The Mosaic Company Management Presents at Barclays Americas Select Franchise Conference (Transcript)

May.21.13 | About: The Mosaic (MOS)

The Mosaic Company (NYSE:MOS)

Barclays Americas Select Franchise Conference

May 21, 2013 11:45 AM ET


Larry Stranghoener – EVP and CFO


Matthew Korn – Barclays Equity Research

Matthew Korn

Good afternoon everybody. I am Matthew Korn, the fertilizer and agricultural analyst at Barclays and thank you for coming into see Mosaic. We are very fortunate that we have Mr. Larry Stranghoener, here to speak with us today. He joined Mosaic as the Executive Vice President and its first Chief Financial Officer back in October 2004 as the company was being formed with the combination of Cargill Crop Nutrition and IMC Global.

Before coming to Mosaic, he serviced as the Executive Vice President and Chief Financial Officer of Thrivent Financial and prior to that, he held a number of Senior Management positions over 17 years with Honeywell in the US and in Europe including three years as CFO. And I am pleased to say that he began his career as a stock analyst with a firm that became Dain Rauscher.

Mr. Stranghoener is a Director of the Boards of Kennametal and Aleris International. He received his Bachelor’s degree from St. Olaf College in Minnesota and an MBA in Kellogg. We are pleased to welcome him to speak with us this morning. Thanks.

Larry Stranghoener

This afternoon, thank you, Matthew, thanks for the introduction. It’s a pleasure to be here. Every time I speak at a conference no matter what time of the day it is, I am told you got the prime slot. So, Matthew assured me this is the prime slot here this afternoon. So I am glad to see at least this many people in the audience.

So I am glad to be here to tell the story. I love telling the story of Mosaic. I think it’s a very good story. I hope you find it of interest. We are going to go into a bit more background about the company than we normally would do because my assumption is that perhaps we are not quite as familiar to many of you as we would be in typical conferences in the US.

So let me begin. Starting with our Safe Harbor of course. As Matthew said, we were formed as a new entity in 2004. We are the product of a split spin-off of Cargill’s Crop Nutrition business. As I think you might know Cargill is one of the largest private companies in the world. In 2004, they spun-off their crop nutrition business. It was about a $2 billion business. They merged it with IMC Global, another $2 billion business to create the Mosaic Company.

I am proud to say I was Mosaic’s first employee. I didn’t come from Cargill, I didn’t come from IMC. As Matthew described, I came from outside of the company. I have no idea what I was getting myself into, because we were born with way too much debt with very poor financial controls and processes, very poor systems, but we got the right people in the right place and created a great company.

Today, we are one of the largest fertilizer companies in the world. We have recently been spun-off from Cargill. Cargill after the creation of Mosaic, retained a two-thirds ownership stake, just about exactly two years ago, we undertook a transaction whereby they spun-off all of their two-third stake.

They did this for state planning purposes, fairly acute state planning purposes that they faced and we are now a fully independent company with far more flexibility to create our own future path. It also results in some interesting opportunities coming up this summer when the tail-end of this Cargill transaction takes place and I’ll describe more about that in a few moments.

Our mission is a very powerful and a noble one. We help the world grow the food it needs. It’s a mission that all of us at Mosaic take very, very seriously. And it’s a great motivator for our employees. Our vision is to become the world’s leading crop nutrition company.

Today, we are the world’s leading combined producer of phosphate and potash, as you might know there are three major crop nutrients, all crops need them to grow, nitrogen, phosphate and potash. We are by far in a way the largest producer of phosphate and one of the largest producers of potash in the world.

We deliver 19 million tons of products to customers in 40 different countries annually. We have a global footprint with facilities around the world. We have, as we say feet on the ground in key markets such as China and Brazil and India and elsewhere in the world. Our primary production facilities are in Canada, where we produce potash and in Florida in the United States where we produce phosphate.

Our vision outside is to be the world’s leading crop nutrition company and we’ll determine that as judged by our customers by the communities in which we operate by our employees and of course by our shareholders. Let me describe each of our businesses in a little bit more detail. We have five potash mines. Our three largest and primary mines are in Saskatchewan, Canada with two smaller facilities in the United States.

