Earnings Call: Q2 2020

Aug 4, 2020

Good morning, ladies and gentlemen, and welcome to the Mosai Company Second Quarter 2020 Earnings Farside chat. At this time, all participants have been placed in a listen only mode. Your host for today's call is Laura Gannon, Vice President, Investors Relations of the Mosai Company. Ms. Gangon, you may begin. Thank you, and welcome to our second quarter 2020 earnings call. Presenting today will be Jockelroy President and Chief Executive Officer, Clint Freeland, Senior Vice President And Chief Financial Officer, and Rick McClellan, Senior Vice President Commercial. We will host a prepared question and answer session addressing the questions received last night followed by a short live Q and A session time permitting. All of our earnings materials released yesterday after market close are available on our website at flesateco.com. 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 issued yesterday and in our reports filed with the Securities And Exchange Commission. We will all be presenting certain non GAAP financial measures. Our second quarter press release and performance data attached as exhibits to yesterday's Form 8 K filing, as well as our commentary on the quarter posted to our website, also contain information important on these non GAAP measures. Now I'd like to turn the call over to Jack. Good morning. Thank you for joining us today. I'll start with very brief comments, then we'll get straight on to your questions. This was a very good quarter for Mosai. And our momentum is increasing. The key points about our performance are our cash flow generation this quarter is the result of the past 5 years of work by our team to transform our cost structure and strengthen our franchise. We're succeeding even earlier than we expected We've already achieved 5 of our 7 2021 cost targets. Even with realized prices down $20 per ton from the first quarter and realized phosphate prices up just $13 per ton in the quarter, we generated over $800,000,000 in cash from operations. We delivered adjusted EBITDA 25 percent higher than consensus expectations, even before our adjusted EBITDA definition change. We paid down $500,000,000 in short term debt and structured payables in the quarter, while retaining cash on the balance sheet above $1,000,000,000 In potash, we continue to invest in the accelerated K Three project hitting a major milestone of connecting the K Three shafts to the k 1 mill. We continue to reduce our brine management costs and we achieved the lowest cash cost per ton of production in over a decade. Mosaic Fertilizante had an excellent quarter hitting both real based cost targets and achieving further cost benefits from the weakening real as well as realizing over 80% of our targeted full year transformation benefits. Frost states drove the cash cost of rock below the target and lower than last year despite increasing distances from mining to beneficiation. And with all of these efforts, we've reaffirmed our commitment to you, to our shareholders, our employees, our customers, and our communities to act responsibly. We announced new aggressive broad based environmental, social, and governance targets, and we will use these targets to drive performance across the business. We are continuing to transform the quarter's accelerating earnings and cash flow clearly reflect our efforts to date and we are driving additional future savings. We expect to deliver another $700,000,000 in savings above the 2019 base as we continue to execute our strategy. Mosaic is more competitive than ever before and with fertilizer markets improving we have significant earnings leverage to the future. Now we'll take Adam Samuelson from Goldman Sachs asked, in the 2nd quarter, Mosaic was ahead of its 2021 targets and a number of its key cost KPIs. How much incremental opportunity do you see on each key metric to further reduce costs? And if so, what level of incremental capital spend would be necessary achieve those outcomes. Thanks for your question, Adam. As we've said earlier, we have new targets that include $700,000,000 of additional improvements across the company. 200,000,000 of those coming from our Brazil operate and 500 coming from our North American and and administrative. Some of the areas where we believe we can make big gains as we go forward, obviously, or in Brazil where we continue to improve that business. In North America, where automation is allowing us to drive efficiencies in both phosphates and potash. And then of course, our k 3 operation which, as we ramp it up, will eliminate a lot of costs and improve our grind management costs. So as we look forward, we see a lot of opportunities still. And, importantly, in September, when we bring our all of this to our Analyst Day, we expect to be able to give you more color and detail on what that's going to look like. Josh, Chris Parkinson from Credit Suisse asked, you're clearly comfortably ahead on numerous cost initiatives including your K Three Shaft, Brian Inflow, faucet rock cost in the US and Brazil, and for LaVanches platform. But when you take a step back, How are you thinking about your structural cost base in a normalized environment and how much more could actually be done, especially in phosphate? Yeah. Thank you, Chris. It's important to keep in mind that these cost improvements certainly are somewhat driven by high utilization. We've had a good quarter where we're able to use our assets fully. And we've had some benefits from exchange rate particularly in Brazil, but also in Canada. Over the long term though, the real differences have been structural, and those are gonna stay with us. And those are going to continue and we're going to continue to improve those. So if we look at, you know, our major projects, which include, as Razy K3, next gen mining, and the Brazil transformation. Those are not temporary differences. Those are true structural changes that will be in value for the long term. Docs, Michael Piken