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The Mosaic Company (NYSE:MOS)

F3Q08 Earnings Call Transcript

April 4, 2008 10:00 am ET

Executives

Christine Battist – Director IR

Jim Prokopanko – President, CEO

Mike Rahm – VP Market Analyst and Strategic Planning

Larry Stranghoener – EVP, CFO

Steve Pinney – VP Phosphate Operations

Analysts

Edlain Rodriguez – Goldman Sachs

David Silver – J.P. Morgan

Mike Judd – Greenwich Consultants

Donald Carson – Merrill Lynch

Mark Connelly – Credit Suisse

Brian Yu – Citigroup

Kristen McDuffy – Goldman Sachs

Charles [Nevery] – Morgan Stanley

Paul D’Amico – TD Newcrest

Bob Goldberg – Scopus Asset Management

Operator

Good morning ladies and gentlemen and welcome to The Mosaic Company’s fiscal 2008 third quarter earnings conference call. (Operator instructions). Your host for today’s call is Christine Battist, Director Investor Relations of The Mosaic Company, please proceed Christine.

Christine Battist

Thank you Grace Ann and welcome to Mosaic’s fiscal 2008 third 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, Mike Rahm, Vice President Market Analysis and Strategic Planning and other members of the Mosaic senior leadership team. 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, mosaicco.com/investors. The slides enhance our discussion but are not a requirement for the call. If you are unable to download the slides, please contact us after the call and we’ll send the slides to you.

We will be making forward looking statements during this call. The statements include but are not limited to statements about future financial and operating results. They are based upon management’s beliefs and expectations as of today’s date, April 4th, 2008 and are subject to significant risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially 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 rebroadcast in any form without the express written consent of Mosaic is prohibited.

I’ll turn the call over to Jim who will re-cap some highlights from our third quarter and where we’re headed over the next few months. Then Mike Rahm will share some insights on the supply and demand fundamentals driving our business. Jim.

Jim Prokopanko

Good morning and thank you for joining us today in what will be a very good news story. It was another outstanding quarter for Mosaic, shattering previous performance records. This is our fourth consecutive quarter of strong results with still more to come. These results were driven primarily by realizing higher potash and phosphate selling prices, strong operational performance and other factors including the benefit of lower cost inventories in our offshore geographies during a period of rising selling prices.

It’s no small task for our supply chain team to coordinate the movement of billions of tons of product whether its raw material inputs from [sporting] rock from our mines to delivering product to our customers around the world. We are operating well and this financial and operations performance was achieved despite significantly higher costs for sulfur and ammonia. I will now point out several key items for the quarter starting with slide 3. Net earnings for the quarter ended February 29th, 2008 were a record $521 million or $1.17 per diluted share.

This represents an increase of nearly $479 million over the year ago quarter and exceeds full year earnings for any full fiscal year since Mosaic was formed in 2004. The phosphates segment had an outstanding quarter posting operating earnings of $443 million. Average DAP selling price for the quarter was $487.00 per metric ton which exceeded our expectations and more than offset higher raw material costs. Mosaic’s potash segment also had an exceptional quarter with operating earnings of nearly $196 million. Again capturing significantly higher selling prices was the headliner, partially offset by higher Canadian resource taxes and the foreign currency translation impact on operating costs due to a weakening US dollar.

We continued to generate significant cash flow, generating approximately $528 million of cash from operations in the third quarter, an increase of nearly $375 million over the same period last year. Our exceptional cash flow has significantly strengthened our balance sheet which in turn will both contribute to achieving our goal of investment grade status and funding reinvestment in the growth of our company. Today we also announced further expansions of our Saskatchewan potash mines that are either now underway or are in the planning and approval stages.

Slide 4 illustrates these potash expansions occurring in measured incremental phases over the next 12 years. I can assure you that we will be responsible about bringing this capacity online and only as demand materializes. Upon completion of these expansions, we estimate our total annual capacity will be approximately 16.8 million metric tons. This new capacity also includes the tons that will revert to Mosaic upon expiration of the Esterhazy tolling agreement. I’d also like to point out that we have expanded our disclosures regarding potash pricing this quarter.

We’ve provided an average selling price for MOP and K-Mag, a potash specialty product, along with the volumes of K-Mag. We believe this information will help you better analyze our potash business. Our guidance for the fourth quarter and fiscal 2008 is summarized on slide 5. This guidance except for SG&A is within ranges previously provided for our fiscal year. SG&A guidance is slightly higher than previously provided due to increased external consulting fees and incentive compensation.

