The Mosaic Company F2Q09 (Qtr End 11/30/08) Earnings Call Transcript

| About: The Mosaic (MOS)

The Mosaic Company (NYSE:MOS)

Q2 2009 Earnings Call

January 6, 2009 9:00 am ET


Christine Battist – Director IR

James Prokopanko – President & CEO

Lawrence Stranghoener – EVP & CFO

Dr. Mike Rahm – VP Market Analysis & Strategic Planning

Rick McLellan – SVP Commercial Manager

Steven Pinney – SVP Phosphate Operations


[Christan McDuffie – Unspecified Company]

Vincent Andrews - Morgan Stanley

[Michael Picken – CRC]

Mark Connelly – Credit Suisse

Bob Koort – Goldman Sachs

Steve Burn – Banc of America

Mark Gulley - Soleil-Gulley & Associates

David Silver - JPMorgan

Robert Goldberg – Unspecified Company


Good morning ladies and gentlemen and welcome to The Mosaic Company fiscal 2009 second quarter earnings conference call. (Operator Instructions) Your host for today's call is Christine Battist, Director of Investor Relations of the Mosaic Company.

Christine Battist

Happy New Year and welcome to Mosaic’s fiscal 2009 second quarter earnings conference call. Joining us for the call this morning are James Prokopanko, President and Chief Executive Officer, Lawrence Stranghoener, Executive Vice President and Chief Financial Officer, and other members of The Mosaic senior leadership team.

We will be using presentation slides during the conference call today. You may view the slides simultaneously with the audio webcast and the slides are available on our website and they enhance our discussion but are not a requirement for the call. If you are unable to download the slides, please contact me after the call and I'll send the slides to you.

We will be making forward-looking statements during the call and these statements include, but are not limited to, statements about our future financial and operating results. They are based upon management's beliefs and expectations as of today's date, January 6, 2009 and are subject to significant risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is included in our press release issued yesterday and in our reports filed with the Securities and Exchange Commission.

This call is the property of Mosaic. Any distribution, transmission, broadcast, or rebroadcast in any form without the expressed written consent of Mosaic is prohibited.

Now I'll turn the call over to Lawrence who will recap some highlights from our second quarter results and provide insights on the factors impacting our business.

Lawrence Stranghoener

Thank you Christine, good morning to all and thanks for joining us today. We are experiencing a perfect storm in the crop nutrient markets with a combination of factors dramatically effecting farmers, producers, and the entire supply chain in all parts of the agricultural world.

James will share with you more details about this environment and the steps we are taking to work through this downturn and to effectively position Mosaic for the coming upturn, but first I will recap some highlights from our second quarter results.

Our results as summarized on slide four exhibit strong growth versus last year driven primarily by higher selling prices and the gain on the sale of our investment in Saskferco. These factors offset the impact of lower sales volumes and an inventory valuation write-down.

Net earnings for the second quarter were $960 million or $2.15 per diluted share. These results included a $1.03 per share gain on the sale of Saskferco, and a $0.41 per share inventory write-down. Let me discuss each of these items in more detail.

Early in calendar 2008 we announced our intention to sell our stake in Saskferco as part of Mosaic’s strategy to focus our resources on our strong potash and phosphates businesses. Together with our partner we completed this sale on October 1, 2008 for gross proceeds of $1.5 billion of which we received half for our portion of the investment.

The sale resulted in a pre-tax gain of $673 million in our second fiscal quarter. We recorded a deferred tax liability of $215 million on this gain resulting in an after-tax gain of $458 million. We do not expect the deferred tax liability to have a cash impact in the foreseeable future.

This was a great transaction for Mosaic as it accomplished a key strategic objective with a very attractive financial outcome. Less attractive was the impact of the current market environment on the carrying value of our inventories.

Declining selling prices, and rapidly declining raw material costs for phosphates, namely sulphur and ammonia, required us to record an inventory valuation write-down because the carrying cost of certain ending inventories exceeded estimates of future selling prices.

