The Mosaic Company F2Q08 (Qtr End 11/30/07) Earnings Call Transcript

Jan. 9.08 | About: The Mosaic (MOS)

The Mosaic Company (NYSE:MOS)

F2Q08 Earnings Call

January 9, 2008, 10:00 a.m., ET

Executives

James T. Prokopanko – President, Chief Executive Officer

Lawrence W. Stranghoener – Executive Vice President, Chief Financial Officer

Richard N. McLellan – Senior Vice President, Commercial

Christine Battist – Director, Investor Relations

Analysts

David Silver – J. P. Morgan

Marshall Reid – Banc of America Securities

Edlain Rodriguez – Goldman Sachs

Donald Carson – Merrill Lynch

Brian Yu – Citigroup

[David Batnick] – Barclay’s

Mark Connelly – Credit Suisse

Michael Judd – Greenwich Consultants

[Charles Neverd] – Morgan Stanley

[Bob Gullberg] –Asset Management

Operator

Good morning, ladies and gentlemen, and welcome to The Mosaic Company’s fiscal 2008 second quarter earnings conference call. At this time all participants have been placed in listen-only mode. The floor will be opened for questions following today’s presentation.

Your host for today’s call is Christine Battist, Director of Investor Relations of The Mosaic Company. Please proceed, Ma’am.

Christine Battist

Thank you and welcome to Mosaic’s fiscal 2008 second quarter conference call. Joining us for the call this morning are Jim Prokopanko, President and Chief Executive Officer, Larry Stranghoener, Executive Vice President and Chief Financial Officer, as well as other members of Mosaic’s Executive Management Team.

Before I turn the call over to Larry for opening remarks I have two reminders. First, we will be using some slides during the conference call today. You may view the presentation slides simultaneously with the audio webcast. The presentation slides are available on our website at mosaicco.com/investors. The slides enhance our conference call, but are not a requirement for the call. Contact us after the call if you are unable to download the slides and we’ll send them to you.

Second, I’ll remind you of our safe harbour statement. Statements made during the conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about future financial and operating results.

These statements are based upon the current beliefs and expectations of The Mosaic Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. The remarks made during the conference call are made based upon information and understanding that are believed to be accurate as of today’s date, January 9th, 2008.

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

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

With that as important background I’ll turn the call over first to Larry Stranghoener, who will review the second quarter results. Following that Jim Prokopanko will discuss our outlook for the remainder of the fiscal year.

Lawrence W. Stranghoener

Thank you, Christine, and good morning to everyone. We appreciate the opportunity to share our results in these dynamic and evolving times in the fertilizer industry. As Christine mentioned, I will briefly address some highlights from our fiscal 2008 second quarter financial results, as well as update certain elements of our financial guidance.

We had another quarter of strong performance and results. Our net earnings for the second quarter ended November 30th, 2007, were a record $394 million or $0.89 per diluted share. Our impressive net earnings this quarter represent a $328 million increase over the prior year and we have surpassed all earnings records since Mosaic was formed in 2004. These results were primarily driven by higher phosphate and potash selling prices and realizing the benefit of favourable industry conditions in the offshore segment.

Our average second quarter DAP selling price was $417 per tonne, which is $174 per tonne higher than the prior year and $10 per tonne higher than from the first quarter. The average potash selling price was $171 per tonne, increases of $29 and $11 per tonne from the prior year and prior quarter respectively. We expect realized selling prices to continue to climb for the remainder of fiscal 2008 due to a strong global demand environment for crop nutrients and rising raw material costs.

There are several specific items impacting our results for the second quarter that I’d like to mention. First, we realized a substantial improvement in gross margin, which equalled 28.4% for the second quarter compared to 10.5% a year ago despite increased sulphur costs in our phosphate segment and increased brine inflow costs at our Esterhazy potash mine. This dramatic improvement is the result of higher prices, to be sure, but also demonstrates the inherent operating leverage of our business and our ability to operate our mines, plants, and supply chains efficiently and at high operating rates. Our focus on execution is serving us well in this time of strong demand.

Second, I am happy to report that we generated $543 million of cash flow from operations in the second quarter; an increase of nearly $400 million from the same period last year. As you know, we have focused on cash flow as a key metric since the inception of Mosaic and it is gratifying to deliver such strong results.

Third, we had $45.5 million in equity earnings in our non-consolidated entities in the second quarter compared with $15.4 million a year ago. The increase in equity earnings from Fosfortil is the result of strong, resilient agricultural market fundamentals. Additionally, our equity investment in Saskferco generated strong earnings, primarily the result of higher nitrogen selling prices. We expect continued favourable results from these investments and are increasing our guidance for equity earnings in non-consolidated subsidiaries to a range of $90 million to $120 million for fiscal 2008.