Our Esterhazy mine is the largest underground potash mine in the world. Our Belle Plaine mine is the largest solution mine in the world. Just to provide you with a little bit of context about the scale of these operations. If we are operating at peak capacity every day, we are moving 28,000 tons of product and equivalent of more than 250 rail cars of product per day.

We are in the process of expanding our potash capacity in Canada. We are two-thirds of the way through the first three million tons of an announced 5 million ton expansion program, you may be aware that just last week announced the postponement of the additional two million tons due to escalating capital costs; we’ll revisit that decision in the next year or two.

Potash is known as the regulator nutrient. It helps crops weather poor conditions such as drought. Potash is a salt; it’s a potassium carbonate bearing ore. Potash typically is mined deep underground. It’s a relatively simple mining process. It’s a relatively clean mining process. I suspect you’d be fascinated to visit our mine in Esterhazy where if you go underground 3000 feet, you’ll discover a city that extends 11 miles in one direction, 17 miles in another direction.

Global deposits of potash are well known. They are located in Canada and in Russia for the most part. As you see hereby on the slide, demand for the product has been a bit choppy over the last five or six years. We however look at this year as being a year of record shipments for potash. We are looking for a total of 55 million to 57 million tons of shipments. And we think we are on a path to grow this business, the market by 2.5% to 3% per year.

Our phosphate as said is located primarily in Florida. We’ve got a terrific complex of mines and chemical processing plants in Florida, unlike potash, the production of phosphate fertilizers are more complex process. It consists of mining phosphate rock which is the key value driver in the business.

At the same time, we produce sulfuric acid. We react the phosphoric rock with sulfuric acid to create phosphoric acid – excuse me. We then granulate that with ammonia to complete to make finished phosphate products known as DAP and MAP and we have just under 10 million tons of production per year.

We are a very low-cost producer in an industry that’s characterized by a very steeply sloping cost curve. We are at the very tail end of that cost curve.

In addition to our operations in Florida, where again we tightly coordinate our mines, our chemical plants in combination with a deepwater port that gives us access to markets around the world. We also have facilities in Louisiana with good access to Mississippi River and we have recently invested in a mine in Peru to give us access to more phosphate rock.

And most recently, we are very pleased to announce that we’ve entered into a joint venture to participate with Ma'aden in Saudi Arabia in a new 3 million ton phosphate production facility. This is a key part of our phosphate growth strategy. This will give us access to another 800,000 tons to 900,000 tons of product when it’s up and operating in 2016.

Phosphate is found in a number of regions of the world. The US has very large deposits. We have probably 30 to 35 years of reserves in the United States. Most phosphates reserves are found in abundance stretching from North Africa, Morocco in particular through the Middle East including Saudi Arabia. There are also deposits in Russia and in China.

As you see on the chart, over the last number of years, there has been fairly steady demand growth in phosphates and we expect demand to continue to grow at a rate of 2% to 2.5% per year. Our values of integrity, excellence, sustainability and connectivity are reflected in all we do are very values-driven organization.

We are very proud of the fact that we have gained significant external recognition for corporate responsibility including the fact that we’ve been ranked in Corporate Responsibilities Magazine’s top 100 companies, three years in a row now, not bad for an eight year old company and Ethisphere Institute recently named Mosaic one of the World's Most Ethical Companies in 2012. We are quite proud of those honors. And that’s reflective of how we do business.

From a shareholder standpoint, here are some key data points. We are about $25 billion in market value at our recent price of about $60 to $61 per share. With the Cargill transaction, we are now a liquid stock. 2.5 million shares trade per day. I’ll tell you in a moment, we think we are about to become more liquid because of some further transactions coming up. We have a dividend yield of about 1.6%. We look forward to growing our dividend in line with earnings growth overtime.

And we have, I think unquestionably the best balance sheet, the biggest balance sheet in the industry. We’ve acknowledged in fact that’s an inefficient balance sheet. We intend to become a more – we should have a more efficient balance sheet, which I’ll tell you more about in a few minutes.

Most importantly, Mosaic stock is leveraged to what we think is one of the more compelling long-term investment stories in the world, that being the food story. And, perhaps many of you are aware of this, but the food story is a story that’s going to be with us for many, many years.

