for the season. And even with that, we are focusing on value than volume, and we're really prioritizing our sales and shipment to the customers who have a much lower credit risk. Lastly, there are some potential shift for the Q4 sales, which is a Safrinha season for corn and cotton, and there might be shipped from November, December sales into January. That is going to define what is going to be the final shipment in Brazil going to be.

The farmers are relatively more cautious for that season, seasonal buying. As of today, we have seen 30% of the buying for Safrinha versus in the mid-30s in the previous year, so it's a relatively slower. There might be some of the demand shifting from late Q4 into early Q1. So that's basically the situation. We have sold everything for our Q3. We're in full execution mode.

Joel Jackson (Managing Director of Equity Research)

Okay, thanks for that, Jenny, Bruce. My second question would be kind of a two-parter, real quick. Just at the beginning of the call, you talked about safety and some incidents, getting a lot of questions on that. Could you elaborate a bit more? And then second question, just quickly, talk about phosphate production sales improving in Q4 versus Q3. Do you think you can get to that 2 million ton quarterly run rate in Q4, Bruce?

Bruce Bodine (President and CEO)

Yeah. Joel, thanks for the additional questions, but the safety incident in the—we had a serious incident at New Wales recently. Actually, it was a fatality, and you know, it did, not that it matters, but it did get headline news, and just wanted to be very transparent about that. It is something that you know is worse outcomes for us as you know industrial operators, and as we said, take that very seriously, and there'll be lessons learned and shared across the entire geography with that. But you know, we feel for the families and those impacted by any incidents that we have of seriousness within Mosaic.

On the phosphate ramp up and return to production, we're, as you saw, quarter one to quarter two, definitely demonstrating results. I think, you know, one of the slides we have in earnings material and the presentation kinda hopefully shows a little more color on how we're progressing. As we said, Bartow and New Wales have shown good signs due to the investments that we've made there, and the finally catching up on the turnarounds, even going back to COVID, as we've talked about in several calls before. Louisiana is also ramping up, had a decent quarter, but still more to go, as we've got some more work to do there in the back half of the year.

And then Riverview, with the brush fire that we've talked about before, and then the conversion of the one large granulation plant over to MicroEssentials and ramping that production up, has kinda hurt that operating rate in quarter two. But still more work to do in the second half of the year that we have planned. But definitely optimistic that in aggregate, with the work that we have teed up and the demonstration that we've seen at New Wales and Bartow, that we're well on our way to kinda hitting that historical run rate that we've talked about, and confident that we'll get there, Joel.

Operator (participant)

The next question comes from Steve Byrne from Bank of America. Please go ahead.

Steve Byrne (Managing Director)

Thanks, Bruce. I'd like to drill into your outlook for potash fundamentals. You raised your global shipments for the year a bit, but we've had a couple of years that were really low. I guess my question is, do you have a view on whether inventory levels in the world are roughly back to normal, or are soil nutrient levels relatively back to normal? And if not, why do you think pricing here is roughly the same as they were in 2019, and yet we got 40% of global supply with sanctions? Are you getting a value proposition out of Canpotex?

Bruce Bodine (President and CEO)

Yeah, Steve, that's a pretty complicated question. I mean, maybe it's just easier to back up in how we see the overall potash market. I mean, first, on supply, although, yes, you're right, sanctions exist on, you know, products, particularly in the FSU, in Belarus, particularly, but we're seeing trade flows have just been shifted around. They're getting their product out. There's been a large rebound, both in Russia and Belarus, this year versus last year, but it's been progressing over the last couple of years. So those tons are available, they're just hitting the geographies, given the restrictions that they have on markets that they can participate in. That they're just taking larger share and closer to home markets. You know, think about Belarus is doing it with rail into China.

But it's coming at a cost to serve for them, which is probably raising the umbrella on how low potash prices could ultimately go by $40-$50 versus historical numbers, just given the type of logistics gymnastics they have to do to get into the markets that are available to them. But, you know, there are several buyers, if you wanna look at it that way, geographies, that the sanctions don't really matter. You know, Brazil is gonna buy from whoever they need to because they're a large importer. And, so again, it is simply just moved the trade flows around, and I think the supply side is much returned to where it was kinda before the sanctions. And then we're seeing demand as that supply has come back, return as well, Steve.