Next, we reported certain tax benefits specific to the second quarter totalling $35.9 million or $0.08 per share related primarily to utilization of foreign tax credits. We expect an additional one-time tax benefit in the third quarter related to the impact of Canadian federal tax rate reductions on deferred tax liabilities of about $30 million. Excluding these one-time benefits we continue to expect an effective tax rate in the low 30% range for fiscal 2008. Our substantially improved US profitability is allowing us to more fully utilize existing tax attributes and enjoy a lower effective tax rate.

In addition, we had a $10.3 million charge this quarter due to a change in estimated asset retirement obligations on certain closed phosphate facilities in connection with our May 2006 restructuring.

Finally, there were unrealized foreign currency transaction losses of $52.4 million or approximately $0.09 per share in the second quarter. This is a direct result of the substantial strengthening of the Canadian dollar during the second quarter. As you may recall, because this line on our income statement primarily represents non-cash, non-economic exposure, we choose not to spend money to hedge it.

Our total debt at the end of November 2007 was $1.7 billion, a substantial decrease from one year ago, resulting in a debt-to-capital ratio of 25% at the end of the quarter. We prepaid $450 million of debt in the second quarter and collectively we have prepaid $1 billion of debt since May 1st, 2007, including a recent prepayment of $150 in late December. This represents a major milestone for Mosaic, which has again been recognized by the credit-rating agencies. In early November Fitch upgraded our corporate credit rating to DD+. This is just one notch below our investment grade goal. As you may recall from our first quarter call, Moody’s had previously upgraded us to a similar level.

Our second quarter capital expenditures were $79.1 million compared with $32.7 million a year ago. We still anticipate that we will incur $360 million to $400 million of capital expenditures in fiscal 2008.

Mosaic’s selling, general, and administrative expenses were $79.8 million in the quarter compared to $70.4 million a year ago. The increase was primarily related to higher incentive compensation accruals, post implementation and depreciation costs related to our enterprise resource planning system implemented late last fiscal year, and other external consulting fees.

Our fiscal 2008 guidance for SG&A remains between $280 million and $300 million.

Now let me turn to some updates to our guidance regarding sales volumes and pricing as summarized on slide number one. We continue to forecast our phosphate sales volumes to range between 8.6 million and 9.1 million tonnes for this fiscal year. Prices are rising and our third quarter pricing for DAP FOB plant is estimated to be $470 to $480 per tonne; an increase from $417 for the second quarter. Note that spot prices moved well beyond these levels toward the end of the quarter and we expect price realizations to move significantly higher in the fourth quarter.

For potash we continue to forecast our sales volumes to range between 8.5 million and 9.0 million tonnes for this fiscal year. Here too prices are up and our third quarter pricing for potash FOB plant is estimated to be $190 to $200 per tonne compared with the second quarter average of $171 per tonne. As with phosphates, prices in the fourth quarter should continue to increase and we recently implemented an $80 price increase for domestic potash effective March 1st.

We expect continued strong year-over-year comparisons and outstanding full-year results. That said, as the curmudgeonly CFO I must add two cautionary comments about our third quarter outlook. First, note that our third quarter typically is the slowest seasonal point for offshore and phosphate sales volumes and we anticipate this trend again this year. Second, we anticipate further increases in sulphur costs, which will pressure phosphates gross margin in the third quarter compared to the second quarter.

That concludes the highlights of our financial performance for the second quarter and guidance for the third quarter. Now let me turn it over to Jim.

James T. Prokopanko

Thank you, Larry. I’ll provide an outlook for the rest of the fiscal year and highlight market prospects and opportunities for Mosaic during the next several years. Prospects for our main businesses during the rest of the fiscal year look outstanding. Agricultural commodity prices continue to climb, bolstering farm economics and nutrient demand in all corners of the globe.

We see no signs of a let up in momentum in either grain or crop nutrient markets as we start the new year. I believe it is fair to say that most analysts expect more upside than downside risks in these ag markets during the next several months.

The recent increases in crop prices are noteworthy. Let’s move to slide two. During our last conference call on October 9th I indicated that the 2008 new crop prices of corn, wheat, and soy beans were trading at extraordinarily high levels and an intense battle for acreage was likely to occur next spring. At that time the 2008 new crop price for corn was about $4 per bushel. New crop soy bean price was roughly $9.50 a bushel. And new crop price of wheat was approximately $6.70 per bushel. Needless to say, crop prices have moved even higher since then due to a combination of continuing strong global demand and concerns over the size of the southern hemisphere’s crop. Today new crop prices for these three commodities are trading at approximately $4.96, $11.81, and $8.40 per bushel respectively. The $0.96 per bushel increase in the price of corn during the last few weeks will generate additional farmer revenue of $173 per acre assuming a yield of 180 bushels per acre. That obviously will help farmers pay higher fuel, seed, and fertilizer bills this year.