from Cleveland Research asked. You mentioned that you are on track to exceed your $225,000,000 in non market growth in 2020. Which segments are exceeding your exit of how much higher can this number were actual items that we spent in 2019, but we did not expect to repeat in 2020. So on those, some of the key items, the plant city idling, that's happened and now is outside of our cost structure. Our Brazilian dams, we've completed the work now and that $80,000,000 of cost is now behind us. Equally, the ramp up of Esterhazy, which has gotten better than we expected, we now are delivering 1,000,000 tons a year from the So that benefit has already flowed through to us. And then of our $50,000,000 of transformation in Brazil that we're part of that 225,000,000. We're already at over 40,000,000. So we see that as pretty much complete and ongoing savings will be a and beyond that original 225 we talked about. Josh, the largest number of and seek a better understanding of our countervailing duties petition. Beth Goldstein from warning side. Chris Parkinson from Credit Suisse asked for an update on potential regulation changes of the US import duties on Morocco and Russian supply. And if the outcome is successful in our favors, what should they expect in changes to their landed US cost? In other words, what are the potential outcomes in terms of leveling the playing field? Thank you, gentlemen. Let me start by saying we believe in free and fair trade. However, the reason we filed this petition in the first place was to address imbalances associated with unfair government subsidies on inputs and to highlight unequal requirements on environmental standards. We believe our competitors benefit from to artificially low rock costs and energy while not having to meet adequate and proper environmental standards. We also will say that what we have done is put this forward to the Department of Commerce and the International Trade Commission. They will judge on the merits and as such determine what level of duties, if any, need to be put in place to create a fair trade situation. And, Clint, do you have anything to add to that? Yeah. No, Josh. I think you're right. We, we certainly are ahead of schedule on the realization of the $225,000,000 in non market benefit this year, you know, keep in mind that the $80,000,000 that we spent on on dam remediation last year, was spread really through the second through 4th quarter, we realized about $36,000,000 in benefit in the second quarter and should realize the balance, throughout the rest of the year. Scott John Roberts from UBS would like to know. Can you review the basis for your prostate's countervailing duties position? And have you had any response from customers or competitors? Thank you, John. Our basis for the petition is clearly laid out in the public documents, and I would ask that you go to those. Also, the comments from any of our competitors or, customers or the other concern groups is clearly laid out in those, public documents. So I would suggest you go there. Our position is clearly that the Department of Commerce And the International Trade Commission really are the ones that will decide What are the merits of this case? Now clearly, as we talk to our customers, some are concerned mostly about how they're going to get their why. We believe that this has opened up new opportunities for outside competitors to come in and make up some of that supply. But in the end, I think all people understand why we put it forward and, you know, we'll have to wait to see what the ITC says in terms of its merit. Josh, we received several questions asking about trade flows and implications to other markets, specifically Adam Samuelson and 7 others ask over the next 6 to 12 months, how do we think about the net impact of potential trade flow impact of potential US countervailing duties on Morocco and Russian phosphate? Do you see risk of market share competition rising in other major import markets, notably Brazil? Thanks, Mike and Joel. Let's answer the last question first. No, we don't think this will impact global supply and demand. All we market and if anything, the countervailing duties only highlighted to people that this market was tight. So what's causing the tight market, favorable farm economics, and lower supply, which began to take shape well before we filed a petition? However, it is reasonable to assume that the trade flows will be altered and some product will be shifted to other jurisdictions, including new suppliers coming into the US and the Moroccan and Russian suppliers focusing on other markets, which could be Brazil or we wherever. The petition, namely. If the Mosaic trade complaint is upheld, will there be a retroactive benefit to Mosaic? And what is the timeline for final decision on the complaint? So thank you, Jonas. Let me first clarify whether duties are applied retroactively will depend upon the level of imports from these two countries from the filing of case until the DOC preliminary ruling. We expect the case to be finalized in q12021 And at that point, if there has been excessive imports, they will look at assessing a retroactive duty. Chuck, I'm now going to move on to questions about phosphate operations. Then Isaacson from Scotia Act. On the cash cost of MindRock in Florida falling to $36 per ton from $40 year over year, How much of that was due to transformational efforts versus favorable geology and how much more wiggle room is there to bring that down and how sustainable are these cost improvements? Thank you, Ben. Clearly, our cost improvements are a combination of several factors. We've certainly been running our assets at elevated utilization rates, and that's helped. But our efforts to centralize mining operations, streamlined processes, and automate have also helped reduce our costs. As previously mentioned, the establishment of a central control center for our mining and collapsing all of our mining operations basically into one large