The pre-tax write-down totaled $294 million with $213 million recorded in our phosphate segment, $149 million in offshore, and $6 million related to nitrogen products, with an offsetting net credit of $74 million in our corporate other segment.

The write-down is based on assumptions regarding future selling prices and raw material costs which may or may not be accurate depending on market conditions and further assumes that most of this phosphate and offshore inventory will be sold at no margin.

Turning to business unit results, our potash segment delivered a strong quarter primarily driven by higher selling prices offset by a decline in sales volumes. Our average MOP selling price was $529 per tonne, an increase of $41 from our first quarter results.

Operating earnings were $548 million, more then a threefold increase compared to the same period last year. Potash selling price increases more then offset higher resource taxes and royalties and a 15% decline in sales volumes such that gross margin grew to 59% versus 41% last year and 52% in the first quarter of fiscal 2008.

Looking forward potash sales volumes are expected to remain soft at least through the third quarter. Realized prices are expected to decline slightly compared to second quarter levels due to a higher percentage of lower priced industrial sales.

In light of the weak demand outlook we are prepared to reduce potash production by up to one million tonnes in the second half of this fiscal year to better control our inventory levels. This includes the impact of reduced production rates which we undertook during the recent holiday season.

Our phosphate segment posted disappointing results due to a lack of demand. A full distribution pipeline, steep declines in raw material prices, and a host of other factors resulted in cautious buying behavior by customers and a sharp decline in sales volumes.

Phosphates operating earnings were $259 million compared with operating earnings of $347 million in the same period last year. Gross margins compressed to 17% versus 32% last year. This decline was the result of the inventory write-down, higher raw material costs, and the impact of lower operating rates.

The average DAP selling price for the quarter was $1,083 per tonne, within our guidance range as realized DAP selling prices did not begin to decline until the latter part of the quarter.

We expect the phosphates segment results to be much weaker at least through the third quarter because of lower selling prices and margins, soft sales volumes, and lower production levels. Because of the write-down we expect that most of our third quarter phosphate volumes will be sold at no gross margin.

As we previously announced we reduced our phosphate production by approximately one million tonnes through December, 2008 and we are further reducing production by an addition one million tonnes to better manage inventory levels during these slower-then-normal market conditions.

Our offshore segment also experienced a fall off in demand due to a full distribution pipeline and weak farmer economics primarily in Brazil. Along with the inventory write-down noted earlier, this resulted in an operation loss of $120 million compared to operating earnings of $26 million a year ago.

The offshore gross margin is expected to remain weak at least through the third quarter or until crop nutrient demand returns to more normal levels. Despite the mixed results this quarter we believe we have the best liquidity position among our peers with total cash of $2.8 billion and debt of $1.4 billion as of November 30, 2008.

As you know we have worked hard during the past four years to strengthen our balance sheet and to build a strong cash position and this is serving us well. We generated $387 million in cash flow from operations during the second quarter, compared with $543 million a year ago.

Cash flow was lower due to the poor sales environment as well as the timing of income tax payments which totaled $568 million in the second quarter. We expect to be a net user of cash at least through the third quarter or until we see sales volumes pick up. Our substantial cash reserves give us much flexibility and position us to emerge from this downturn with our financial strength in tact.

Now let me comment briefly on our financial guidance, like companies in many industries we are providing less guidance then we have in the past simply because of the significant uncertainties in our markets.

We had previously withdrawn our sales volume guidance for the year and have no update to provide at this time other then to repeat our expectation for weak sales volumes at least through our third quarter.

Additionally given the modest number of sales transactions that are occurring we have elected not to provide DAP and MOP selling price guidance ranges for the third quarter though we have noted we expect third quarter realized phosphate prices to be down substantially and realized potash prices to be down slightly from second quarter levels.

We are updating our annual capital spending guidance by noting that we have reduced planned outlays to a range of $800 million to $900 million this year, down from our previous range of $900 million to $1.1 billion.