There have been questions about farmer affordability of crop nutrients. I want to put the cost of crop nutrients into perspective. Let’s look at slide three. We estimate that a farmer would have to sell 26 bushels of corn at today’s 2008 new crop price in order to pay for fertilizer purchased at current spot prices and apply it on each acre of corn planted this spring. To put that into perspective, the per acre cost of fertilizer calculated in bushels of corn has averaged about 23 bushels during the last five years, and have ranged from just 19 bushels in 2003 and 2007 to as high as 30 bushels in 2005.

Yes, crop nutrients are expensive today, but farmers are seeing record crop prices at the same time and are getting a great return for their fertilizer investment.

Phosphate and potash fundamentals remain exceptionally strong in both the near and medium terms, as shown on slide four. The current spot price of dimonium phosphate, or DAP, loaded on a vessel in Tampa has increased $610 per metric tonne, up from $450 per tonne in mid-October. And by the way, yesterday we closed on an export DAP sale for February’s shipment at $685 per metric tonne loaded in Tampa.

Regarding potash. The current spot price of blend grade potash delivered to Brazil has climbed to more than $400 per tonne. Up $100 per tonne from levels just a few months ago.

In the case of potash, supply continues to struggle to keep up with galloping demand as evidenced by extremely low stocks held by North American producers at the end of the fall season. This situation likely will persist until additional capacity comes on line over the next few years. As a result, market prices continue to increase significantly in all major markets.

Then there’s China. We believe our Chinese customers recognize the new reality of world potash pricing and we know that in-country stocks of potash in China are tight. Campotex is not now in formal negotiation with the Chinese; however, we believe an agreement can be reached with China in the first quarter of 2008. In the meantime, no new shipments will be made to China except for carry-over shipments from last year’s contract. There is very strong demand in both the other international markets and here in North America with willing buyers for the tonnes that China will miss in the first quarter.

The phosphate situation and outlook is similar to that of potash. US producers reported holding the lowest inventories in modern history at the end of the North American fall season. More importantly, large increases in market prices for phosphate rock and phosphoric acid in 2008 will dramatically boost costs for non-integrated producers that still account for almost one-third of global phosphate production.

Note that substantially higher sulphur costs, particularly outside of North America, are also underpinning higher phosphate selling prices. All of these changes in raw material costs have combined to dramatically improve our global competitiveness. We believe our established supplier partnerships, our scale, and infrastructure investments in sulphur give us a competitive advantage over our competition.

Finally, after searching to unprecedented levels last year phosphate exports from China will likely drop in 2008 due to domestic Chinese needs and government policies designed to keep more product at home for local farmers. We estimate that the Chinese market is short phosphate and government planners who are battling serious food inflation are expected to make every effort to produce a record crop in 2008 would require local farmers having ample supplies of crop nutrients.

These indeed are heady times for agricultural and crop input businesses. We have noted on several occasions that this is not a one-year phenomenon caused by weather-related supply shops. Rather it is a multi-year upturn driven by strong and sustainable demand pull factors.

Grain and oilseed markets are sending strong price signals to farmers to plant more acres and boost yields in order to meet accelerating demand. That has resulted in increasingly robust nutrient demand forecasts. The most recent estimates and forecasts from the International Fertilizer Industry Association now indicate that global nutrient use will increase 13% for almost 20 million metric tonnes during the three years from 2006 to 2008. That is nearly the equivalent to adding another United States to global demand.

Now let’s move on to slide five. Agriculture has an impressive track record of productivity growth and efficiency gains. For example, the real price of corn has trended down over time, reflecting the tremendous growth and productivity. Although we have seen a recent uptick in the prices of ag commodities, we have seen a steady drop in the inflation-adjusted cost of ag commodities over nearly 40 years.

Now turning to slide six. Average US corn yields have increased from less than 80 bushels per acre as recently as 1970 to more than 150 bushels per acre today. This works out to be 1.7% annual growth in per acre corn yields. At the same time, nutrient use efficiency has also improved dramatically. US farmers applied about three pounds of nutrients per bushel of corn in 1970 compared to just over 1.5 pounds per bushel of corn today.

We expect these on-farm productivity gains to continue. Recently Rob Fraley, the chief technology officer at Monsanto, predicted in a Business Week cover story that corn yields would reach 300 bushels per acre by 2030. We place our bets on agricultural innovation and technological advances to generate productivity and efficiency gains which will keep the agricultural sector thriving for years to come.

So given these extraordinary fundamentals how is Mosaic playing to win? In potash we have a readily available and cost-effective asset base that enables us to bring on production quickly through ground field expansions. Our expansion of 1.1 million tonnes in Esterhazy last year demonstrated that we can expand capacity at one of the lowest per tonne capital costs in the industry. Additional expansions are already under way at our (inaudible) and Bell Plain operations. We are thoughtfully mapping out additional opportunities.