So, you know, this year, at 70-73 million ton outlook, it's gonna be at or near record. So I think the nutrients are going down as the supply becomes more and more available. And then, obviously, long term, unlike phosphates in potash, there are significantly announced expansions in greenfield mines coming on. And as growth in demand happens, at, pick your number, 2%-3% compound annual growth rate, that demand is gonna be needed, but it's probably gonna keep prices in a more constrained zone than what you may see in, for instance, phosphates. Jenny, I don't know if you have anything to add. You know, she's saying no, Steve, so I guess I got that one.

Steve Byrne (Managing Director)

Okay. Very good. Thank you. And I'd like to drill in just a little bit on the biologicals that you're now selling. I believe that both are involved in nutrient uptake. I guess my question for you on that is: what is the business model of selling these biologicals? Are they effectively blended with your P and K blended material that you sell, or is this sold through a completely different channel? Just where do you see this business model going? And do those biologicals result in any reduction in the P and K application rates required on that land?

Bruce Bodine (President and CEO)

Yeah, Steve, thanks. First off, we're excited about biologics, and we see a lot of synergies with our distribution network, our customer relationships, the brand that we have, at least what we believe that we have in the marketplace. We're bringing higher-performing products with real science and data-backed results to the market. And we think they're very complementary to what we're currently selling. And I'm gonna let Jenny get into a lot more of the details of that and unpack that a little bit more. But we see meaningful growth potential for these, and we think we have good products already in the market that are delivering significant yield results without impact to overall fertilizer application.

In fact, the two combined, so 1 + 1 equals more than 2 in this regard from a yield standpoint, and really helps the story of how to help farmers or growers get more out of the same amount of acres of land. But, Jenny's team has been doing a lot of work to develop, launch, programs in the various geographies that we talked about in some of our prerecorded comments. So I'll turn it over to Jenny to talk a little bit more about mechanisms, delivery, and any other salient points there.

Jenny Wang (EVP of Commercial)

Sure, Bruce. Hey, Steve. In terms of the go-to-market for our bioscience products, firstly, as you can imagine, we go through our current customer base and the current market access. Basically, the products are coated with the fertilizer, fertilizer granules. So that is one of the major go-to-market approach for our product. So one of the major leading brands that currently we're selling in the Americas, North America and Central America, PowerCoat, are basically coated on the fertilizer granules. We also have a current brand, BioPath, are sold as a standalone foliar application. So that usually can be mixed with fungicide and insecticide, so when the farmers are treating their crops. As you well know, that we have invested in the next generation nitrogen fixation product.

That product is likely going to go with seed coating as the, as the go-to-market approach, which is going to give the highest efficiency and the lowest cost. And, we're working with several major seed companies on that front, and hopefully we can provide more updates, in the near future. Thanks.

Operator (participant)

In the interest of time, we will-

... Richard Garchitorena.

Richard Garchitorena (Chemicals Analyst)

To the turnaround at Esterhazy. Can you basically quantify in terms of how long Esterhazy will be down during the quarter? And then also related to that, Colonsay being restarted. So this is essentially putting capacity just to replace that lost tonnage during the turnaround. Any associated costs with that, and how do you expect costs to be impacted in three Q and then into four Q, I guess? Do we go back to the normal sort of portfolio of Esterhazy, the bulk capacity, the bulk capacity for production? Thanks.

Bruce Bodine (President and CEO)

You know, Richard, thanks. We do have, as you know, the scheduled turnaround, as you mentioned, at Esterhazy. You know, right now, it's roughly a month. And that'll be plus or minus a few days, based on discoverables as they get into pieces of equipment and things like that, as always. But as we talked about, based on the capacity comparison, you have to run Colonsay about five months to offset one month of Esterhazy production. So Colonsay likely is gonna run much of the remainder of the year, to provide that volume offset, exactly as you said.