We remain committed to our planned potash expansions as we like the long-term outlook for potash and these are long lead-time projects. That said, we are evaluating whether to moderate the pace of our expansions in light of near-term market conditions and less robust cash flow.

As for other guidance SG&A costs are now expected to be down slightly from our prior guidance to $340 million to $360 million, the effective tax rate is still expected to be in the low 30% range, and our guidance for Canadian resource taxes and royalties has been withdrawn in light of the uncertainty about potash volumes.

Now James will share some insights on the factors impacting our business, the outlook and what we are doing to manage through this environment.

James Prokopanko

Thank you Lawrence and good morning everyone. Happy New Year to all. I hope that for all of us 2009 proves to be more prosperous and more predictable then the year just ended.

I’d like to briefly touch on the key factors impacting Mosaic and also provide some perspective on what we see ahead. Dr. Mike Rahm, who heads our Market Analysis and Strategic Planning team will discuss the outlook in greater detail at our Analyst Day next Tuesday, January 13, in New York City.

During this call, I’d like to highlight a few important items. Crop nutrient markets are recalibrating due to several global factors that include, the decline in grain prices, a large drop in raw material costs, lower nutrient demand prospects, stronger US dollar, and the drop in energy prices.

This recalibration in manufacturing costs and farm economics resulted in reduced fall fertilizer application, froze the distribution pipeline, backed up inventories of production points, and forced many nitrogen, phosphate, and potash companies to reduce output.

The uncertain farm economics caused some farmers to decrease nutrient use or postpone application from fall to the coming spring season. Slide six shows the drop in agricultural commodity prices throughout the quarter.

This drop has sent [bare] signals to farmers and corresponds to price actions seen in other commodities, notably oil. We are encouraged by the recent rally in grain prices and the decoupling from oil and believe this may portend a recovery in the markets we serve.

Slide seven shows the decline of sulphur and ammonia prices which are key inputs for phosphate productions. These larger then expected declines fueled marketplace expectations for lower phosphate prices and coupled with a sharp drop in nitrogen prices hastened a sudden change in market sentiment with buyers choosing to sit on the sidelines during this last fall fertilizer season.

A late harvest in North America exacerbated the situation. Slide eight shows that farmers in many regions battled the elements throughout November to get late maturing crops out of the field. In fact, many did not have the time to complete fall fieldwork.

For example, the Iowa Department of Agriculture reported that farmers had completed just 43% of their planned fertilizer application by November 30. This compares to a five-year average of 66% for the state.

All of these factors impacted our second quarter results and will impact us in varying degrees during the second half of fiscal 2009.

In looking forward I will comment about the immediate near-term outlook for the next six months, and then will comment separately on our outlook beyond our fiscal year end.

Prospects for the balance of 2009 hinge on how quickly demand returns which in turn hinges on two factors. The first is farm economics. As already noted and as shown on slide nine we are encouraged by the Santa Claus rally in agricultural commodity markets and estimates of record US farm income.

Since December 5, commodity prices have increased between 25% to 30%. If this rally continues through to the spring, then higher grain prices coupled with lower production costs for diesel, propane, and crop nutrients, will provide an added boost to farm economics and should provide the self-correction mechanism needed to reverse the current downturn.

The second factor is how quickly out of the money dealer inventories get work down along the entire supply chain. We expect that dealer customers will average down their inventory costs through new purchases at lower prices.

This along with lower retail prices eventually will facilitate movement of inventories through the pipeline. This difficult process will happen, but it may take some time.

As for the long-term, as summarized on slide 10, we need to remember that there are 73 million more people at the dinner table every year and diets globally are improving. Despite this, the world currently has access to historically low levels of grain and oilseed stocks and continued bumper crop production is an urgent priority.

Also there is a limit to the amount of arable land available for crop production. As a result increased crop production must come primarily through higher productivity and crop nutrients will be a primary driver.

Finally, there has arguably been insufficient investment in crop nutrition capacity in recent years creating the potential for new supply/demand imbalances until new capacity is brought online.