operation, which should be begin operation by the end of the year will really further enhance cost savings. And as we introduce new management structures, incorporate automation for certain mining functions and accelerate savings from adjustments to transportation, which start to see real With the recent rise of over $50 per ton in DAP pricing, have you ramped up your production at the mine? And what could be the benefit of better cost absorption from higher tons in the third quarter? Thanks for the question, PJ. High utilization rates had a beneficial impact, but that's really only part of the story as we've mentioned. But I will say that as we look at Q3 going forward, we can expect those tonnage, high tonnage and high utilization rates to continue. So we do expect to see better costs throughout the rest of the year, both structurally and because of high utilization. Jack, we also have a question from Adam Samuelson from Goldman Sachs. The specialty percentage rose to 48% of shipments and marked a new quarterly high in phosphate, coincident with micro central shipments to Pernodache being substantially above recent quarters. Is this sustainable? Why or why not? Thank you, Adam. The sales of MicroEssentials in Aspire hit record highs and KMA came in close to the record in quarter 2 to 2020. Among these growth, Micro Central Shipments to Brazil has been a major driver Now we believe that the growth of MicroEssentials will continue over the next quarter, driven by Mosaic Fertilizante and also North America. I have to reemphasize the value that MicroEssentials brings to the growers is showing positive returns for them on their investments. So these are bringing real value to the growers and to our customers, the distributors. So we do believe that as more people start using microessentials, this is very sustainable and they're going to see the benefit and they're going to keep using that product. Submitted multipart questions related to our potash operations. So first, Chris Parkinson's F. The demand environment in potash appears to be modestly improving, while spot prices are well off their first half lows. Can you talk about your spot process for the second half of twenty one operating rate assumptions and how that may drive changes in your mind map. Thanks, Chris. As you know, we've accelerated the development of K3 and this has an obvious impact on costs. Both now with declining brine management spending and in the future as the mine ramps up. Beyond K3, we continue to see strong results from Bellplane, which were ordered its lowest cost position in more than a decade. As we move forward, we're going to take advantage of owning 2 of only seven mines in the world with annual production capacity of over 3,000,000 tons and with some of the lowest costs in the industry. So as we look to the future, we intend optimize the production coming from K3 and from our Bellplane operation and only see running higher cost mines like Calanzae if the market really requires it in the future. Docs, another question comes to you from Jonas Oxgaard of Burn seen. In potash, you lowered your cost per ton a fair bit, but how much of that was simply spreading fixed costs over a 20% larger volume? On a fixed volume basis, what would your cost reduction be? Good question, Jonas. There is no question that the larger volume helped spread out our costs. However, we believe there are structural changes that are fundamentally changing long term. We think one area of clear savings is the accelerated reduction of brine management costs as we shift to K3. K1 Underground Mining will be completed this year. Brine Management accounted for $8 a tonne in Q2, and that will continue to line as we move into 2021 and will be eliminated completely by 2022. So as you can see, A lot of our cost reduction is actually structural and should be with us for the long term. Yeah. P. J. Juvekar from Citi, What kind of savings do you expect from sending K3 potash ore to the K1 Mill, and what is the updated timeline now to shut down K1 and K2? Thank you, PJ. We expect to be sending potash to K1 and actually be shutting down our K1 shafts a production perspective early in 2021, that will start meaning we're only going to be operating 2 shafts and then by will eliminate brine inflow, and that really will be the end of our K1 and K2 plant, mines from a production perspective. Vincent Andrews is interested in how he should think about our potash shipments in the second half of this year, given how strong shipments were in second quarter. Also, can we remind him of the accounting for the Chinese contract shipments that were already in a bonded warehouse prior to Con price agreement. Thank you, Vincent. Yes, we did have strong shipments in quarter 1. And if I referred to our discussions with Canpotex, I think they have a fairly full order book for q 3 and even going well into q 4. So I believe the shipments internationally will be strong in the second half. And domestically, we're expecting a good fall in North America. So we're expecting strong shipments there as well. So from our perspective, second half is looking pretty strong from a potash perspective. In terms of the, shipments in the first half, I I just like to throw it over to Clint to explain a little bit about our China shipments to bonded warehouse that we reverecht in the first half of the year. Clint, can you discuss that? Sure, John. And good morning, Vincent. So to start with, on a consolidated basis, we don't recognize revenue. Until that product is sold to a third party. However, we do on a segment level basis. We do recognize a revenue when, Canpotex sells product to our distribution business in China. And when they sent that product, to our distribution business in China. The segment recognized, revenue, but that was on an estimate of pricing since the contract had not been completed. Once the contract was completed and the price for that transaction was that that gave rise to the adjustment. But again, that's