Colonsay, as we've demonstrated before and as we've talked about, are flexible tonnage to do exactly that, to look at what the market needs overall and make sure that we can meet our commitments, and then to serve as backup for instances like this, where we need to make sure product is in our warehouses in position to meet international demand or domestic demand, in those times where we do maintenance turnaround. From a cost standpoint, we prefer to run always Belle Plaine and Esterhazy first, as those are our two low-cost, solidly low-cost producers here in North America. Colonsay is higher in cost, so there's likely gonna be some cost effect on the, you know, production cost during the times that that's running.

But we've made significant improvements over time in Colonsay and stripped off costs there. So the incremental cost is not gonna be that significant from an overall unit cost standpoint. So I'll leave it there, Richard, and move on to the next question, given time.

Operator (participant)

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

Adam Samuelson (VP Equity Research of Agribusiness and Packaging)

Thank you. Morning, everyone. So Bruce, in your prepared remarks, you alluded to phosphate stripping margins remaining well above historical averages and expected to remain so. Just given some of the cost dynamics within your own phosphate business and some of the actions you're taking, at current input prices and current DAP prices, how big of a gap do you see in terms of your realized, whether gross margin per ton or EBITDA per ton, versus what the stripping margins reflect? And if I could ask a specific question on the quarter, your ammonia costs in COGS went up sequentially, despite more internal ammonia production, which is the cheapest that you could buy.

Natural gas has gone down, and Tampa ammonia prices really has had trended lower through the second quarter and really haven't moved all that much. So can you just provide clarity on why the ammonia costs have gone up sequentially?

Bruce Bodine (President and CEO)

No, thanks for the question. Let me maybe answer it a little bit, well, differently. We actually, our realized stripping margins are higher than benchmark stripping margins, and that's something that probably don't have a lot of insight, as we don't report on that. But, because of exactly what you just said, is our ammonia cost advantages with our long-term CF contract, as well as, you know, up to a third, internal production, at Faustina, at producer economics. And then just our buying power for sulfur and, even ammonia that's left on spot, it gives us a pretty good advantage, given the geography where we import those, those raw materials as well.

So, you know, it did go up on ammonia costs, as you said, Adam, in Q2, and that's really because in Q1, our ammonia plant was down for turnaround for much of quarter one, where we did have more spot going into inventory. And that's just actually that raw material, ammonia, flowing through inventory, too. So the benefits of running in quarter two, you'll start to see those in quarter three. So, yeah, I hope that answers the bulk of your question in a little different way.

Operator (participant)

The next question comes from Chris Parkinson from Wolfe Research. Please go ahead.

Chris Parkinson (Managing Director and Senior Research Analyst)

Great. Thank you so much for taking my question. So, you know, Bruce, you know, your execution is, I'd say, very much on trajectory for kind of the goals you've been laying out. Phosphate stripping margins are looking a little bit higher. The cost curve is a little bit steeper than people have been anticipating. Balance sheet's in great condition. I mean, what else do you think needs to be done to reengage investors? Is it just-- Is it your belief that further execution is the key, you know, proving out your thesis in the context of low crop prices? Just what would be your, you know, kind of two cents on current market dynamics right now? Thank you.

Bruce Bodine (President and CEO)

Yeah, I mean, I agree, Chris, and thanks for the question, that you know, market fundamentals, as we talked about, appear to be strong and just don't see anything, you know, out there that's gonna be a big derailer. But to your point, why are we not getting maybe more credit, given how much we're leveraged into phosphates? I think it is on execution and delivering those results. Yes, we're making progress, and I appreciate the commentary, 'cause we feel good about how we're executing on our strategy, but we do still have a lot to go in the back half of the year. To see that kind of 8 million ton, 7.8-8.2 million ton run rate going into 2025, we still got to deliver upon that.