In phosphates our vertically integrated enterprise provides us tremendous opportunity. From our owned rock mines to our world-scale concentrate plants through to our global supply chain network. In the medium term, we view phosphates with the potential to be the strongest of the three major nutrients. As the largest producer of phosphates in the world we are positioned to fully leverage the opportunities ahead of us.

To complement our phosphate and potash production businesses we have a global distribution network consisting of port, storage, and plant facilities in key locations that play an integral role in distributing our products to our valued customers. Just as important, we have diverse on-the-ground teams to serve these customers and stay away from the emerging customer and marketplace trends.

What does this mean for our customers, our investors, and our employees? It means that Mosaic has a unique business mix with world-scale and exceptional potash mines and mills, the world’s leading phosphate production business positioned to generate unprecedented earnings, and a noteworthy international footprint that compliments these businesses very well. No other crop nutrition company has the breadth, scope, and reach of Mosaic and we more than others are well positioned to deliver solutions and capture value in the dynamic times ahead.

In conclusion, we look forward to the opportunities that are ahead of us at Mosaic. Two-thousand-and-eight should be an exciting year as we wisely use the cash flow we have generated to improve our operational efficiencies, pursue growth opportunities based upon our strategic plan, and continue on our path to reach investment grade. All of this will create value for our employees, customers, and shareholders.

Thank you, and back to you, Christine.

Christine Battist

Thank you, Jim. Now, Operator, would you please open the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of David Silver of JP Morgan. Please proceed.

David Silver – J. P. Morgan

Yeah, hi, good morning. Jim, I had a question about potash pricing and in particular I was looking at slide four in your presentation where you seem to kind of point to delivered prices into Brazil of $350 or more beginning in the middle of ’07. I’m trying to relate that market price or market dynamic to the seemingly much lower guidance of $190 to $200 FOB the mine for shipments, I guess, to take you through February of 2008. Is there something company specific or is there some meaningful time lags? Can you discuss maybe why seemingly you’re indicating your potash prices, realized prices are going to lag what you have as some benchmark market prices by such a wide margin?

James T. Prokopanko

Sure, David. This is an issue we’ve addressed and continue to explain. As a sale today typically doesn’t get shipped for about 12 weeks, something in that range. Anywhere 8 to 16 weeks later before it shows up as a sale on a revenue on our books. So what we’re posting today and for the next couple weeks are products that we sold back in would be October/November time period. At that time prices weren’t at where they are today. So it’s just a matter of some catch up before we get to those kind of spot levels you see posted today.

Lawrence W. Stranghoener

David, I’d add, note too that we have a mix of products we sell in potash, including industrial products and K-mag – a specialty product – that are currently priced below agricultural market prices.

David Silver – J. P. Morgan

Okay. And if I could ask a question about sulphur. The markets both in the Gulf and offshore are pretty volatile right now. And this is probably an issue of increasing importance for you guys. I’m just wondering if you could characterize not just the price but maybe your feelings about the availability of sulphur sufficient to kind of maintain running your DAP operations at the rates that you indicate. In other words, is there any risk that maybe some middle man will get a sharp idea of taking some $250 a tonne sulphur from the Gulf and shipping it into some offshore markets where the selling prices are much higher.

James T. Prokopanko

Okay, David, this is an area of concern for us, absolutely. What has happened is, one, we’ve on one hand had strong demand for sulphur. As a result of a strong fertilizer complex about 85% to 90% of the sulphur in North America goes to fertilizer use. That has been complicated with what seems like an epidemic of plant outages and plant disruptions at refiners and gas processors. Unnatural, unusual to see this happening and we think it’s just a transitional thing we’re going through. These plants are getting back on line. We are seeing more and we expect 12 and 24 months out more production, sulphur production coming on stream, but in the meantime we’re going through some tough times.

The North American market is largely a molten market whereas the international market is a solid market. To take a product from molten form to solid form requires some granulation capacity, some shipping capacity, logistics capacity that aren’t in place now and we think it’s going to be very difficult for anyone to move molten product into the international markets.

Now on to your point, do we have risk of supply disruption? Well, if there’s no sulphur tomorrow we would have that problem. We’re staying ahead of it. We’re going after all sorts of alternatives and to this point our suppliers have been able to keep our plants up and operating and with our molten barges, our handling facilities with the inventories we don’t see a near-term risk in shutting down production as a result of lack of sulphur.

David Silver – J. P. Morgan

Thank you very much.

Operator

Your next question comes from the line of Marshall Reid of Banc of America. Please proceed.

Marshall Reid – Banc of America Securities

Good morning. Just a couple questions I guess back on David’s question. Are you guys getting all the sulphur you need to run your plants at full rates? Do you think maybe your competitors are having trouble sourcing sulphur and they may be forced to cut back operating rates here, which could tighten up the market here?