It’s based on the fact that population is growing by some 75 million people per year. Diets are improving in many parts of the world, increasing demand for protein. All of this underlies very steady growth and very predictable growth in grain and oil seed demand.

At the same time, there is very little new arable land to come into production. And so, to get the yields that are going to be needed to feed the world, farmers around the world are going to have to look to improve seed technology, better irrigation prospects, - better irrigation and better crop nutrition practices and that puts us squarely in a key role to play in this food story.

To put this in some perspective, this is a data point that I still think should be fact check, but even if it’s only half right, it’s an eye catcher and that is, in order to feed this growing world, to feed this growing population to meet the demands for better diets. The world is going to need to grow as much food in the next fifty years as its grown in the last eight thousand years, that puts some perspective on this food challenge that we have and fertilizer of course is going to play a critical role in meeting this food need.

So with that as a backdrop, let me go into our strategic priorities and tell you how Mosaic will fulfill this mission of helping the world grow the food it needs. We spent quite a bit of time last year doing a deep dive on our strategic direction. This was appropriate in light of the divestiture of the Cargill’s stake. We certainly had far more strategic flexibility. We will soon have far more financial flexibility, and so we spent a great deal of time with outside advisors and looking at our strategic direction.

And we started with the premise that Mosaic is good at a lot of different things. We are a very large mining company with expertise in surface mining, shafts mining, solution mining and so we considered using that expertise to move into other kinds of mining. We are a very large chemical processing plant company with great expertise in chemical processing.

We considered getting into to other kinds of chemicals. We are a very large agricultural company. We know agriculture. We know farmers. We know farming. It’s in our DNA. We thought about getting into other kinds of agricultural services. We considered all of these in the context of this food story we talked about, in the context of other emerging mega trends.

In the end, we concluded that we are in a very good place sticking to our knitting. Being in the crop nutrition space, we concluded it’s the best place to be in terms of returns on capital, in the agricultural industry and we further concluded that being in P and K specifically are the best places to be in the crop nutrition real.

And so, we happily concluded that what we are doing is exactly what we should be doing and so in effect we are doubling down on what we are best at. Phosphate and potash and we want to be known as a crop nutrition company.

Our strategic priorities revolve around the notion of course of creating value for shareholders, shareholder return is one of our stated priorities, but we know that in order to create value for shareholders, we need to do a number of things well. And specifically, we need to invest in people. We need to g row the business.

We can grow partly through innovation and we need to ensure we’ve got market access for the products that we produce. We also think that financial philosophy is a key role in creating value for shareholders. Last week, as many of you may have heard, we outlined our financial management philosophy. I’ll talk more about that, but that also has a key role to play in creating shareholder value.

So, let me talk in turn about each one of these priorities of people growth, innovation, and market access. We do believe, perhaps with not much humility that we’ve got the best people in the industry. We will target this. We do think talent makes a difference.

One mark of this is that we’ve got the best safety record of any of our peers and we are often confounded by the fact that investors don’t seem to care about safety and yet I tell you should care about safety and I’d urge you when you are meeting with companies, especially in capital goods industries ask exact it is about their safety mindset.

It will tell you a lot about how good they are at operational excellence and how much they really care about their key resources, their people. That’s a key focus for us and we think it’s evidence of our excellence with respect to operational excellence. We are one of the few companies in the industries that can boast of a true track record of innovation. I’ll talk more about that that clearly is a reflection of the talent we have. We will continue to make investing in talent as top priority for our organization.

One interesting tidbit on this. We are good at moving people around. One of our most successful phosphate mines is our Four Corners Mine which h has been especially successful in the last couple of years in response to some challenges we’ve had with permitting new mines in Florida.

We recently moved the manager of that mine to head our Esterhazy Mine in Canada. And so there has been one remaining but he would move from Florida to Esterhazy Canada. You might ask, well, what is phosphate mining have to do with potash mining and the fact there is not a heck of a lot and yet this is all about leadership. So we moved a true leader, somebody who would exhibit the strong leadership capabilities in our phosphate mine to our Esterhazy mine and he is making a world of different set at that mine as we speak.