And, with that, as you well know, comes significant cost absorption, and those cost absorption numbers aren't even in our, you know, cost savings as of right now, and we'll reconcile that and report on that on an annualized basis because it's just too much noise from quarter to quarter. So, I think it is on execution. I think the other thing is, and maybe Jenny, if you've got any comments here, but is that people just think China's gonna open up some magic floodgate on export, and we just don't see it that way. Based on the intelligence and the people we have in country, as Jenny has talked about, we're seeing very good demand domestically in China on phosphate for agriculture, given their focus on food security.

And then you can't ignore the fact that LFP, on the industrial side, is making significant growth and is somewhat cannibalizing other available agricultural P2O5. So, again, I don't know what it's gonna take for people to, you know, believe in that, but I think this year demonstrates just how that policy in China is impactful. Yeah, OCP may be exporting a little bit more, but the fact that China is exporting that much less kind of neutralizes that. So we just see very constructive fundamentals in phosphates. Maybe people just got to see it for a little bit longer, and no doubt, we got to demonstrate on what we've said we can execute and control.

Operator (participant)

The next question comes from Ben Theurer from Barclays. Please go ahead.

Ben Theurer (Managing Director)

Yeah, good morning, and thanks for taking my question. Just wanted to quickly get your thoughts on Fertilizantes for the second half. You clearly had a very strong first half in terms of, like, the distribution margin. You're guiding for the historical range, like, being in there. What are, like, the puts and takes that could potentially take you higher? And if you could give us a preliminary preview as you think about the fourth quarter for the profitability at Fertilizantes. Thanks.

Bruce Bodine (President and CEO)

I'll start maybe at a high level, and Jenny, I'll turn it over to fill in a little bit more details. But, you know, we're very optimistic about the second half of the year in Fertilizantes. I mean, just at a high level, again, just to reiterate, kinda how we see this business is, you know, 9 million tons distribution historically growing to 10 from a volume standpoint, $30-$40 distribution margin, about $100 million of EBITDA contribution on co-products on an annualized basis. And maybe something we haven't talked about, but publicly, but as much as it's available in our information, but I think it's worth highlighting, is that there's another $100 million, thereabout, of SG&A costs that kinda you got to take off the top.

So, you know, throw all that together, and you can do the math on what you think volumes are gonna be quarter by quarter, based on historical performance or whatever you do. But given the demand in Brazil, we see good returns, and EBITDA contribution out of Fertilizantes in the second half of the year. Jenny?

Jenny Wang (EVP of Commercial)

Yeah, I guess your question specifically on Q4. I just want to say for Q3, repeat, we have solid sales book that we're executing upon. The volume is historically Q3 is the highest quarter, and the gross margin per ton is at the $30-$40 range. For Q4, depending on how the market is going to move from second half of Q4 into first half of Q1, there might be some shift on the volumes. And also want to remind, Q4 is the Safrinha season, where nitrogen has a much higher percentage in the total market, which we participate a little bit less than the summer season. So that's a reminder. Thanks.

Bruce Bodine (President and CEO)

No, thanks, Jenny. The only other thing maybe to think about is FX tailwinds. I mean, we're with the FX movement over the last month, several weeks, there's definitely providing some tailwinds to our operating costs that are Real-based, so that should help on the margin expansion as well.

Operator (participant)

The next question comes from Edlain Rodriguez from Mizuho. Please go ahead.

Edlain Rodriguez (Director and Equity Research Analyst)

Thank you, and good morning, everyone. I mean, I mean, Bruce or Jenny, just a quick question on the resiliency of phosphate price. Like, how do you see that playing out in terms of the disconnect between P and K prices? Like, does that gap narrow by P coming down or K going up? Because it doesn't seem like that gap can continue for forever.

Bruce Bodine (President and CEO)

Yeah, Edlain, thanks for your question. I don't know that our crystal ball is any better than yours, and I think it just... and Jenny, please help, but when you go back to the fundamentals, I just think the supply and demand fundamentals on the global scale are different between those two commodities, and just because they are divergent today doesn't mean they need to converge. It would be my thoughts on this. It's very much gonna be those two commodities independently. What is going on from a supply and demand standpoint? We know what the crops need. It comes down to supply. Supply has probably got a you know, more announced, as I said earlier, on potash, and what can come to the market over the next decade.