James T. Prokopanko

Yeah, we’re getting all that we need to operate our plants. We’d like to, of course, get a little bit more and build a buffer. Maybe we’re not building the buffer, but we have a good inventory stock of sulphur in place. We are the largest consumer of sulphur in North America and I think we’re getting, I’d like to believe we’re getting that due kind of respect from our suppliers.

As far as what our competitors are facing, I just don’t have any idea what situation they’re in and what they’re facing in terms of their supply/demand balance on sulphur.

Marshall Reid – Banc of America Securities

Okay. On phosphates you mentioned rock and sulphur costs are going up dramatically. Yet based on current selling prices in various regions what do you think the response will be from non-integrated producers? Could we see production curtailed until prices rise here and how high do you think DAP prices need to go in order to make it attractive for non-integrated producers to keep running?

James T. Prokopanko

Well, you put your finger on a real challenge for these non-integrated producers. Those that – and non-integrated, what we mean are those that don’t own their own rock reserves. Sulphur’s a different situation. I’ll make a point about that in a moment. But North America, if you don’t have your own rock you’re paying, you could be paying as high as $200 a tonne FOB Morocco whereas Mosaic has their own rock reserves and our own rock mines in Florida that feed our facilities. So that’s going to be a challenge and we expect they will have to, their response will be to pass those higher costs on to the consumer of the product. I don’t think there’s any phosphate producer that is an integrated sulphur producer as well, so we’re all liable to the same market dynamics and the same market pricing, more or less, on sulphur.

A difference, an important difference here, and this is where I think Mosaic is so well positioned, is North America, we are paying, and you’re seeing the most recent posted sulphur prices in that $250 a long tonne range. China is paying, or India has just recently concluded some contract at $550 a tonne. Morocco has concluded a sulphur contract at over $400 a tonne. You look at that differential and call $550 versus $250, $550 India versus $250 in the US, $300 a tonne differential in the sulphur price, and 0.4 of a tonne of sulphur in a tonne of phosphates, that’s $120 a tonne cost advantage to Mosaic over a producer in India and $80 a tonne differential to those versus Morocco. So North American producers are in a good position.

Marshall Reid – Banc of America Securities

Any thoughts on how high DAP prices need to go here in order to cover those costs off shore?

James T. Prokopanko

How high DAP costs have to go?

Marshall Reid – Banc of America Securities

DAP prices have to go.

James T. Prokopanko

Well, we’re, they’ll go to – before, I’d ask Rick McLellan, our commercial manager, who thinks about this a lot to help with that answer.

Richard N. McLellan

Thanks, Jim. I think what we’re seeing is a reflection of these new costs in the pricing FOB Tampa today where in the, where yesterday we closed on $684 a metric into the South American market. Clearly it’s going to be a factor of when contracts for both sulphuric and, sulphur and phosphoric acid get done in the major markets such as India that will set the underpinning for what phosphate prices are going to do. But they have room to go up from the $685.

Marshall Reid – Banc of America Securities

Okay. One more question then I’ll get back in cue. Just phosphates again. Costs are going up for you guys this quarter, but so are selling prices. Although maybe not to the extent that the spot market would suggest. Could we see gross profit per tonne decline sequentially in phosphates this quarter?

James T. Prokopanko

Yeah, that’s possible, Marshall, in the third quarter. It’s simply a timing issue. We’ll see very significant pricing increases by the fourth quarter that will more than offset the expected increases in sulphur costs by then. But it may be more of an issue in the third quarter.

Marshall Reid – Banc of America Securities

Okay. That’s helpful. Thanks, guys.

Operator

And your next question comes from the line of Edlain Rodriguez of Goldman Sachs. Please proceed.

Edlain Rodriguez – Goldman Sachs

Good morning, guys. One quick follow up on sulphur costs. How long are your contracts and how often do those contracts get re-priced?

James T. Prokopanko

Our contracts are three-month contracts. That’s about the industry standard. And we re-negotiate every three months, a couple months, couple weeks before the end of that contract to set the new price.

Edlain Rodriguez – Goldman Sachs

Okay. That’s fine. Another question on products. Do costs for Esterhazy, like, the brine costs, can you talk about what we see, you know, what we should see going forward and how much is left in terms of those costs?

James T. Prokopanko

Yeah, we are spending roughly $10 million to $12 million, $13 million a quarter in the first half of the year that will likely slacken off somewhat as we move into the second half of the year. We’ve been spending a lot of money on pumping capacity and running those pumps, and to great effect, we believe, as well. But you should start to see those costs coming down.

And remember, this became a major issue last year at about this time, so on a year-over-year basis in the third quarter you should see improvement this year versus last.

Edlain Rodriguez – Goldman Sachs

Okay. Just going back to DAP, the margin issue again. Now, if I understand what you said correctly, you expect that margin contraction issue to just be like a third-quarter issue and by the fourth quarter you should be back to prices.