Ultimately, we want Mosaic to continue to be known as a company where people want to work and grow as individuals. So it’s a key strategic priority. The second key priority is growth and probably too many of you the most important priority. We understand that we need to grow cash flow and we are working on all of the levers of cash flow growth. Whether it’s top-line growth, whether it’s margin improvement, whether it’s working capital management, whether it’s the tax rate or capital expenditures, these are the five key cash flow drivers and we are working on all of them.

One of the key growth strategies that we have, as already said is the potash expansion program. We’ve got plans to add 5 million tons, nearly a 50% increase in capacity. We are being a little bit measured in the pace at which we do that. Ultimately, the world will need these tons. We can bring on this capacity at a much lower cost than any new Greenfield entrant to this industry could do. So this is going to be a key source of growth for us going forward.

And I am happy to say that the current projects underway are all on-time and on-budget. We have opportunities to expand our margin rate in the potash industry. We’ll recognize, we are not quite as good as the leading player in the potash industry. Our objective is to become the leading margin performer in the potash industry and we are working to accomplish that.

In the phosphate business, we don’t have the same sort of internal growth opportunities that we have in potash because we don’t have quite the extensive reserve base of ore in phosphate that we do had in potash nonetheless, we do have growth opportunities externally the Ma'aden joint venture, our joint venture in Saudi Arabia is an example. Further, we’ve got great opportunities to grow the value of this business by focusing on improved margins and improved asset efficiency and we are doing that.

One of the unique margin improvement opportunities in front of us right now is the possibility of investing in a new ammonia plant not to get into the merchant ammonia market but, we require 1.5 million tons of ammonia per year to produce 9 million tons of phosphate fertilizer.

We currently produce about a third of our needs ourselves at a cost of about $200 a ton of ammonia. We purchase the other 1 million tons at a price of about $600 a ton. So, we think it may will make sense for us to spend the capital to capture this margin differential, of course, we’ll need to make a determination as to whether that margin differential is likely to persist in the future. But it’s under active consideration as we speak. If we go ahead, if we have done this a few years ago, we would have captured five incremental points of gross margin our phosphate business.

The third priority is market access. I think this is an underappreciated part of our strategy. We are unique in our industry and that we are both a producer as well as we have distribution capabilities, wholesale distribution capabilities in key markets around the world.

Brazil is one area in particular, where we think that our ability to continue to have access to that market for our own produced products depends upon our ability to have port facilities, blending and bagging facilities, supply chain capabilities. And so we are investing on the order of hundreds of millions of dollars over the next few years to grow our distribution capability in Brazil and we’d look for similar opportunities in places like India and China if that were to make sense.

Distribution is not – we don’t think an attractive business in and of itself and so this needs to be understood in the context of being primarily a producer and ensuring again access to markets or the product that we produce.

Finally, the fourth strategic priority is innovation. I mentioned, we are one of the more innovative companies in the world. The evidence of that is a product called Micro Essentials. In our phosphates business, we have developed a proprietary technology whereby we embed so-called micronutrients essential nutrients for some soils, for some crops such as sulfur, zinc, boron.

We’ve developed a way to embed granules of those micronutrients into a granular phosphate fertilizer allowing a much more efficient distribution of those crop nutrients on fields and it provides farmers with a decided yield advantage to the tune of about 5% to 7% which translates into big dollars, which translates into a little value opportunity for us to sell what otherwise would be a commodity product at a higher price.

Today, we produce 25% of the phosphate products we produce are MES and we’ve got the capacity – we’ve got the ability should we choose to pursue it to convert as much as 50% of our phosphate production capability to MES overtime and we are evaluating whether or not that makes sense.

This is a product in high demand today despite the price premium. When I go to visit customers which isn’t as often as it should be, but one constant refrain I get is, can we get more MES. We are selective in who we allow to have it, but it is a very, very successful product, not only in North America, but in some other regions of the world.

We are also focused on process innovation. We are investing to reduce electricity usage in the phosphate business which is a very intense electricity user and so that will continue. That’s a further margin enhancement opportunity for us. And across the board, we look for process innovation to improve our cost structure and we are showing evidence of achieving those objectives.

So now just a few words about our capital management philosophy. I told you this is another key part of our TSR objectives. We have built, very deliberately a very big balance sheet and without getting into more detail than you care to, the tail-end of this Cargill transaction will happen now in the next number of months.

