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The Mosaic Company (NYSE:MOS)

Company Conference Presentation

May 22, 2014, 08:00 AM ET

Executives

Lawrence Stranghoener - EVP and CFO

Analysts

Joel Jackson - BMO Capital Markets

Joel Jackson - BMO Capital Markets

Good morning, everybody. Welcome back to Day 2 of the 2014 BMO Farm to Market Conference. I'm Joel Jackson. I cover fertilizer at BMO and I'm pleased to host Day 2 of the conference along with my colleague, Ken Zaslow.

Because of the unique line up of companies, we have our largest conference this year. We have more than 600 investors, industry contacts and management teams from all continents except Antarctica. We're pleased that the companies from last year returned and a lot of companies have come for the first time this year. So we expect – between today and yesterday we're hearing from senior execs from more than 50 leading private and public companies across the agriculture, fertilizer, proteins, specialty foods, distribution and retailer sectors.

So today Ken and I are going to bring you a great line of executives spanning the fertilizer and agro business industries. Our goal yesterday and today is to help investors begin to explore the key issues confronting fertilizer and agro business and hopefully you'll come away with some investment opportunities.

So we expect a comprehensive discussion of the main issues facing the sectors today. Let's talk about those first and probably the single greatest issue facing our sector. How will companies deploy the largest levels of cash we have seen in years? Many management teams are at critical crossroad to deploy capital to deliver consistent and more predictable results by focusing on internal opportunities, acquisitions or return of capital to shareholders.

Second, where are the opportunities and pricing implications associated with the potential for abundant crop, global crop availability? On the other hand, how are companies preparing if the U.S. crop falls short of expectations. Third, how are Indian subsidy schemes and seemly relaxed Chinese export policies impacting global fertilizer demand, price and trade flows? And will last week's election of the BJP in India change anything?

Fourth, in nitrogen will lower Chinese coal price in export tariffs reduce the nitrogen price flows and pressure earnings? And fifth and finally, 2014 represents a year for potash with prices about $100 a ton lower than last year and there are many questions surrounding producer discipline, volume relative to price, demand growth and capacity additions.

So before setting up for today's presentations, I want to thank our amazing global sales force, our devoted editorial staff, our tireless conference coordinators, everybody else with their commitment and remarkable effort to making this event happen.

Let me quickly walk through some housekeeping items. Number one, we have a very comprehensive reference guide for all the sectors in our conference book. It should help you navigate the fundamentals discussed yesterday and today. So please take a look at our book. They are available in the foyer if you haven't gotten it yet.

Second, each company's presentation will be split between a formal presentation and a Q&A session. So during the Q&A we want you to ask as many questions as possible. If we don't see your hand, please interrupt us. We want your questions answered before ours.

Third point here is really we have an app that hopefully you downloaded for the conference here and you can actually ask questions via the app from your mobile device. It puts the whole conference at your fingertips and we'll be checking for questions during the session from the app. If you have any questions about the app, please check with our team at the hospitality desk in the foyer.

Finally, let me draw your attention to the screen for a short video with some important conference details.

[Video]

Let's start the presentations with Mosaic, one of the world's largest producer of phosphate and potash fertilizer. So Mosaic has been shifting its strategy over the past years and what has been a volatile past year for both the phosphate and potash markets. Mosaic is investing in a Saudi phosphate joint venture, recently announced the acquisition of ADM's Brazilian distribution business and acquired CF phosphate business. The company has nearly completed the balance sheet transformation. Speaking today is the Executive Vice President and CFO for Mosaic, Larry Stranghoener.

Lawrence Stranghoener

Good morning, all. Thank you, Joel. It's always a pleasure to be at the BMO conference. You folks do conferences very well and we're pleased and honored to be here. I'm honored to have the 8 o'clock kick-off slot. Good morning to all of you early birds. It seems no matter what time I speak, I'm told that's the best time of the day to speak, so I'll take you at your word and say this is the best slot of the entire day, so we're pleased to be here.

I'll remind you as we start of our Safe Harbor statements and then I'll start my comments by giving you a quick overview of the industry as we see it and why we at Mosaic are such strong believers in the long-term fertilizer story. You've heard Jim and me, Jim our CEO and me talk about the foods story many times. Clearly the agricultural industry is volatile but the long-term outlook for food demand and thus for nutrient demand is highly compelling.

Since 1980 farm yields are up by nearly 60% but they're still struggling to keep up with demand growth because global population and human prosperity are both on the rise. Farmers around the world need sustainable yield improvement and crop nutrition is key to achieving that.