James T. Prokopanko

Yes. I’m just pointing out that there’s a lag effect. We’re seeing these significant increases in sulphur costs hitting us in the third quarter. We’re seeing an increase in prices, but not to the extent that prices will increase come the fourth quarter. By the time we get to the fourth quarter we would expect the increases in selling prices to more than offset the expected increases in sulphur costs.

Edlain Rodriguez – Goldman Sachs

Okay. So it’s a temporary issue. Okay. Thank you very much.

James T. Prokopanko

It’s only a temporary lag issue with respect to prices and costs.

Edlain Rodriguez – Goldman Sachs

Thank you.

Operator

And your next question comes from the line of Don Carson of Merrill Lynch. Please proceed.

Donald Carson – Merrill Lynch

Yes, thank you. Jim, a couple questions on the capacity outlook, both for the industry and for yourself. I don’t believe you talked at all about any plans to increase phosphate capacity or bring back on line some of the capacity you idled back in May of 2006. I wonder if you could address that.

And then secondly on potash, when do you expect the Esterhazy share that currently goes to a co-producer to revert back to Mosaic?

James T. Prokopanko

Okay. On phosphate we are running our plants well and near capacity, which is in the high 80%, close to 90% capacity utilization range. Which for fertilizer facilities I’d call operating at full capacity. We’re looking to debottleneck some of our phosphate operations and we do consider from time to time bringing on additional phosphate production. We’re going to be very thoughtful about doing that and it’s going to be within line on what the demand factors are for phosphates. So if we do plan to open a facility you’ll hear about it.

Donald Carson – Merrill Lynch

And on Esterhazy, when that reverts back to you.

James T. Prokopanko

Yeah, the Esterhazy potash expansion. We have an expectation that that is going to be no later than 2013 that that product comes back to the Mosaic company. We believe it could happen earlier, but it’s a little bit of a complicated calculation to understand what the reserve amounts were that the other potash company had access to and we’re working with them to resolve what that specific date is, but no later than 2013. And expect it to happen earlier than that.

Donald Carson – Merrill Lynch

And then a broader question on use of cash flow. I mean, obviously it’s only a question of time until you get to investment grade rating. You’re there financially. Obviously it takes the rating agencies a while to respond. But you’re going to be generating a lot of cash. You talk about growth opportunities. Are these growth opportunities above and beyond just potash and phosphate capacity expansions? What specifically do you mean? And what’s your time frame for starting to return some cash to shareholders, starting with the dividend and then moving on to share repurchase?

James T. Prokopanko

Good questions, Don. First of all it’s, you’re right, our first objective is to get to investment grade and we believe that our balance sheet today is very much deserving of investment grade rating. Priority investments beyond building the balance sheet is, number one, expansion of our potash business with some very attractive ground field projects, many of those that have been announced. Second, reinvestment in our phosphate operations, improve efficiencies, improve operating rates, and to enhance our mining capabilities of the phosphate business. Third, I think there could be some opportunities to expand phosphate mining and production outside of North America.

And then there’s a variety of other opportunities that we continue to pursue. It’s been talked about in the past. Uranium processing in our Florida facilities. Development of the land in Florida. And beyond that, dividend policies and so on, returning money back to shareholders. That’s a question we’re asking ourselves. We’ve got a group that’s looking at an ideal capital structure for Mosaic and once those folks complete their deliberations you’ll hear more from us about what we may intend in regards to dividend and capital structure.

Donald Carson – Merrill Lynch

Okay. Thank you.

Operator

And your next question comes from the line of Brian Yu of Citi. Please proceed.

Brian Yu – Citigroup

Thank you and good morning, guys. A question for you on the forward sales again, going back to David’s question. Given how tight the markets are, is there an opportunity to not sell forward as much and what’s the minimum lead time you need for logistical purposes?

James T. Prokopanko

I’ll let Rick McLellan address that.

Richard N. McLellan

Yeah, very good question, Brian. To clarify some things, we have the majority of our phosphate and potash for the fourth quarter to sell. We recently announced the potash increase domestically and we’ll start to sell into that. The thing that we have to be careful on is making sure that we have agreements in place to get product to our customers when they need it, both domestically and international. That’s part of the reason why we do go ahead and book a good solid forward book into place.

Brian Yu – Citigroup

Okay. So what would be the minimum lead time required, just for logistical purposes?

Richard N. McLellan

On the export side at least a month. And domestically, four to six weeks. That would be the minimum.

Brian Yu – Citigroup

Okay. So, Jim, going back to what you’d said earlier about booking sales that don’t ship for eight to 16 weeks, is there an opportunity there to bring in some lead times again because your inventories are so low and it doesn’t seem like there’s any lack of demand of the available supply out there?