So as a result of that transaction, 129 million of our 425 million shares are held by a charitable trust and various Cargill family members who exchanged Cargill shares from Mosaic shares. Those shares have been locked up. Those lock-ups begin to expire this summer.

And so, we have built this balance sheet in anticipation of our desire to buy back some of those shares rather than having them come to the market. And so, we have indicated a willingness to move to a more efficient balance sheet with a primary objective in doing so to buyback a number of shares, returning capital to shareholders.

More specifically today, or at least by the end of our fiscal year which ends in - I guess next week, we think we have roughly $2 billion of surplus cash and at a targeted debt-to-EBITDA ratio of $1.5 billion, we would have $3 billion of debt capacity. So $5 billion of capacity that we are eager to put to use with a primary objective to use a significant portion of that $5 billion for share buybacks.

Should we be able to reach agreement with these shareholders with the shares that are coming off lock-up, complex transaction, I hope I conveyed the primary message, which is we look forward to returning capital to shareholders soon via a share buyback.

Finally, if we execute well on these strategic priorities that we have if we continue to pursue this vision of becoming the best crop nutrition company in the world, if we execute on our capital return objectives, we think we are in a position to deliver very strong value to our shareholders. We’ve got a great set of assets. We’ve got a great work force. We think we’ve got the discipline needed in this industry to execute on these priorities appropriately and so we see a very attractive investment opportunity for our shareholders and we are determined to see this through.

Again, I am very proud to be in the role I am at, at Mosaic. It’s a terrific company with again a noble mission. We are confident we are on a very attractive course for our shareholders. So with that, Matthew, I’ll stop and take whatever questions the audience might have.


Matthew Korn – Barclays Equity Research

Thanks, very much Larry and we’ll open it up to questions in the audience. Just let me – I’ll kick it off with just a simple one. As you mentioned, potash shipment growth over the past six, seven years has been somewhat soft relative to that of the other nutrients. In 2012, I think what’s particularly challenging is as you saw the contracting process for some of the Asian importers delayed for few months.

Can you talk a little bit more about what you are seeing so far this year that’s making you so optimistic to see a record year and whether this is a simply a reaction to price and a lot of price or is there something more?

Larry Stranghoener

Yeah, I think that prices have been declining to be sure, because in the potash market we’ve seen a case where supply has gotten a little bit ahead of demand. And the question we asking, potash is when will demand catch up with supply. We think that prices are now at a level where crop nutrients are very affordable. Farmers everywhere in the world are doing very well.

They are getting powerful signals to plant as much as they can to get the best yields they can and with crop nutrients, potash in particular at the current prices they are far more willing to buy than they might have been just six or nine months ago. And so as a result, as said, we think we’ll see record demand this year, even in places that have been stubborn in the past few years such as India and China.

We still have a long way to go to make sure they get back to their former peak levels, but we are starting to see good movement of product into those two key geographies. And of course, we are continuing to see very strong growth in Brazil, as you known and very strong growth in the Malaysia and Indonesia as well.

Unidentified Participant

Thanks, I wonder if you could talk about the perception that potash is going to go into the chemical, is going to go into oversupply over the next few years. If you could talk about that? And also, there has been disappointment this year about Indian demand last year and that is because they don’t have any capacity themselves within the country and so that – so they were subsidizing other competitive products?

Larry Stranghoener

I’ll address both of those questions. In potash, we are seeing new supply coming on-stream, it’s coming on as we speak. It’s coming on in our hands in the hands of other competitors of ours. What you typically see in commodity businesses like this is supply comes in stairs up fashion, whereas demand is more regular and so we are in a period now where I think, we think, supply has gotten a little bit ahead of demand and it’s created a bit of a sloppy pricing environment.

It’s why prices have been declining somewhat. That said, with the demand we are seeing now, record demand this year, assuming demand continues to grow at 2.5% to 3% per year, we will soon be in an environment where this capacity is absorbed, operating rates in the industry can increase and that sets the stage for an improved pricing environment going forward.

Over time, one of the key questions in this industry is, will there be new Greenfield entrants, a number of the big mining companies have announced intentions to get into this industry. Some of those plans have been scrapped as of late, others presumably are going forward.