The recent and current operating environment has presented challenges for us but has also created investment opportunities for us and for you. Through the winter and still today moving product has been more difficult than in any year in recent history. A very harsh winter in Canada combined with a shortage of locomotives to move increasing volumes of Canadian commodities has restricted our ability to ship potash. The cold weather also left rivers frozen later into the spring than usual. While these conditions have mostly had a negative impact, one positive upshot was that our customers were willing to take on more risks to ensure they had product when they needed it this spring.

The markets for our two nutrients have been somewhat divergent recently. Prices for phosphates rose dramatically late in 2013 due to strong global demand and logistical problems encountered by some of our competitors. Prices have moderated recently with Chinese exports coming to market and shipping concerns abating. For the second half of this year, we think demand from India and the supply volumes from China will go a long way towards shaping prices.

In potash demand has been and remains quite strong while prices have remained near the floor established late last year, primarily because of new supply coming into the market. The second half market outlook will depend on Indian demand and the resolution of logistics challenges.

Now I'll talk more specifically about Mosaic and the very significant strategic steps we are taking. First, a bit of background. As Joel described, Mosaic is the world's largest combined potash and phosphates producer in the world and the most balanced with the 11.5 million tons of phosphate capacity annually and currently 10.7 million tons of annual potash capacity.

In phosphates we have the largest reserves in North America with about 35 years of remaining rock reserves in Florida, though I should note that we've been saying we have 35 years of reserves for as long as I've been here which is 10 years now improving processes, improving technologies, keep extending the useful and profitable life of our mines.

Our MicroEssentials premium phosphate product is a clear differentiator and we are growing our production capacity to about 4 million tons per year or nearly a third of our total phosphates capacity to meet fast-growing demand. Finally in phosphates, I'd note we have a logistical advantage in serving the North and South American markets and to India with our Saudi Arabian joint venture.

In potash we are the second largest North American producer with current operating capacity of 10.7 million metric tons and expansion projects underway that will increase our capacity to 13 million tons per year. In potash we have access to at least a century of very high quality ore.

I'd like to spend some detail on costs, some time going through detail on our costs, which are a paramount concern to us, especially when we are at the troughs of cycles. At Mosaic we view low cost production, low cost operations as a cross cycle priority and we are taking significant steps to improve our position.

First, let's look at phosphates as shown on this slide. Our Florida operations are in the lowest quartile of production costs in the industry and this includes the newly acquired CF Industries facilities. As we have discussed a number of times we have additional plans to take $200 million of cost out of this business unit over the next five years which we expect will offset inflationary pressure and will further enhance our very attractive position on the industry cost curve.

We have also taken important strategic steps to build the phosphate business and I will touch on that shortly. In potash the cost curve is much flatter across the industry and we are well positioned, especially so that we exclude the cost associated with brine management at Esterhazy. This chart shows cost on an FOB port basis. We have a much stronger position for product delivered to North America. In this business also we have plans to remove $200 million of cost over the next five years and I'll show you some data about how that will improve our cost curve position.

While we're talking about our expense reduction plans, I'd also like to note we recently unveiled plans to remove close to $100 million of cost in our corporate support functions over the next few years. We undertook an exhaustive review of our support functions, the activities they performed and we've developed plans that will allow us to appropriately serve our business units but to do so much more efficiently. Overall then we've committed to more than $0.5 billion of cost savings over the next five years and I know we have a meaningful amount of compensation tied to achieving those goals.

Now, as said, I'd like to dig deeper into our potash production costs where we see opportunity in the years ahead. While potash market fundamentals are stable, prices are still relatively low and it is likely we will not be producing anywhere near our top capacity for a few years. This chart shows 2013 actual MOP production with enterprise cash costs of about $140 per ton, and with Esterhazy, the world's largest potash mine, at the low end of our underground mine costs even with brine inflow costs.

The Belle Plaine mine shown here is a lower cost operation now because it is a solution mine whose cost depend heavily on the cost of natural gas. And like most market watchers, we expect natural gas prices to stay low for the foreseeable future. The smaller mines depicted here, Colonsay and Carlsbad, are higher costs primarily because they just don't have the capacity of Esterhazy. High volume production is obviously cheaper per ton.

Now let's look at this in a different way. As an example, if we optimize production across our mines, average enterprise cash cost would decline to the low $120 per ton. This means that if we simply maximize production at our lowest cost mines maintaining our current overall annual potash production, cost would decline. Note that this does not include the additional cost reduction programs that I discussed a moment ago.

Now here's the big potential shift. When our new K3 mine shaft is up and running, it's low cost production will give us the option at some point to reduce brine management expenses either in part or in total. We don't expect this scenario to play out until the next decade but if or when we make this decision, cash cost for the entire potash business would decline to below $100 per ton and Esterhazy cash cost would be below $80 per ton which would likely make this the lowest cost potash mine in the world.