an adjustment on the potash segment only because we won't recognize revenue on that product on a consolidated basis until it's finally sold to a third party. Thanks for that clarification, Glenn. Josh, I'm now going to move on to questions about Mosaic for lozanches. We have 4 analysts, including John Roberts from UBS and Mark Connelly from Stevens, asked similar questions about the timing of volumes in Brazil. Brazilian farmers are having an outstanding year so far and have been widely reported to be buying inputs well ahead of last year's schedule. How much do you think has been borrowed from the 3rd quarter? And are we likely to see an offsetting reduction in 3rd quarter margin to reflect those lower volumes next quarter and specifically within the quarter. April and May were significantly higher than the prior year while June appeared to be much closer to a year ago. Is that just timing or are the trends decelerating into July? Great question. The strong volumes in the first half of the year did reflect some forward input purchases as a result of generally favorable farm economics. But year over year demand is expected to be up slightly to 37,000,000 tons. And in that figure, we believe we are beginning to take market share as farmers gravitate towards higher analysis products and high value products such as our microessentials. Josh Mark Connelly at Stevens asked, how did the dramatic improvement in in Brazil break out between volume driven cost improvement and operational structural cost change that should repeat with normal volumes. Thank you, Mark. Let me start by saying last year, operations were negatively impacted by the change in that required us to, shut down a couple of operations for down improvements that reduced volume and impact of our raw materials access. This year, we're we're benefiting from running at full operations rates. And this also has allowed us to have more access to our own rock supply. So overall, that has helped a little bit. So about a third of what those costs are probably volume related. The others are improvements to our freight, our inventory management, our overall planning and, of course, structural changes to our to our, cost structures. I think overall though, we're we're seeing long term changes to how the Brazil business is running, and we're starting to see full benefit of the $330,000,000 or so of integration benefit that we announced at the end of last year. Jobs P. J. Juvekar has a question about currency. The Brazilian real hybrid since the US dollar was down significantly year over year in second quarter of 2020. How did that volatility impact you and what specifically was the impact in the quarter on Mosaic for Livanches? Thanks, BJ. I'd like to talk about 2 aspects of the, Brazilian real that really has changed things And the first of those, of course, is the impact on farmer economics. I think that is actually the bigger improvement. They're ability to buy fertilizers and the continuous growth of the Brazilian agriculture segment is largely driven by great economics for the farmer. And so, you know, that's the first place we want to talk about where the Brazilian real has helped us. In terms of our cost performance, you will see that we tend to put our targets in reais base. So that allows us to understand what's the real underlying improvement. Obviously, there was some positive impact. I think we saw definite improvements in our overall cost because of the reais, but I would say we focus more on what is the reais based cost because that tells us whether we're really improving the business or just taking advantage of currency. Oh, in the back, you'll notice sorry. BJ, I'd also like to point out that if you look at the back of our stuff, you'll see basically our sensitivities and a a 1 a 10¢ move in the reais amounts to about $20,000,000 a year unhedged. If we think about us as being about 50% hedged, it's fairly easy to do the reconciliation to last year's reicos. Josh, we have another question from Ben Isaac's phone. With respect to La Zay for La Zanches. And La Zay for La Zanches sales volumes have been notably higher year over year. Can you walk through the strategic strength of this business and how it relates to your mix between commodities and micro essential tons. Thanks, Ben. You know, again, I've said this before, but I'll I'll repeat. The volume growth really was a result of and in farm Economics in Brazil. The strengthening of the US dollar versus the real excellent barter ratios and anticipation of a strong summer crop demand. So both both commodity and performance products have shown robust increases in quarter 2 of 2020 versus a year ago. Chris Parkinson asked for a COVID 19 update. His question is. Brazil is in the midst of a fairly complex 19 outbreak, which has periodically been affecting the port and logistics system. Can you give us an update on the demand in environment as well as any logistical headwinds you foresee during the peak fertilizer application season. Thanks, Chris. Look, let's start from our own operations in Brazil. And although we've had a number of cases, because of the high level of community transmission, we have not been impacted on our operations to this point, and we've instituted a number of procedures to make sure we mitigate the spread. Sorry. And then from an overall country logistics perspective, we believe that in general we have been unaffected by COVID. Now, obviously, there's going to be local places where that impacts us But in general, we've been able to work around that and kept the product moving to the end and from a demand perspective, despite COVID, we've continued to see strong demand, again, driven by favorable farm and economics and we have got our product to our customers with relatively little impact The last question we received in will then come from Joel Jackson. Hertilizantes 2nd quarter gross margin was more than double the results from the prior 2 years. How much of that gain was