In phosphates, it's just not as clear as what is gonna be a catalyst to bring, to your point, pricing down. So in the meantime, we're optimistic on P, don't see prices with a lot of risk there and on K. I think the zip code of where prices are today is pretty solid for the foreseeable future. There may be some seasonal uptick here and there, and from year to year, but I don't see some dramatic change in K moving up or P moving down just because they're divergent today. It looks like Jenny doesn't have anything to add.

Operator (participant)

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

Lucas Beaumont (Director of Equity Research Analyst)

Thank you. This is Lucas Beaumont on for Josh. I just wanted to go back to your comments kind of on the conversion costs in phosphates. So, I mean, they're down kind of 15% from the end of the year, but year-on-year, they're only down sort of about $5 a ton or 5%. And you're still kind of running at about $100 a ton currently. If we go back to, like, 2018, 2019, when you used to produce the 8 million ton run rate, that was about $65. So, I mean, we know there's gonna be benefits there as you sort of get back up to that run rate, be it the end of this year or sometime in 2025.

But, can you kind of help us think about where is kind of the range there that you're thinking about? Is it, you know, $90 or $80? How should we sort of frame that out? Thanks.

Bruce Bodine (President and CEO)

Yeah, thank you, Lucas. Definitely see that as volume improves, that fixed cost absorption. And there's other benefits, like electricity generation that we've talked about, rather than buying third party, we'll produce more of our own internal power, that we generate and reap the benefits there. But overall, kind of from that historical high, we see a $20-$30 reduction in total cost. Will we get back to that $65-$70 number? Listen, the inflation that we've seen overall across the globe, and United States is no different, and our operations are no different. I don't see getting back to those numbers, but we should definitely see further improvement, maybe another $20, down from where we are right now, as we get to that historical run rate.

Operator (participant)

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

Andrew D. Wong (Equity Research Analyst of Fertilizers and Uranium)

Good morning. Thanks for taking my question. So with expansion at Esterhazy set for mid-2025, do you still anticipate needing to keep Colonsay kind of, like, on hot standby, and what's the cost to maintain that on standby? Like, if you permanently kind of shut that down, like, what would be the cost savings? And just broadly on the potash strategy, like, can you just talk about the rationale and maintaining supply flexi-flexibility, how you see that impacting buyer behavior, knowing that supply can just be available when they want it, and would it make more sense to maybe not have that excess capacity or flexibility available and maybe have a little bit more scarcity on supply?

Bruce Bodine (President and CEO)

Yeah, Andrew, I mean, we think that having Colonsay as a flexible option for when the market demand is there, and it intersects appropriately with shareholder value, that it does provide significant optionality to the upside for us. And we've demonstrated our responsibility to try to control that volume that we have, based on the commitments that we have, both to Canpotex and to our customers in North America, where we can. But the fact that we need to run it right now is because you take the big dog out of the equation for a month, and that's a lot of tonnage that we have to make up for.

Just given the tightness in the market, in the inventory, particularly on our side, we don't have inventory built up to be able to buffer that out, so Colonsay needs to come on. How long it will come on? As we always have said and always look at, it is gonna come down to what's going on in the marketplace, what do we believe it looks like for the future in that regard, to your point, and we'll make our own opinions on that, and does that intersect proper shareholder value at the same time? Right now, we're focused on through the end of the year, Colonsay is probably gonna have to run to offset the Esterhazy turnaround.

But we will continue, as we always have, to monitor the best decisions for Mosaic and our shareholders, and our customers and decide what to do with that, going forward. So with that, I think we're done with the call operator on the questions. And I'll just conclude that I'd like to reiterate just a couple key themes. One is Mosaic delivered solid second quarter results and operational performance. We are making steady progress on our strategic initiatives to grow the company, manage costs, and maximize returns. Fertilizer demand is robust around the world, and our market outlook remains constructive. And our overall outlook for the remainder of 2024 is positive. So thanks, everyone, for joining our call, and have a great and safe day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.