Just six months ago the world was focused on food security issues including food riots in many cities. This was brought about by long-term demand factors which are still very much at work, though they have been masked in the short-term by the global economic crisis.

Clearly the world still needs to produce a bumper crop in 2009 to meet projected demand and grain and oilseed markets are beginning to recognize just that. Slide 11 shows that back-to-back record harvests have barely moved the needle on the gauge measuring overall grain and oilseed stocks.

Another bumper crop is required next year to meet the demands for food and fuel as well as to build stocks to more secure levels. Now I want to conclude with a few points on what Mosaic is doing in this environment.

First we operate in markets that are global, cyclical, and commodity based. My management team accepts this fact and has extensive experience in all cycles of this business and we have just added a new senior executive, [Jock O’Rourke], who brings extensive global mining and operating experience to our team.

Of course no one has a crystal ball that will predict these swings in the market but we do know how to manage through these fluctuations.

Second, we are controlling what we can control. This starts with maintaining a highly disciplined approach to managing our business. We are reducing production as appropriate. We are taking steps to reduce planned capital expenditures even as we continue investing in projects to improve productivity.

We are also preparing to reduce costs more aggressively if the market remains soft. Finally, we are managing our balance sheet wisely and maintaining tight scrutiny of all operating and financial risks we face in this uncertain environment.

Based on my nearly three decades in this industry, I can assure you that even in the midst of these cold winter days, and let me tell you it is plenty cold here in Minnesota, spring is certain to follow. We expect that the strategic path we embarked on last year, namely focusing on growing our core potash and phosphate businesses, will stand the test of time.

Clearly we are experiencing some tough [sledding] right now but we are well positioned strategically and financially for when the market turns and we know that it will turn. I continue to have a great deal of confidence in the long-term outlook of crop nutrients and I look forward to discussing this with you in greater detail at our Analyst Day next week in New York.

Now we’ll be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of [Christan McDuffie – Unspecified Company]

[Christan McDuffie – Unspecified Company]

I noticed in your quarter that the debt declined by $66 million, could you tell us what you repaid in the quarter?

Lawrence Stranghoener

We opportunistically bought back some debt on the open market that was offered to us at very attractive prices, nothing more then that.

[Christan McDuffie – Unspecified Company]

Could you tell us which bonds debt you were repurchasing?

Lawrence Stranghoener

I’d have to get back to you separately, I don’t know off hand.

[Christan McDuffie – Unspecified Company]

The $746 million that you received from the Saskferco sale, did that flow through to your cash balances because I noticed you said it was held in Canada?

Lawrence Stranghoener

Yes that does, that is included in our cash balances.

[Christan McDuffie – Unspecified Company]

Looking ahead what do you think about working capital for the next quarter, do you think it will be a large use of cash?

Lawrence Stranghoener

Working capital is actually a source of cash in the most recent quarter as we collected a big chunk of receivables. Going forward we would expect inventories to build modestly from current levels until we see sales volumes increasing so I would expect it to be a modest net user of cash in the third quarter.

[Christan McDuffie – Unspecified Company]

So most of your expectations for a negative cash flow then comes from declining EBITDA as we look ahead for the third quarter not from any kind of one-time cash outflow, they’re from a working capital cash outflow.

Lawrence Stranghoener

Yes, that’s correct.

[Christan McDuffie – Unspecified Company]

Could you give G&A by segment?

Lawrence Stranghoener

I could do that but in the interest of time, let’s move on and I’ll get back to you separately with those numbers.


Your next question comes from the line of Vincent Andrews - Morgan Stanley

Vincent Andrews - Morgan Stanley

Wondering if you could comment on two things, first maybe any update on the Chinese potash negotiation and then secondly you commented that Brazil is going to remain difficult through fiscal 2009 whereas the rest of the business you’ve characterized as just at least through 3Q 2009 and I wonder if you could talk about what we need to see in Brazil for that market to improve and how much the outside of the Brazilian market is going to hinge on Brazil improving.