We expect to continue realizing higher selling prices into our fourth quarter and beyond and drive results with our ongoing focus on world class operations performance. That brings me to the topic of the sustainability of the current robust market environment. We believe market conditions for the past several quarters will persist for the foreseeable future. Dr. Mike Rahm, Mosaic’s Vice President of Market Analyst and Strategic Planning, a recognized and respected thought leader and economist in our industry will share out assessment of why we so strongly believe the momentum in the ag sector will remain in place for some time.

Mike Rahm

Thank you Jim and good morning everyone. As Jim indicated we are optimistic about the outlook for agricultural and crop nutrient markets as well as Mosaic’s long term competitive position in the global phosphates and potash industries. The chart on slide 6 shows that world grain and oil seed production increased 3.2% to a record 2.5 billion tons last year. Farmers responded to higher grain prices by increasing planted area 1.6% and by boosting yields 1.5% in 2007. That was a strong supply response but not strong enough o keep up with demand.

As you can see from the slide, global grain and oil seed demand during the past two years is growing at almost double the historical rate. Demand growth is accelerating as a result of strong traditional drivers for food, seed and fiber as well as for the increasing demand for bio-fuels. That is what makes this cycle different from those of the past. Slide 7 shows that world grain and oil seed stocks will decline 39 million tons during the 2007-2008 crop year, despite high prices and a record crop last year. Bio-fuels get a lot of the credit for the faster demand growth but it is still very much a food game.

Traditional drivers of population and income growth are the main engines powering faster grain and oil seed demand growth. Strong economic growth in a number of developing countries is creating a large and increasingly affluent middle class who demand more protein rich and grain intensive foods such as meat and dairy products. On slide 8, for example, two studies by McKenzie and Company estimate that almost 1.1 billion people will join the middle class income groups in China and India alone between 2005 and 2025.

These developments represent a systemic change in grain and oil seed demand. With respect to bio-fuels, the increase in production no doubt has helped accelerate grain and oil seed demand. We estimate that bio-fuels account for roughly 5% of total grain and oil seed use today. Bio-fuels are expected to account for about one-third of the growth in grain and oil seed use during the next three years. As a result, bio-fuels are projected to account for about 7% of total grain and oil seed use at the end of the three year period. Prices for a wide array of agricultural commodities have climbed to record or near record levels in response to these tight fundamentals.

The nearby futures prices for corn, wheat and soybeans are highlighted on slide 9. Futures markets, however, indicate that this is not a one year phenomenon. For example, farmers today could forward price their next three crops of corn at an average price of $5.80 per bushel. Their next three crops of soybeans at an average price of $11.70 per bushel and the next three crops of hard red winter wheat at roughly $9.65 per bushel. Those are unprecedented forward prices for these commodities. But this is not just a corn, soybeans wheat game.

Nearby prices of rice and palm oil have shattered previous high marks and prices of other commodities such as sugar, coffee, cocoa and cotton have increased this year as well. The bottom line is markets are asking farmers to step on the accelerator and rev up the engines of production agriculture worldwide. Farmers pressed on the accelerator last year but they need to step harder on the gas in the future. Our assessment is there are plenty of RPMs and plenty of horsepower left in these engines to meet accelerating demand. In some regions such as the Americas and Africa, farmers can bring more land into production without jeopardizing the environment.

In nearly all regions, farmers can boost yields through the adoption of new and improvement technologies and the use of optimum cropping practices. This is what makes the agricultural outlook so exciting for Mosaic. As many of you saw last week, or as many of you saw this week, the markets were riveted on the perspective planting report released by the USDA on Monday. This report is based on a survey of farmers planting intentions on March 1st. It showed that farmers intended to boost total planted acreage of the 22 crops surveyed by approximately 3.5 million acres this year.

However, farmers indicated that as of March 1st they planned to plant less corn and more soybeans than a year ago and less corn than most analysts had expected. It will take a few months before we know what farmers are planting right now. But if as the report indicated, corn acreage declines 86 million acres this ear and if yields are at or even slightly above trend, corn stocks are expected to decline to dangerously low levels by the end of the 2008-2009 crop year.

As a result, corn acreage will need to rebound into the mid 90 million acre range in 2009 in order to meet projected demand. Farmers will begin fertilizing those acres next fall and some retail dealers will begin to position product for the fall season in a matter of weeks. Higher grain and oilseed prices clearly are incenting farmers to plant more area, intensify cropping practices and use more crop nutrients. The recent statistics from the international fertilizer industry association indicate that the demand for crop nutrients is growing at more than double historical rates.