It will be quite interesting to see over the next year or two what the supply picture by the end of the decade truly does look like. Longer term, by the next decade, we think this industry will need Greenfield expansions and the economics are such that, unless we see potash prices approaching $600 a ton, the economics we don’t think are there for Greenfield expansions.

With respect to the India subsidy issue, India has got a large political issue on their hands, because they’ve got a fertilizer subsidy regime which overincentivizes the application of nitrogen. And so, at the expense of phosphate and potash and it’s just as you say, it’s at least a – would say it’s partly they’ve got an indigenous nitrogen production industry and they do not have an indigenous phosphate or potash production industry.

This has got to change. Economic signs says this can’t continue if they continue down the path they are on, it will, they will pay a price in terms of yields, and given the critical issue of food security in this country, it can’t last, but we are dealing with a political issue and so it’s very difficult to predict just how when this might be resolved. We just know it has to be resolved.

Unidentified Participant

How this is being on?

Larry Stranghoener

This has been going on – it’s become an issue since the boom burst in this industry when fertilizer prices went sky high in 2007, 2008, the fertilizer subsidy bill in India reached an amount that was higher than their total defense budget.

And so, they clearly recognized, this was a problem and they are making tweaks to ever since, but the tweaks they’ve been making have penalized phosphate and potash at the expense of nitrogen and that’s what we need to work out of. Yes sir, another question in front. Wait for the microphone please.

Unidentified Participant

Thank you. Most recent data we’ve seen corn plant in the US picked up quite a bit over the most recent period, can you comment as to how that evolution belated as it was impacted your business up to now?

Larry Stranghoener

The planting season in North America has been much delayed, in fact, it might surprise you. I came to London for the better weather in London than we’ve been having back in Minnesota over the last few months. So it’s been a very late spring planting season. We’ve never been concerned about.

Planting always happens. Planting is so efficient in North America. It can all be done in the space of ten days if necessary. As you point out, last week was a week of almost record progress in terms of plantings. This crop will be planted, fertilizer will be applied, we think it’s going to as we projected a good – very good spring application season which followed a very strong fall application season. So the guidance that we provided remains intact. Things are happening as we anticipated they would.

Unidentified Participant

In terms of the US market, the supply chain has changed somewhat over the last few years, where lot of the inventory is still held on the producers’ balance sheet. How do you see that changing? Is that structural change that will be with us for the next several years? How do you see that evolving?

Larry Stranghoener

You are right. I think that, we think this is a structural change as much as we should warrant the case. This all stems back to the same boom burst cycle we had in 2007, 2008 when a lot of dealers and distributors, our customers got hurt very badly by having products that fell dramatically in price.

And they have become highly risk adverse ever since to the point where they are willing to take on how they are getting pricing risk whatsoever. So, it has fallen upon us as producers to take that price risk meaning that we are going to have we think permanently higher inventories and it’s permanently changed our approach to supply chain as well.

I think we’ve adjusted as I know we have at Mosaic, we are prepared to deal with going forward. If it ever changes, there is probably pent-up demand just to put the pipeline fill to the tune of 2 million to 4 million tons, but we truly don’t expect that.

The one possibility is because of the shakeout among dealers and distributors, we are seeing a consolidation, we are seeing much stronger players, much savior players with better balance sheets. Some of them have come to realize that whenever they wanted to take price risk they lose some opportunity and so, that maybe the one thing that causes it to change a little bit. But by and large we think it’s a structural change.

Unidentified Participant

I’ll ask another if I can. Mosaic is doing some preliminary work as you mentioned on debottlenecking and maybe even a new ammonia facility than in Louisiana. Could you discuss, we’ve been hearing about capital cost, labor cost increasing done in that region. Could you maybe discuss a little bit how you are evaluating, where you in evaluation of their project and when we might hear more about it?

Larry Stranghoener

Yeah, I described in my comments, our ammonia position. We are short 1 million tons of ammonia. We hate the fact that we are paying $600 a ton for that ammonia. So we are well into the process of fund an engineering for a new ammonia plant that would make us self-sufficient.