James T. Prokopanko

No, that’s correct and we have until the markets stabilized over December. We’d really pulled in our horns and weren’t making sales until we had a better understanding of what the market dynamics are. But it’s tough to raise the price without having some base sales to reference and we’ve got customers we have to serve and the best time to sell the customer is when they’re buying. And we’re using our judgement as to when that best time is and I think our commercial team has done an extraordinary job at keeping our customers supplied and managing prices in balance with what the S&Bs are showing us.

Brian Yu – Citigroup

Okay. Good answer. Thanks. And then this is more of a question for Larry. In the past you’ve always disclosed what the market-to-market derivative gains or losses were and it was absent this quarter. Is it non-material?

Lawrence W. Stranghoener

It’s non-material. They’re minimus (sic) numbers this quarter. So Christine can give you the exact numbers, if you’d like, but on the range of $5 million to $6 million.

Brian Yu – Citigroup

Okay. Great. Thanks, guys.

Operator

And your next question comes from the line of David Batnick (sic) of Barclay’s (sic). Please proceed.

David Batnick (sic) – Barclay’s (sic)

Hi, guys. Just some, you know, getting back to use of cash flows. I’ll skip that since you answered that quite well. You did mention though that you’re looking at the complete plan in terms of what the capital structure should look like and dividends and all that. Is there any timing on when that plan is expected? Is it by the next call?

James T. Prokopanko

Well, this is being done in conjunction with the strategic planning work that we’ve discussed with you before. Now that we have a better understanding of our strategic game plan, where we want to go over the next three to five years, it’s appropriate to determine what the capital structure is to support that plan. What should our cash allocation policy be given that plan? So it’s very much a work in process and we will keep you updated. It’s something that I’m very anxious to bring to a conclusion relatively soon.

As has been pointed out here, we are awash in cash right now. Business is performing extremely well. We’re generating a lot of cash. We expect to continue to generate a lot of cash. It’s unlikely that we will seek to pay down additional debt. We think we’ve probably accomplished what we wanted to accomplish on our march to investment grade. And so that all puts a finer point now on us coming to some conclusions about our cash allocation policies. So we’re anxious to bring that work to a conclusion and when we do we’ll share that with you.

David Batnick (sic) – Barclay’s (sic)

Okay. Is there, can you say if there’s anything left or can you tell us what’s left on the term loan?

James T. Prokopanko

There is very little left on the term loans that we took out last year at this time. So there may be some tag ends of some bonds that it may make sense to buy back at some point, but we, again, I’ll repeat, we’ve largely accomplished what we’ve wanted to accomplish with respect to debt repayment.

David Batnick (sic) – Barclay’s (sic)

Yeah, I understand. I’m just trying to understand what the rating agencies are waiting for. If they’re waiting for the incident plan. Based on the fact that there are a bunch of other, I don’t know, based on what’s happened it’s hard to, and basically looking at your competitors and where they’re rated. Can you say anything about plans to meet with them again soon now that earnings are out? Or you have already?

Lawrence W. Stranghoener

Yeah, we’re regularly in contact with the rating agencies. I think that everybody on the call understands that we’ll have the metrics we need long before that’s acknowledged by the rating agencies, and that’s typical of the process that we have to go through. I think that the agencies want to see some sustainability of results. We don’t think we have any difficulty demonstrating that these results should be sustainable, as Jim highlighted in his comments. So we will continue to meet with them regularly, to ensure they understand the dynamics of the business, the outlook that we have, and I’m sure in good time they will acknowledge what’s been happening here and what’s likely to continue to happen.

David Batnick (sic) – Barclay’s (sic)

Okay. Please do accelerate this.

Lawrence W. Stranghoener

Okay.

David Batnick (sic) – Barclay’s (sic)

Thank you.

Operator

And your next question comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Mark Connelly – Credit Suisse

Thank you. As we look at your potash costs it looks like they’re better this quarter and you’ve talked about improving efficiency at phosphate operations. Can you give us a broader sense of how you think operations are moving forward at Mosaic right now? Obviously we had some bumpiness over the last couple of years. I’m just wondering if you can put some colour around how things are working internally right now?

James T. Prokopanko

Things are much improved these last couple quarters. We’re finding much more stability, finding our pace with our operations, and on occasion we do have an occasional bump in the road, but those bumps are becoming smaller bumps and I think we’ve got a strong operational leadership group at our facilities and we’re seeing some lower costs as a result of higher operating rates, good absorption of those costs, and we continue to drive for that. I’ve said on previous calls that operational excellence is important in this business and we’re applying that due consideration and the effort and the time to ensure that we’re getting there. So right now we feel we’re getting better. We’re not at where we want to be and we think there’s room to improve.

Mark Connelly – Credit Suisse

Okay. That’s helpful. Thank you.

Operator

And your next question comes from the line of Mike Judd of Greenwich Consulting. Please proceed.