market conditions versus foreign exchange tailwinds versus share gain in the market versus a pull forward of Q3 because of COVID related logistics concerns. Thanks Joel. I would summarize our results in the 2nd quarter in Brazil as a couple of factors. First of all, if we looked at the exchange rate, it's probably offset almost perfectly the change in pricing. So what we see in actual results is almost solely the result of our own actions and the reversal of some of the dam costs that we saw last year Doc, we received a handful of questions on the balance sheet, primarily focused on uses of free cash flow. John Roberts asked, what are the capital allocation priorities moving forward? And can you please discuss your gross debt level dividend and potential share repurchases? And TJ Juvekar asked beyond paying down some debt, what could be uses of cash as especially with improved free cash flow in the second half of twenty twenty. Would buyback be a proven use of cash over the countervailing duty decision prevents you from buying back stock? Josh, can you talk about capital priorities to address both of these questions? Our capital priorities are unchanged and they continue to be what we've said in the past. Alright. You know, our first priority is to maintain the business next priority, maintain investment grade metrics. And to do that, you know, we have to continue our normal capital plan as we have. We expect to lower debt by about a $1,000,000,000 over the next few years, doing so when our bonds come due in the next couple of years and then continue some of the key projects like the Esterhazy acceleration, k3 acceleration. And then what we have after returning capital to shareholders. All free leads are dependent on future cash flow generation, and capital allocation will not be impacted in anyway by the countervailing duties. We've also had a couple of questions from a buy side analyst, and they include can you describe what's included in the 610,000,000 of short term debt that you indicated will be paid in 2020? And does moldy still plan to keep bought a $1,000,000,000 cash balance and paid down in 2021 maturity. At the start of this year, we did increase our cash balance to a $1,000,000,000 by, first of all, taking out some money from our revolver and executing on some of our, inventory financing debt. Since that time, we've paid down the revolver and we will continue to pay down the rest of the $600,000,000 in short term debt throughout the rest of this year. Before we move on to market related questions, then Isaacson asked about our tax rate outlook. Why is your effective tax rate expected to be in the mid to high 50s? And how should we think about this rate under a trump or Biden presidency? Thank you, Ben. Let me start by saying the first part of this is And the reason for the tax rate being higher is our income mix between our 3 jurisdictions, Canada, Brazil, and the US. The details of that, I'm gonna actually hand it over to Clint to explain why the negative earnings in the US will create a higher tax rate overall. Comes down to an earnings mix, phenomenon for us, if you recall, the, the tax rate is is is based on GAAP results by jurisdiction. And when you look at the United States, not only is our phosphate business, incorporated into that, but also our corporate G and A our interest expense and so forth. So, there are times when that pretax income in the US turns negative, and that can begin to skew the rate when you then start to factor in things like some of the foreign currency moves that we've seen, and how it affects our our mark to market and and some of the notable items that that we have on our schedule, that begins to skew. And then, you know, as you've seen Brazil, improve this year, that's our highest rate tax So so that, begins to influence that rate as well. So, really, the combination of all of those things that's resulting in an unusually high tax rate for this year. And then I'd add 2 things. 1, on a longer term basis, we would expect that effective tax rate to be, somewhere in the mid to high 20s. But then I would also call your attention, that our cash tax rates and payments, are much different than that. Matter of fact, this year, we expect to end up with a, a small cash tax refund. So very different than the, the effective tax rate in our financial statements. Now let's move on to market related questions. Mike Pikean asked if he could comment on our summer filled programs in the US and where we see downstream inventories Thank you, Michael. I think we've had fairly successful fill programs in both phosphates and potash here in the US. Recent discussions that we've had with our customers suggested they're probably in the range of 60% full for the a fall season. So there will be increased buying towards the fall season, but the for the most part, our customers Steve Byrne is looking for insight into future volumes. How are you trending in each of the segments through the month of July on a year over year basis? Do you see volumes higher in the third quarter? Any expectation for volumes for the rest of the year? Thanks, Steve. I would characterize Q3 as largely having our order books full for both phosphate and pot Ash. And so it'll be a matter of delivery and, revenue recognition that will determine where we are for quarter 3. But We expect a reasonably good fall in the US and global markets are running well. So for both phosphates and potash, we expect relatively normal Q3 volumes in both. And then for the rest of the year, we should also see a good stable volume. Josh Mark Connolly would like insight into grain and royalty price implications. How important to Mosate's earnings outlook are higher grain and royalty prices. If the current price of corn is the same through 2020 and soybeans stay at or near their current prices, do you think there is any material room for higher P and K prices in the market? Thank you, Mark. Clearly, oil seed and grain prices do have implications for