James Prokopanko

Two questions, China first, the China potash, those negotiations are under way and China will buy when China chooses to buy. We think its going to certainly be in the first half of the year perhaps the first quarter, and we’re optimistic that we’ll achieve a sale, another annual sale with China and that’s about all we can say on that.

As for Brazil a couple of things have happened, some of gotten more encouraging but overall its been a tough agricultural market in Brazil. We did have a period where the Real strengthened, now that’s reversed. The US dollar strengthened, so there’s been some encouraging news for Brazilian soybean farmers.

Its been mostly around some other crops along with the credit availability its been tough in Brazil with this global economic credit crisis, farmers and dealers have been impacted throughout Brazil so that is, that’s taken a bit of the bloom off the rose there. As well, sugar prices are down and some of the other non-oilseed commodity prices have been down.

So its just, they’re going through a tougher ag economy in Brazil then we’re seeing in North America for example.

Vincent Andrews - Morgan Stanley

Do you still expect that the Chinese to contract for higher volumes this year then last year and then just on Brazil what needs to take place to turn that market around, is it more government involvement from a credit perspective, higher crop prices, or what do we have to look for?

James Prokopanko

China, we’d hope they’re going to buy more. We’re not, I’m not going to make that forecast here on this call but we think they’re going to be, at least with we purchased, and perhaps higher then last year. What has to happen in Brazil, we have to see continued rally in Brazil in soybeans which we’ve been seeing over the last month.

We’ve seen the US dollar strengthen which is positive and we think with a little bit of time, by next harvest we’ll be seeing back to a normalized business in Brazil. We have higher inventories then we’d like to see, the whole market does in Brazil, and that will clear out with time and should be through by the summer months.


Your next question comes from the line of [Michael Picken – CRC]

[Michael Picken – CRC]

If you could a little bit about the current stalemate between the fertilizer dealers, farmers, you alluded to it a little bit in your prepared comments but just trying to get a sense of what sort of brings this stalemate to an end, is it just that the retailers are going to eventually cave in on pricing or do you think the farmers are going to start buying more and how long can the farmers wait before running a risk of shortage next spring.

James Prokopanko

Well you’ve got a dealer network that would like to recover their costs, which is clearly an understood imperative and they will along with what they can replace that product at, have to look at a new blended price and so we’re going to be getting closer to the point where farmers have to go to the fields and that time is going to start, we’re going to start approaching that certainly in the southern US come the end of January, February farmers have to make the decisions and start making their orders.

Dealers are then going to have to decide at which price they’re going to make the sale or farmers are going to choose not to put the fertilizer on. Its buy it or don’t and if you don’t buy it well you can rest assured that there will be less grain and there will be a market response in the months ahead.

So I think farmers understand that as well that prices have been rallying and I think there’s going to be greater incentive for them to apply normal nutrient levels to their fields.

[Michael Picken – CRC]

Just as you think about the global phosphate market do you think at this point given the cuts that you’ve made and some of your competitors have announced, do you believe that the level of the cuts have been sufficient to the point where we might start to see a stabilization of phosphate prices, and I know that’s sort of hard to forecast and then I know the China wildcard is also in there, but it looks like their government proposed a series of performs in the last two weeks designed to sort of help its domestic farmers and fertilizer industry and how do you see this potentially impacting you on the phosphate side.

James Prokopanko

It all comes down again to commodity prices and if we see stability in these commodity prices that we’ve used the last 30 days as any indication that we have and even some strengthening, we will see sentiments turn very quickly.

Right now we estimate that something less then half of the world’s phosphate production capacity is in operation. In other terms one-half of the production at least is shut down. We are starting to get to a period where you just can’t turn that back on in a day and ship all the product and have it there next week.

So you’ve got not just the phosphate producers that have idle capacity but you have the important links in the supply chain, rail companies that have idled rail capacity and I think we’re starting to really play a dangerous game of chicken here that its going to be too late to get product into some positions when the farmers actually want it.