So the equation that we’ll have to solve for is, what do we think the long-term supply demand price of ammonia is, the long-term supply demand price of natural gas is, compared to the capital cost of this project. And we are coming to a final conclusion, ultimately it’s in our interest to have more ammonia capacity which should reduce the price of ammonia.

There have been, I think, 29 ammonia projects announced in North America and we are trying to sort out how many of those are real and how many of those are fake. So, we’ll see, we’ll be making a decision by the end of this year and it will be based upon that calculus that I just described. Yes, ma’am. Could you wait for the microphone please.

Unidentified Participant

Thank you. In relation to the China and India story, the food story, has something changed in relation to the amount of potash and phosphate that should be being applied is being applied?

Larry Stranghoener

I think, a couple of things have changed for the worse, in India the subsidy issue that we talked about and so, the amount of potash being applied in India is 2 million tons to 3 million tons lower than it was just a few years ago, even now they are producing more now.

So, ultimately, to get back to what we would consider most agronomist would consider to be balanced nutrition ratios, they need to be applying at least 3 million tons more potash. And the ability to get there depends upon the comments I made earlier about changes in their subsidy system.

In China, it’s a little bit different story. It’s – I’d say, it’s more a matter of their buying power and their willingness to take a holiday with respect to potash and take the chance of lower yields because, they don’t like, frankly the structure of the potash industry. And so, they are very tough negotiators on price even at the point of perhaps being penny wise and pound foolish backing away from market not taking as many tons as they had in the past.

They are too, I think, they are down probably about 2 million tons from their peak level. It’s starting to grow at the end, no. And so, I think with potash prices having come down, affordability being what it is. I think we’ll see a good path forward in China from here on now.

Unidentified Participant

So, can I just ask quickly, is there any relationship between potash and what Monsanto is doing, does that affect the demand for potash?

Larry Stranghoener

Not that I am aware, we are not aware of any – maybe Matthew, I just – or somebody you may know more, but, we are not aware of any seed technology research being done that would lessen the demand for phosphate or potash. There is some more things done to improve the ability for seeds to absorb nitrogen.

But not – no, we are aware of anything with respect to phosphate and potash. In fact, just the opposite, we think as seed technology improves, as yield move from 160 to 300, it’s going to require more nutrients. The key methodology to get these higher yields would be much tighter spacing of plants which we think will require more use of crop nutrients to achieve those yields.

Unidentified Participant

In terms of the Cargill, you’ve got to do the call last week. Why last week, if negotiations can only start in about five days, can you just sort of give us an idea here as to what is your strategy to pursue this clearly? You are prepared to purchase the shares, but do you have a high degree of confidence that the first tranche will in fact come to market? Can you maybe, elaborate a little bit further on your prior comments?

Larry Stranghoener

We did this call last week to outline our capital management philosophy, just because, we recognized, we were going to move from an abnormal balance sheet to a normal balance sheet and without information from us, investors were speculating what that normal balance sheet would look like, we were concerned that expectations were getting out of line, we wanted to make clear statements about how we view capital management philosophy.

So, it was partly just to help set the stage for what’s going to be happening this summer and give some people some boundaries within which to work with respect to what to expect. I don’t know how this is going to play out, that’s the honest frustrating truth of this and then a bit of it is awkward position of negotiating in public with the other two parties to a transaction and then also in this awkward position of – it won’t be all that of stock price decline before we do a big repurchase and yet no CFO wants to see a stock price decline.

So it’s just an awkward period because of the way this deal was structured. And so, literally, until we can start the dialogue with the other parties which starts next week and we learn what their appetite is for selling their shares, when? Whether they are interested in amending current agreements to allow for different approaches to disclosing their shares? I can’t be any more specific or give anymore guidance than I am giving.

Unidentified Participant

Practically, if there is not an agreement to purchase from Cargill, when could you come to the market in any way, shape or form to purchase on the open market?

Larry Stranghoener

November 26, six months after the May 26 date.

Unidentified Participant


Larry Stranghoener

Then we have and credit ability to repurchase shares to directly purchase shares, whatever we should choose to do, the agreement no longer is an issue for us at that point.

Matthew Korn

With that I think we are at the end of time. We thank you all for coming. Thank you Larry again for coming and speaking with us and have a great rest of the day. Thank you.

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