In the near term when the K3 shaft is in operation, the potential impact of an uncontrolled brine inflow declines significantly. This in turn will allow Mosaic to evaluate and likely reduce our current annual brine management spending. As you can see we are adapting to potash industry realities. We are well positioned today and will be in great shape in the future and when fundamentals improve.

Now let's turn and look at the remarkable progress we're making on our strategic priorities. By now all of you who follow us know these priorities. We are delivering tangible gains as we execute our strategies related to people, growth, market access and innovation and we believe good execution on these priorities will drive shareholder value.

Consider this list of accomplishments for just the first few months of 2014. We closed the CF Industries phosphate acquisition, I'll cover more detail on that in the next slide. More recently we announced that we have agreed to acquire ADM's fertilizer distribution business in Brazil and Paraguay, and I'll also provide more detail on that in a couple of slides.

We have made significant progress on the financial front as well. We have repurchased or committed to repurchase about 12% of our outstanding shares and we are approaching our clearly articulated balance sheet targets. In addition, we have committed the necessary capital to expand production of MicroEssentials and we've made all this progress in operations while continually improving our safety performance, a critical priority for us. And as already noted, we continue our focus on enterprise wide cost savings.

We are well along the path of integrating the former CF Industries phosphate operations and we remain extremely pleased with this transaction. The two cultures are a great fit and the 700 CF employees that we have inherited are energized and highly engaged. As we announced on our last earnings call, note that we will have zero margin on finished product that comes from this acquisition per accounting rules. This impact will largely be confined to the second quarter. That said our appealing financial projections for this transaction have not changed. We expect meaningful synergies and accretion and we expect to complete our integration by the end of this year. And don't forget that we will enjoy the benefits of our related CF ammonia supply agreement beginning in 2017.

The ADM deal likewise holds great promise for our international distribution business. It allows us to cancel elements of our previously announced organic investment strategy and accelerate our growth in this large and fast-growing region of the world. We are targeting to close this deal around the end of this year. We expect to increase our market share in Brazil and we will have facilities in key strategic locations in that country as well as in Paraguay.

In addition, this deal will allow us to capture more of the significant incremental margin we derive from our MicroEssentials product line. As you may know, we capture roughly 20% of the incremental value of our MicroEssentials product with the other 60% going to farmers and 20% going to distributors. In Brazil, where we have our own distribution capabilities, we captured 40% of that value. The new MicroEssentials capacity expansion I described earlier and the ADM transaction will complement one another very nicely.

So now onto a few comments about our balance sheet and capital priorities. We have clear cut and consistent priorities for our cash. First, we will maintain our investment grade ratings and financial flexibility including a sizable liquidity buffer. Second, we will set aside the capital necessary to sustain our operating assets and our annual dividend. Next, we will invest in organic growth, pursue acquisitions and joint ventures and finally return excess cash to shareholders.

We have consistently generated strong operating cash flow including over $600 million in the challenging first quarter business environment. Our cash flow combined with our very strong financial foundation have enabled us to make major investments for growth while returning substantial sums of capital to our shareholders. We are well on our way to achieving our balance sheet targets by the middle of this year including our 1.5 to 2 times adjusted debt to EBITDA goal as shown on this slide.

Here's a more detailed look at recent capital commitments. One thing that I think has been somewhat overlooked recently is the number in the upper left hand corner of this chart. Nearly $9 billion in capital commitments have been made in the past two years all of them entirely consistent with the philosophies I mentioned and all of them fitting well within our ability to fund.

To put it succinctly we are making major investments, taking advantage of cyclical opportunities to drive value creation and returning excess cash to our shareholders. On the latter point, note that we have repurchased or committed to repurchase over 12% of our outstanding shares. We have a positive outlook for Mosaic's future and our actions will allow us to fully capitalize on that outlook.

In summary, here are our key messages. Mosaic is the largest combined P and K producer in the world. We ship product to customers in roughly 40 countries which gives us important geographic diversity. We have a very strong financial foundation with clearly articulated policies and priorities. During this challenging market environment we are making major strategic strides. The ADM and CF acquisitions and the ammonia supply agreement that accomplished the CF transaction, for example, and also the decisions to exit businesses that don't produce appropriate returns on capital such as our Hersey potash mine and our operations in Argentina and Chile.

Maybe most important our management team has been together for a long time, we've been through cycles, we don't get too excited in the up cycles, we don't get too down in the down cycles. We're very well prepared to thrive across the cycle and adapt to change. We believe in our mission of helping the world grow the food it needs and we're determined to become the leading crop nutrition company in the world.