We’ve got a matter of four or five weeks to get this system working again or there will be less fertilizer available for farmers to put on their fields. And in China with all that’s happening in the economics, they remain committed to keeping their agricultural sector vibrant, increasing production, and maintaining or lowering the cost of food. They don’t want food inflation going on at the rates of the last few years so they brought a lot of resources to bare to increase production.

So I think the Chinese are certainly going to certainly in country, use all the fertilizer they have in the past and perhaps a bit more and then what they have left over for export, the government has made it very clear that they are concerned about too much fertilizer leaving the country.

So our estimate is I think this year about 2.2 million tonnes of DAP and [MAP] will have been exported from China and we’re seeing that only being marginally higher next year, maybe 2.5, 2.6 million tonnes.


Your next question comes from the line of Mark Connelly – Credit Suisse

Mark Connelly – Credit Suisse

It sounds to me like there is a severe pinch on the supply chain and if we were to see normal demand patterns for farmers in the early spring, what’s your sense that we might have a panic buying, or a reversal in fertilizer prices?

James Prokopanko

The chance of a panic buying, the supply chain is full. If there is no shortage of fertilizer to go out to farmers that want to buy today and the next couple of weeks. In many parts of the country there is a second fill that takes place in season and if this is delayed much too long there is going to be a challenge to getting that fertilizer into position.

We’re not forecasting where these prices are headed. I think my judgment is, right now there’s much more upside then there is downside and what its going to hinge on is what happens to these commodity prices going forward.

Dr. Mike Rahm

I think that’s a good question and frankly I think we would have answered it differently a month or six weeks ago but the combination of factors such as the severity of the drop in shipments, the rally that we’re seeing in commodity prices, and as James commented before, the movement of power of rail cars out of position to move fertilizer to spring is beginning to raise concerns about the capability of the supply chain to deliver the tonnes that are needed this fall.

Our estimates assuming shipments in January remain dormant and pick up a little bit in February, peak shipments in March, April, May, we think for phosphate have to be 15% greater then the average that we’ve shipped during this period during the past three years and for potash probably 20% greater.

That is becoming an area of concern for us.

Mark Connelly – Credit Suisse

In the past you’ve had some lag in your DAP prices and you obviously had a good price realization this quarter, are we likely to see a continuation of this lag or because of revaluations and everything else will it decline in coming quarters?

Lawrence Stranghoener

We’ll continue to sell forward when the market rebounds as we always do and that necessarily means there may be a lag between our realized prices and current spot prices. It will depend very much upon the trend in spot prices and so prices will be what prices will be when supply and demand factors sort themselves out, but we’ll continue with the selling practices that have worked well for us and for our customers and that will imply that there will be a lag between spot prices and realized prices.

It happened on the way up and its happening on the way down and presumably it will happen again back on the way up.


Your next question comes from the line of Bob Koort – Goldman Sachs

Bob Koort – Goldman Sachs

On the inventory side, obviously we can see what you do from a producers standpoint with the TFI numbers, give us some sense of what’s going on at the dealer level and I think you mentioned that at some point they can average down their inventory with current prices, I’m just wondering what kind of buying capacity they might have and then I know you said you’re not providing a pricing forecast but I guess Lawrence had to have some price incorporated into that inventory write-down, can you give us some sense of what that price looks like relative to current pricing?

James Prokopanko

Many of the warehouses are full, but as I said earlier, the dealer warehouses are full or near full with NPNK, nitrogen, urea, phosphate, and potash. There is capacity for them to buy and certainly commit for a refill into those warehouses. Clearly with what’s happened in the markets and raw material costs everybody is being hyper cautious and doesn’t want to extend their commitments until they know a bottom has been put into the market.

And our observation is with the kind of questions we’re getting now and the inquiries from buyers, I think people realize that we’re, as I said earlier, there’s more upside from today’s prices then there is downside. So we’re starting to get a sense that people are ready to come to the table and begin to make some commitments.