us. But in general, the farmers tend to work a lot more on their needs to plant. So what's a lot more important to us is planting intentions, number of acres planted, and remember also that grain and oil seeds are just a few of the products that we fertilize. So it really depends on what does the whole global market look like and what is the demand for P and K and what supply balance there as opposed to something on the grain oil seed? It has an indirect impact, but I would say no direct impact on our pricing. Vincent Andrews from Morgan Stanley wants to know about our market forecast. Given that the last 10 years of P and K shipments show some pattern lumpiness, potash more than prostate, Why not forecast lumpiness going forward rather than just CAGRs? Thanks Vincent. We tend to forecast on annual growth simply because some of the other factors that go into the lumpiness of business are impossible to forecast. And those are, you know, really inventory movements globally and, of course, weather. You saw in 2019, the weather impacts in the US made a fundamental difference to the growth rate of both phosphates and potash on a on a global scale. So we really have to look at it on averages, but recognize that there will be lumpiness as we go forward. I'm gonna move on to some questions on phosphate. This one is from Ben Isaacson. The benchmark MAT selling price fell by $16 to $314 per ton, yet Mosaic's average finished product selling price fell by almost three times a amount or by $44 to 308 from 3.52. Why? How could we think this? So how should we think about this relationship going forward? Thanks, Ben. The answer here is simply that the average selling price in Port LaVontes is based we sell, including urea and potash in the blends, both of which are down significantly. So when you look at that relationship going forward, you have to take into account all three products that could be in our blends that we sell. Then also asked SaaS shipping margins have started to improve in July after remaining largely flat throughout the second quarter. Are you seeing this flow through to the phosphate segment's margin. Thank you, Ben, again. That's driven margin is we track that because that really is what do we get after the cost of raw materials and transport as as revenue. So, of course, this slows directly into our margins. An improvement in stripping margin really is almost directly related to our overall profitability. Adam Samuelson, would like to know, or what does Mosai see as the equilibrium prices of US NOLA, DAP, and MAP, versus key offshore benchmarks. Thank you, Adam. All I can really say there is if you look at it historically, other than the last, say, 3 years where there's been a real increase in imports, we have seen NOLA prices being similar to other global prices, and I would expect that under a more fair trade market, that's what you would see is you would see the NOLA price being equal to what the price is in other markets adjusted for the transport cost. And that's exactly what we expect will happen after a countervailing duty case if they, readjust that market. Drugsseedburn would like more insight into our global phosphate demand outlook and its relationship to inventory swings specifically. What is your estimate of underlying global consumption of phosphate in 29? And was it below the shipment of 71,000,000 tons? Did it reflect channel inventory build? Thank you, Steve. If we look at 2019, there was no question that there was buildup of global inventory, particularly in the US. I mean, in the US, there was a poor season and the imports, in particularly kept coming in, we shut down our Louisiana operation for a number of months last year and and still the inventory build in the US was was very high. Likewise, the the Brazilian inventory was probably slightly above normal coming into this year for maybe some of the same reasons but what I will say is in the first and second quarter of this year, we have largely cleared out all of that inventory and probably have moved from an area of high inventory to a very low inventory in phosphates, as we move into the third quarter of this year. Jochen related question, he also asked our normalized inventory levels the reason for the increased phosphate shipment forecast in 2021. Thanks, Steve. Yeah. In terms of 2021, what we really see is the inventory levels should be pretty much leveled off and we expect normal growth in the market as per any other year. So that, 2% type annual growth in 2021. Vince and Andrews would like our opinion on farmer economics. He asks Given the recent run up in DAP prices, are you at all concerned about your farmers deferring fall applications? Thanks, Vincent. Look, our experience has been, and if you look even at this spring with the COVID uncertainty that farmers will put fertilizer on their fields according to their needs. And, you know, frankly, today with precision agriculture, they're more likely to put the right amount of fertilizers on every year. So, you know, and phosphate prices, frankly, also are a very small piece of the overall cost of running a farm. So I don't believe that most farmers will look at phosphate pricing and have it changed there application, but I'd also highlight that phosphate prices are still very affordable when you look at where grain and oil seed prices are. So as with most fall seasons, we would expect that weather will be a the main arbitrator of demand and you know, with expecting an early crop maturity this year, we expect we should have a good fall. Josh, we have 3 questions related to China and phosphate. 