Thanks for your attention. With that, Joel, I think we've got time for questions.

Joel Jackson - BMO Capital Markets

Yes. Please raise your hand to ask a question. You can also submit questions today on the app.

Question-and-Answer Session

Unidentified Analyst

Good morning.

Lawrence Stranghoener

Good morning.

Unidentified Analyst

Seeing as you're being so aggressive about taking cost out of the business and moving lower down the cost curve, why does it still make sense to produce at Carlsbad absent K-Mag?

Lawrence Stranghoener

I think that's a fair question. Carlsbad has important geographic distribution capabilities. It's not a very large mine but it's a way to serve the Southwest and Western part of the United States very cost effectively. As we look to optimize our operations as noted in the one slide, I think that's a strategy that we'll need to continue to evaluate in the future.

Joel Jackson - BMO Capital Markets

Larry, we saw a couple of weeks ago PotashCorp strike an alignment with OCP out of Morocco, such that PotashCorp would distribute OCP's phosphate products into the continent. Maybe talk about your views if that would change the North American phosphate industry?

Lawrence Stranghoener

That certainly caught our attention as well, Joel. We've had a long relationship ourselves with OCP. We've been a significant customer of theirs. I think it's noteworthy that neither company issued a press release on their own. I think that should tell you that neither company saw it as a material transaction. Our understanding and belief is that this is a way for PCS to continue serving its current phosphate customers in the wake of production outages in their own operations. We don't think it's much more than that at this point.

Joel Jackson - BMO Capital Markets

It's a quiet room this morning.

Lawrence Stranghoener

It's early.

Joel Jackson - BMO Capital Markets

Why don't we ask about Ma'aden? So what are the opportunities to – is there a Ma'aden III out there? Is there a Ma'aden IV out there? And what would Mosaic's role be in that?

Lawrence Stranghoener

We're delighted to be a partner with Ma'aden in Phase II. As many of you know, Ma'aden Phase I has struggled a bit to get to full production. I think partly as a result of that, they sought us out as a partner on their Phase II project. That project is well underway. This will be a $7 billion, 3.5 million ton per year production facility. It will be without question I believe when it is up and running in 2017 the lowest cost phosphate production operation in the world and we're thrilled to have a 25% stake in that operation as well as a 25% share of the output from that operation. There are plans to go on to Phase III, Phase IV and beyond in Saudi Arabia and we would like to be part of those projects and have every reason to think that we will be provided continued good success with Ma'aden Phase II.

Joel Jackson - BMO Capital Markets

Okay, I have a question on the app and it is can you please provide a bit more clarity on the types of strategic partnerships and/or JVs that Mosaic is pursuing that you mentioned in your presentation?

Lawrence Stranghoener

The most critical JVs that we have are in place are the Ma'aden joint venture that we just spoke about and I just gave some color as to why that may be important beyond just Ma'aden Phase II. Beyond that we have a joint venture with Vale in Peru, the Miski Mayo mine which is an important supplementary source of rock, a nice edge onto our mines in Florida. There aren't any other joint ventures of particular note. We have sulfur supply, logistics supply chain agreements with Gulf Sulphur Services which is an important but probably not material joint venture. And I can't think of any other joint ventures – Anton, can you – that would be noteworthy at this point in time. I think as with acquisitions, we're always looking for opportunities to grow in a way that would enhance value for our shareholders but there's nothing on the radar screen right now that it's worth noting for the audience on that front.

Joel Jackson - BMO Capital Markets

Larry, you have about a $1 billion authorization beyond the MAC Trusts buyback program, about $1 billion of authorization for share repurchases. I think you've committed to about $400 million of that $1 billion. What should we expect for the rest of that program?

Lawrence Stranghoener

We have been – I believe we certainly have attempted to be quite clear about our capital priorities, so we laid out our plans in some detail last summer about this time and we have largely executed on those plans. We believe at the balance sheet targets that we specified as I showed in the slide and while it's true, we have some remaining authorization under the current share repurchase program, we're likely going to stay on path until such time as we generate more cash to pay debt down to the 1.5 times level at which point we'd feel comfortable again returning excess cash to shareholders. But we have that additional authorization. I don't think investors should look for a lot of activity from us for the rest of this year beyond what we've already committed to with the MAC Trusts through repurchase agreements that extend through the end of July of this year.

Joel Jackson - BMO Capital Markets

There's a question which is if you could please elaborate on how you're reducing corporate overhead by $100 million?