Beyond that, these dealers had, many many dealers had an exceptional year last year. They’re perhaps going to give some of it back this year with prices that might be higher then replacement but you don’t run a business just for a year, it’s a multi year enterprise and I think many of the good and great dealers that I talk to, they understand that, that there’s up and downs and that there might be a bit of give-back this year and it was a great year last year.

So they’re come back to the table. I have little doubt and we’re seeing those early signs of it. And as far as the pricing, and no we’re just not going to go down that road and provide indication and yes, Lawrence, and our commercial team estimated but we’re going to keep that to ourselves for obvious commercial purposes.


Your next question comes from the line of Steve Burn – Banc of America

Steve Burn – Banc of America

To continue on that pricing front, can you confirm that the Moroccans have settled at least some first quarter [rock] prices at or above $250 a tonne?

Rick McLellan

There has been confirmation that they’ve completed some business at that level.

Steve Burn – Banc of America

Does that suggest that the non-integrated producers will likely remain idled until that pricing returns to say $550 a tonne?

Rick McLellan

I think that the biggest issue right now is with the amount of production that’s out, those producers are out as well and most people have inventory that they have to work their way through and so the impact will be muted as they work through that inventory.

Steve Burn – Banc of America

And then on potash, is your forecast for a sequential decline in your net realized potash price due exclusively to mix shift towards industrial, in other words have you seen any cracking in the fertilizer potash prices anywhere?

Rick McLellan

Right now we haven’t seen anything that shows that the ag business has shown any cracks and its strictly about product mix and we’ll be shipping more industrial in this quarter.

Steve Burn – Banc of America

Can you just quantify that, what percent of your potash shipments will be industrial this quarter versus normal?

James Prokopanko

Typically I think you probably know that roughly 15% of our shipments are industrial. It will be a higher percentage this quarter and I think we’ll just leave it at that.


Your next question comes from the line of Mark Gulley - Soleil-Gulley & Associates

Mark Gulley - Soleil-Gulley & Associates

Can you give us a bit of a sneak preview as to what you think will happen to application rates for P&K, let’s say North America for next year all-in?

Dr. Mike Rahm

Short answer is I wish I knew, but we’ve done some research with respect to our dealer customers and even with our farm customers and right now in our S&D, we’re baking in a 5% to 10% drop in the national average application rates for P&K. We expect that corn acreage even though some recent surveys show those numbers dropping into the low 80s, we think at the end of the day they’ll be in the mid-80s.

So based on that we have about a 10% drop in P&K usage in the US baked into our S&Ds.

Mark Gulley - Soleil-Gulley & Associates

Then on the raw material side, just a huge disparity between the spot prices of sulphur, ammonia, and of course what you show in your second quarter results, can you give us any flavor for when you think those spot prices get baked into what we see in your reported results on the raw material side?

Steven Pinney

On the sulphur realizations our inventories are very full at the moment. Its going to take some time into the next fiscal quarter before those inventories can be worked down. Part of that is dependent on how much of a reduction we take in the production side to work through those inventories, so I really can’t give you an accurate forecast of when we’ll actually see prices approaching the spot.

Mark Gulley - Soleil-Gulley & Associates

And finally you talk about a million tonne reduction in potash production, that’s compared to what? Compared to last year, compared to your previous guidance, just trying to understand what do I subtract a million tonnes from?

Lawrence Stranghoener

That would be compared to our capacity which would be roughly comparable to the original sales guidance that we had.


Your next question comes from the line of David Silver - JPMorgan

David Silver - JPMorgan

I’d like to ask the potash negotiation question a different way, last year for the first time I think India jumped the Q and concluded a large long-term potash agreement ahead of the Chinese and when I look out into the market today, I’m scratching my head and I’m saying, well it seems like from a customers’ point of view there would be a first mover advantage as well so from the [Capotex] perspective, is there interest from India or other large buyers looking to take advantage of kind of the uncertain market now and maybe cut themselves a better deal then if they wait for the Chinese to conclude their negotiations?