Michael Judd – Greenwich Consultants

Yes, in terms of your volume projections for this current quarter they’ve been pretty much flat from the last time you provided that update. I’m just wondering if you think there could be some upside to those numbers. Thank you.

James T. Prokopanko

Well, you’re correct. We’re saying that our guidance stays in the range that we’ve been start of the year with and that’s not changing. I commented earlier that we are operating at pretty high operating levels, rates, and we expect to continue that for the balance of the year and as much as the industry is there just isn’t much free capacity to improve, increase the production of potash or phosphate, for that matter. Everything we can produce is being sold.

Michael Judd – Greenwich Consultants

Thanks a lot.

Operator

And your next question comes from the line of Charles Neverd (sic) of Morgan Stanley. Please proceed.

Charles Neverd (sic) – Morgan Stanley

Morning. Just had a couple quick questions. You had talked about a 20 million tonne increase in fertilizer consumption over the period of ’06 to ’08. Between ’06 and ’07 how much of that has been, let’s say, completed and what’s sort of left for ’08 in that 20 million?

James T. Prokopanko

The 20 million, I think I was referring to a nutrient tonne measurement over a three-year period.

Charles Neverd (sic) – Morgan Stanley

Right. So how much of it has gone over the two years? We’re done with two of the years, so that leaves us with one. What’s left of that?

James T. Prokopanko

Thirty percent. I’d say it’s going to be pretty much divided over the three years.

Charles Neverd (sic) – Morgan Stanley

Okay. And as far as forward sales, you had mentioned I think in your release that a lot of your sales were into North America, less into the foreign markets. Do you think North America can continue to absorb at the rate it’s been into the coming quarter, I guess, which like you said is usually a stronger North American quarter than foreign quarter.

James T. Prokopanko

Our sales annually are about two-thirds international, one-third domestic North America. We’re convinced that at these prices, corn, bean, wheat prices, fertilizer is a very wise investment by every farmer in North America and yesterday closing of corn prices on the Chicago Board of Trade, new crop 2008 price, closing within $0.03 of $5, farmers would be remiss not to put on all the fertilizer that they agronomically should put on. And we think the logistics system is well tuned to handle that. I think there’s some extra capacity in the rail systems with some perhaps slower movements on other commodities. We’re well positioned to get all the product to the customers throughout North America.

Charles Neverd (sic) – Morgan Stanley

Okay. But I mean, do you think they bought a large predomination of what they’re going to need this year already or is there still more to come for their current needs?

James T. Prokopanko

Rick, what’s your assessment?

Richard N. McLellan

There’s still more to come for the current needs. Last spring’s planting pretty much emptied out the domestic warehouses and our customer’s warehouses. So refilling that change, it has really been ramped up in the last six months and there’s still a portion for them to buy for the rest of this year.

Charles Neverd (sic) – Morgan Stanley

Okay. I mean, would you say that this year they bought more in the fall and winter period than they did last year and maybe spring will be a little bit lighter or that they’ll continue to buy into the spring at the same level that they did last year?

Richard N. McLellan

I think the comparison would be better. They bought more in the fall than they did the previous year to get ready for this, for, which ended up being a very successful fall season. So the expectation is for good demand right straight through to spring.

Charles Neverd (sic) – Morgan Stanley

Okay. Thank you.

Christine Battist

Okay. We’ll take one more question before we close the call.

Operator

And your next question comes from the line of Bob Gullberg of (inaudible) Asset Management. Please proceed.

Bob Gullberg – (sic) Asset Management

Good morning. Just one more follow up on the forward selling on phosphate. If you look at where pricing was both in Florida and on the export market, the big move, the big recent move in pricing really started in early December, which would be 12 weeks prior to the start of the fiscal fourth quarter. Prices moved up to about $550 a net tonne in Florida and in the high fives, $570 plus on the export market. Should we expect to see those type of price levels given an average of a 12-week lag in the forward sales book as we start the beginning of the fiscal fourth quarter on March 1st?

James T. Prokopanko

Yes, you’re correct. And it’s right to notice that this last run up in phosphate prices didn’t really kick in until December or the beginning of our third quarter. So we will see the kind of spot prices, something closer to the kind of spot prices we’ve seen in the last few weeks, show up in our fourth quarter.

Bob Gullberg – (sic) Asset Management

Just to conclude that, just to finish the point. I’m sorry. So you’d be starting the fiscal fourth quarter at that sort of a price level for your realizations. Would that be a fair conclusion to make?

James T. Prokopanko

At what sort of price level?

Bob Gullberg – (sic) Asset Management

At the price levels I mentioned. Early December price levels of $550 –

James T. Prokopanko

Yeah, that’s correct. That’s right.

Bob Gullberg – (sic) Asset Management

Okay. Great. I appreciate that. Thank you.

Christine Battist

All right. That concludes our second quarter conference call this morning. Thank you very much.

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