Lawrence Stranghoener

I'll take you through a bit of a history journey I think to help understand them. Mosaic was founded just about 10 years ago and at that time we were not ready for prime time, so to speak. We didn't have the right processes in place, the right systems in place. We didn't have the right people in the right places. We had too much debt and we needed to spend a lot of money to be a fully functional public company. We got a little bit of wind in our sales. That's about the two or three-year mark to the company had money to spend and we put in place more than adequate systems and processes and probably more people as well than we needed as we sought to overcome the significant weaknesses we had at the beginning. I think that as the years have gone by it's become clear especially as we need to adjust to realities in the potash industry that we didn't need quite as high a level of service from our corporate functions to our business units as we were providing. So we've taken the opportunity to look in great detail, painstaking detail at all of the activities we performed in our corporate support functions and came to the conclusion that we simply did not need nor could we afford to do everything we've been doing. And so every one of our support functions has been eliminating activities and therefore eliminating the people that are associated with those people some more than less. This is a very strategic thoughtful approach. This was not an across the board. Everybody shall cut 15%, but we think the end result will be a much more effective and efficient corporate support function, a set of corporate support functions that are aligned with the realities in this industry right now.

Joel Jackson - BMO Capital Markets

So the next question is, are we at a normalized potash price or do you see any additional recovery and in what timeframe? And then what needs to happen for downside or upside to occur?

Lawrence Stranghoener

I think we've hit a bottom in potash pricing. We've seen a bit of recovery off of that bottom. We think that because of very strong demand and that's really one of the key messages we'll be imparting during our one-on-one meetings today, the demand picture for potash is really quite strong. We think it will remain strong through the end of this year and further we think that has to happen to eat into the excess supply the industry now faces. I think as you know in commodity businesses, supply comes on in stair-step fashion, demand grows in a more linear fashion. Right now supply is ahead of demand, so as we look out in the second half of the year, we do see this strong demand growth beginning to eat into excess supply. We think that may pave the way for modestly improving prices as we head into the second half of the year. But all of that said there still is a supply/demand imbalance in favor of supply that's going to provide headwinds I'm afraid for pricing for some time to come in this industry. So off the bottom to be sure, room for some modest recovery because of very strong demand, but I don't think we're off to the races any time soon with respect to potash prices.

Joel Jackson - BMO Capital Markets

Maybe following up on that, specifically in North America there is a lot of supply coming on from a lot of your partner/competitors. One of your customers, Agrium, is adding a lot of capacity this year – well, finishing it this year and bringing it on the next few years. How do you see sort of North America playing out with all the new capacity coming on?

Lawrence Stranghoener

Yes, North America will be an interesting market over the next two or three years as Canpotex numbers add new capacity. I think most of you know that the primary outlet for export sales for Canpotex numbers is through Canpotex where allocations are controlled by production volumes. So any excess production capability almost necessarily has to find its way into the North American market and we'll see how this plays out over the next two or three years. I think it's likely that we'll see less room for imports in the North American market due to the factors you just addressed, Joel. So that's how we see that playing out.

Joel Jackson - BMO Capital Markets

In your ADM acquisition this year, maybe talk about some of the – elaborate on some of the rationale for that in terms of pushing more MicroEssentials into Brazil, maybe being able to have more ability to move some of the incremental phosphate you picked up from the CF acquisition, maybe some other rationale too?

Lawrence Stranghoener

Yes, Brazil needs to be understood. It's a different market where retail distribution is critically important. Brazil is a market of very large retail farmers. I was in Brazil just a few months ago, for example, I visited one 20,000 acre farm where the farmer actually had a 100 row planter, imagine that, a 100 row planter. So the scale of the farming there is unknown to North American farmers. So, as a result, the industry is different. The distributors co-ops don't play as meaningful a role. You need to be able to serve farmers directly and to do that you need blending and bagging facilities and you need access to ports. And so we've had that presence for some time in Brazil. We've got about a 12% or 13% share of the distribution market in Brazil that already provides an important element for our own products. We saw the opportunity to expand that distribution footprint. We had embarked on our own internal investment program to accomplish that. When the ADM acquisition came up it allowed us to accomplish just about everything we wanted to in one fell swoop in geographic areas that were very complemented to our own with facilities that are in great condition. So this is very much aligned with our strategy for market access for providing access to our products in Brazil and for enhancing the value of our MicroEssentials sales. I see that our time is up. Thank you all for your attention. Good luck today.

Joel Jackson - BMO Capital Markets

Thank you, Larry.

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Source: The Mosaic Company's (MOS) Management Presents at BMO Capital Markets 2014 Farm to Market Conference (Transcript)

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