1st, Vincent Andrews What do you anticipate will be the Chinese DAP exports in the second half of twenty twenty? And what second half twenty twenty gap price does that assume? If GAAP prices are higher or lower than your assumption, what would happen to Chinese exports? Thanks, Vincent. Chinese exports over the first half of the year were lower by about 800,000 tons from last year. Now our base forecast calls for Chinese exports to end the year about 600,000 tons lower. In other words, we expect but international pricing is a little higher. We'll incent a few extra tons coming out of China in the second half. And if prices are higher than our expectations. There might be a little bit more upside, but we don't see significant upside And part of the reason for this is domestic demand is coming in fairly strong as we move into fall. And think the big issue there will be export availability limitations. Now obviously if our prices are lower than expectations, yeah, the volumes could be even lower than what they are now. Goldstein and Steve Byrne both asked about production specifically. What is the status and outlook for reduced phosphate production at specific facilities in China and Tunisia, and do you expect lower exports over the next several years? Well, let me hit China first. You know, there's been a a well known shift towards shutting down some of the higher polluting plants particularly along the NC River. And we've seen some of these, ginsauph estates shifting production to higher purified fossil and food grade phosphates. Since smaller plants shut down throughout the year, that have resulted in production declines in the first half of the year. In terms of Chinese export volume over the next years, we maintain the Chinese exports will trend trend lower and we'll establish a new normal. I mean, we've now seen what we think is the bottoming of Chinese domestic demand and we're seeing a lowering of production. So with that, we'll have to come a lowering of exports as they meet domestic demand. For Tunisia, it would appear that expectations for a plant action in in 2020 were somewhat overstated, but it's also important to put Tunisia in context. They produced an average of about 750,000 tons of DAF and TSP over the last 5 years. Current protests will certainly lead to shuddering of the production. The business plagued them for over a decade, so which means we would expect them to stay about the same run rate as we go forward as well. Josh, the last section of questions relate to potash Global Markets. Steve Byrne and Seth Goldstein asked about the impact of palm oil demand on potash. What is the typical lag which we movements in palm oil prices and changes in potash demand in Southeast Asia, and has the rebound in palm oil pricing resulted in increased potash demand and talk to Hazel. Thank you, gentlemen. The palm oil demand is important for potash. And what we've seen recently is an improvement in palm oil prices, and we know that for production reasons, they will be adding potash to their palm oil plantation. So so we see that as a fairly direct relationship I wouldn't say we see increased demand, but we see demand that is getting back to its normal levels. In terms of a longer term, export demand and domestic demand for biofuels is helping in terms of optimism for recovery. So all of these things mean that we should see a better demand for potash in the Southeast Asia region, particularly Malaysian and Indonesia. Joel Jackson and Ben Ibitz, and we both like to understand where global potash inventory stand in the various regions, particularly in China. Thank you, gentlemen. If if we look at China, there's there's sort of a bifurcation of of inventory. We know there's about 3a half 1,000,000 tons at the port. But we believe there's relatively low inventories as we move inland. And so as we're now seeing a strong demand for NPKs in the domestic market, We do expect that the movements out of the port to those NPK plans. We'll start bringing down inventory levels assuming that the arrivals are about at normal levels compared to last year. Mark Connelly and Steve Byrne are both interested in potash demand growth. What is driving the acceleration in potash demand in your forecast and are there specific geographies? I wouldn't say we're actually forecasting an acceleration of potash demand, our potash demand growth. From a long term trend is staying fairly steady at what we believe to be around 3%. And if you take 2019 out of it, I think we still stay just on that trend. In a related question, if demand ends up toward the high end of your range, do you see increased supply balance in the market, or would you expect the market to tighten? Well, I guess this requires 2 things. 1, it the success of production ramp ups on the new price particularly, I guess, Eurokems, Vargo Cali and Yersolski. But given the delays we've seen in recent years on these ramp ups, it would seem that the market should tighten actually if demand comes in at the high end of our expectation. And the last related question, also, what is the full case for potash pricing over a 3 to 5 year period? Thanks. There's a number of, factors that could create a bull run-in potash prices. And the first I've already mentioned which is slower ramp up of the, projects, particularly the ones in Russia and Belarus. But What we would really expect is probably a higher utilization rate of the North American assets over the next say, 3 to 5 years and and a more modest rise in prices. That would suggest prices appreciate slightly to where they were maybe in 2018 and utilization of assets goes up at the same time. Another follow-up related question from Adam Samuelson and Ben Isaacson, they're both asking about the disconnect between pricing trends between Brazilian MLP that rallied off lows in the second quarter versus U. S. And Southeast Asian MLP prices that have continued to leak lower. Are strong Brazilian Economics enough to offset the weakness in other regions? Thanks. Brazilian farm Economics are really outstanding at present, which is certainly helping to underpin pricing in that market. And we expect that to continue for the US and Southeast Asian markets, I think it's important that remember that this is a seasonally slow period for potash demand. And that will impact prices. I'd also like to highlight that our summer fill program