James Prokopanko

We, [Capotex] concluded a sale in the last month or six weeks to the Japanese and Koreans, so they were not as large as a Chinese or Indian sale, but it was a material size sale. And so they have a view that these markets are going to remain strong and I think that’s wise counsel with the curtailments that have been put in place or that have been announced, buyers shouldn’t dawdle over making the commitments and ensuring that there’s production available, product available for their needs.

We’d encourage the Indians to come to the table but right now it’s a negotiation that’s going on with the Chinese and that is the, that’s the largest new bit of business ahead of us.

David Silver - JPMorgan

You may have addressed this directly and I may have missed it, but should we assume that the inventory write-downs that you took and reported in the second quarter results, has that captured the bulk of what’s gone on in the market or is there some risk that post November 30, there could be some further downward adjustment that we see come through in the next quarter or two?

Lawrence Stranghoener

The write-down reflects our assumptions with respect to future selling prices and of course those assumptions may or may not be accurate. We believe we’ve taken an appropriately conservative view of that but until we see where prices settle out, once we start to see more sales transactions I can’t rule out the possibility of an additional write-down.

That would be surprising to us though if that were necessary.


Your final question comes from the line of Robert Goldberg – Unspecified Company

Robert Goldberg – Unspecified Company

I just wanted to follow-up on a comment in the press release that you expect operating cash flow to be negative at least through the third quarter, since you commented earlier that you don’t expect working capital to be a significant use of cash, I was just wondering how you would get to a negative number for operating cash flow since you do have about $90 million of depreciation. I’m wondering what, I’m assuming you’re not presuming a loss in the quarter so I’m wondering what else is in that calculation to come up with a negative number.

Lawrence Stranghoener

Well recognize that in the phosphate business virtually all of the volume we’ll be selling will be a zero gross margin and so you can draw your own conclusions about cash flow in that business. The primarily issue is that we just don’t see much sales volume. We have liquidated in effect a good chunk of receivables in the second quarter and so there’s not likely to be a net inflow of cash from working capital. In fact, as I mentioned earlier, there’s likely to be a modest net outflow with respect to working capital.

And so on balance I think people should be looking for weak cash flow in the quarter and we think it could well be negative.

Robert Goldberg – Unspecified Company

So just to summarize if the working capital outflow were to offset the depreciation and amortization in the quarter, the way that operating cash flow would negative is if you had a small operating loss I suppose.

Lawrence Stranghoener

And there would be other items that work there with respect to tax payments and such.

Robert Goldberg – Unspecified Company

Were there [stiffing] in tax payments in the November quarter or did they swing into the February quarter?

Lawrence Stranghoener

No there were substantial tax payments in the second quarter.

Robert Goldberg – Unspecified Company

So you would expect some of that to recur possibly in the February quarter or are those semi-annual payments?

Lawrence Stranghoener

Taxes are paid on a quarterly basis based on our estimates of what full year taxes will be and I don’t yet know exactly what I should be looking for in the third quarter but I’m just suggesting what some of the factors are that might lead to negative operating cash flow.

James Prokopanko

With that we’re going to conclude our questions and I’m going to just exercise my prerogative of having last word at least on this call. A few comments I want to make, first the Mosaic team really performed well in our second quarter by making the most of the market opportunities that we were presented and for making our own share of opportunities available to the company.

Our results I think for the second quarter demonstrate that claim. Second although the third quarter will have its share of challenges, my Mosaic colleagues are well equipped and prepared to manage and lead through this period.

Its important that I reinforce that this is just the kind of period we’ve prepared the Mosaic enterprise for by building a strong balance sheet, establishing a significant cash reserve, reducing our debt, and pursing operational excellence throughout our business.

Finally, I continue to have a great deal of confidence in the long-term outlook for our business and the urgent necessity for the world to continue to build on its capacity to produce food. Mosaic is playing a significant role in helping the world grow the food it so desperately needs.

We look forward to seeing you next week at our Analyst Day on January 12 in New York, take care everybody.

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