was extremely well received, and it is typical of commodity markets to necessarily see first the rebound in demand and then prices following after that. We have now completed our pre submitted questions. And so now I would like to do is open it up to the audience for live q and a operator. Thank We will limit the question to one per participant to allow the others questions to be addressed. Thank you. First question comes from the line of Adam Samuelson from Goldman Sachs. So I guess I wanted to just follow-up on the affordability question, Josh, on phosphates. And can you on your own kind of affordability metric that you published, we're now above long term average. And just trying to think about where you would see an upper limit to that? And especially if you think about next year in farmer income, risks from government support programs in the U. S. Or lack thereof given kind of the big pharma support payments that have been experience both this year and last. Thanks, Adam. Welcome. You know, there's certainly a relationship between, crop prices and how people feel about the imports. But as you say, you know, support payments from governments and whatnot have done a lot to keep farmer incomes at least stable. And, yes, while we're pushing, phosphate and potash prices, probably not potash much, but certainly phosphate's a little bit closer to that. Ratio. 2 things on this, I'd say is first of all, you gotta look at December 21 prices. And if you look at December 21 prices, I think we, I think we'd be looking at what, 360 and 9 360 for corn and 9 bucks for for, Dean. So they're they're gonna see some reasonable prices on their, if they sold forward into that market. So they'd be incented to get a good crop and and use the fertilizer But in terms of the direct relationship between truly affect demand. Next question comes from the line of Steve Byrne of Bank of America. Your line is open. Yes, I just wanted to hear whether or not you saw any impact on phosphate imports during the month of July following the countervailing duty petition and just ask for an update on your gypsum sales out of your Jibstax in Brazil. Any update on that? Sure. Thanks, Steve. First of all, yes, in July, I believe the, imports were low in July. I I, I'd have to get an exact number and get somebody to get back to you on on how much that was down. But our understanding, and we we did talk to a lot of customers, and our understanding is certainly the the importers who were importing either the OCP or the Russian products, definitely took a step back to understand what the risks might be in terms of, them picking up some sort of countervailing duty risk. So, we we did see a step back in July, whether they will come back into the market in the next couple of months. I don't know. What we have seen, however, new projects coming in from places like, Egypt and Australia and Mexico. So it does say there is some some change. I got out of somebody to give me. What was the second part of your question there, Steve? I missed the missed in my writing. Next question comes from the line of Chris Parkinson of Credit Suisse. Your line is open. Great. Thank you very much. So you already mentioned you expect Chinese DAP export should be down I guess 600,000 tons or so. And that you don't really expect a much on a year on year basis in terms of Tunisian availability, which is fair. But there have been a few mines over the last couple of years, that were kind of in the process or the tail ends of their ramps, you know, in Morocco, obviously Saudi, you know, even Turkey and Egypt, believe that the phosphate market has really just felt has already, felt the full effects of those previous ramps and now we can just kind of isolate our thought presence in terms of new supply on just the Maroccets and Saudis, just what's your kind of aggregate assessment of the SD over the next, let's say, 2 to 3 years. Thank you very much. Yeah. Yeah. Thanks, Chris. I think, you know, materially, it is all about, what's left of the Saudi ramp up and, you know, assuming they they reached their, I think, 2,700,000 tons was their target for 2020. And there is a some debottlenecking and other projects that OCP is expecting to do. I mean, those are still yet to come, but, and maybe a little bit of extra coming out. I I saw, plus I grow has been export or has been producing a little higher number. So there could be some new tons coming out of fossil growth. But for the rest of the world, I would say, basically, the closures are more than setting any small ramp ups that we've seen. And overall, it it really is now coming down to small increases from the Saudis and then whatever, Morocco brings in in the next couple of years with a little bit of addition from possibly from parts of the Thank you. No further question at this time. Well, if there are no other questions, I'd like first of all, say thank you for the questions you brought in. We had a very good set of pre submitted questions, which I thought was very healthy. But to conclude our call, I'd like to just reiterate our our key themes here. Jose generated strong results despite low realized prices for our products. Our long term transformation efforts are really starting to deliver substantial structural cost savings, and we expect to drive additional savings in the years ahead. A balance sheet continues to strengthen as we paid down debt and generated strong cash flows. Fertilizer markets continue to improve and prices are rising. We are navigating peacefully with minimal impacts to our business. So in summary, Mosaic is more resilient and competitive than it has ever been. And we have built significant earnings leverage for a rising price environment. So we are looking forward to continue improvement and continued success on our journey towards being a very competitive company. So thank you for joining the call. Have a great day. And we hope to talk to you in person soon. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.