Slide 10 illustrates that global phosphate use is projected to increase 13% during the three years from 2006 through 2008. Global potash use is forecast to increase 18% during the same period. Demand for both nutrients is growing at more than double the rates from 1995-2005. Another important factor contributing to the price momentum this year is that the crop nutrient industry was not well prepared to meet a demand surge of this magnitude. Thin margins and poor earnings during the first part of this decade forced many companies to cut back on capital expenditures and to idle or permanently close unprofitable facilities.

As a consequence, crop nutrient markets quickly tightened once demand took off and some plants sputtered when trying to boost output in response to higher crop nutrient prices. For example, slide 11 shows that US phosphate rock production has declined more than 30% since its peak in 1996. Mosaic’s competitive position in the global phosphate and potash market continues to strengthen. In the case of potash, Jim just highlighted our planned expansion. We’re confident these expansions are aligned to meet projected increases in global demand.

For example, Fertecon projects that potash demand will increase the equivalent of almost 23 million tons of KCL between 2007 and 2020. Our expansion would meet about 20% of this projected growth and keep Mosaic among the leading players in the global potash industry. In the case of phosphates, significant changes are taking place in the industry cost structure and supply curve. The global industry is made up of integrated and non integrated players. Integrated producers like Mosaic mine their own phosphate rock. Non integrated players buy phosphate rock or phosphoric acid and are the highest cost producers today due to the recent sharp increases in rock and acid prices. Slide 12 summarized the costs of the three raw materials used to produce DAP for a non integrated producer in India.

These costs have increased more than $1,000.00 per ton of DAP today. Similar cost trends exist for non integrated producers worldwide. Non integrated producers account for almost one-third of the world’s phosphate supply, so the market requires the output from these producers in order to meet global demand. As a result, the high costs incurred by non integrated producers are a key determinant of market price and integrated producers such as Mosaic possess a significant cost advantage. Jim, back to you.

Jim Prokopanko

Thanks Mike. There is no question that today’s rally in agricultural commodity prices is fundamentally different from those of the past. As many of you have heard me say, the strength in crop production and commodity grains is being driven by global demand growth, not supply shocks. Markets are sending strong signals to farmers worldwide to step harder on the accelerator by planting more area and intensifying crop practices in order to meet this demand growth. That is the basis of our optimism for global agriculture, crop nutrient demand and Mosaic.

I’d like to conclude with why Mosaic is the best positioned crop nutrient company to leverage these extraordinary market conditions. First, Mosaic is the only company that includes both world scale phosphate and potash operations. We are the largest integrated phosphate producer by a very wide margin and one of the two largest potash producers in the world. And we’re expanding that capacity.

Second, we’re one of the few vertically integrated phosphate producers with proven reserves of readily available rock. We have some of the best processing plants in the world and we will continue to invest aggressively in our operations to insure we produce phosphate produces at a competitive cost advantage long term. Third, in potash we have the ability to bring on new incremental capacity at one of the lowest capital costs anywhere in the world. We estimate the capital costs for these incremental expansions will be the lowest cost in the industry and are a fraction of the cost of a green field project.

Fourth, our North American base phosphate and potash businesses are bolstered by our production assets and distribution network in prime growth regions such as Asia and Latin America. We have [aguatamists], sales teams and committed staff with the operational expertise that know how to serve customers and build and run plants. These offshore enterprises give us a chance to see the changes and trends in the industry first hand. Finally, cash flow at Mosaic is very strong, a trend we expect to continue for some time. As you know, we have largely completed our debt pay down plans and expect our cash balance to grow in coming quarters. Given current market conditions, it is a great time to be flush with cash and we will be comfortable holding sizable cash balances.

We will also be using cash to fund a sizable increase in capital expenditures next year to fund our expansion plans, de-bottlenecking opportunities, for energy saving projects and to ensure our mines and plants are running at peak efficiency and in full compliance with all applicable regulations in this time of exceptional demand. Additionally, we look forward to formulating a shareholder distribution plan as we move toward investment grade status. We have made dramatic progress at cleaning up our balance sheet in the past couple years and you can count on us to maintain an appropriate level of financial strength and to use cash judiciously in years to come.

Overall, Mosaic’s unparalleled leverage of being a major producer of both potash and phosphates, our capacity and announced plans to expand potash expansion along with our unique global reach in distribution and operations gives us a superior and distinctive advantage unlike any other crop nutrient company. As excited as we are about the crop nutrients outlook and what Mosaic has to offer, we recognize that with great opportunity comes great responsibility.

For those of you who have chosen to invest in Mosaic, or are considering an investment in Mosaic, I assure you we are committed to executing well in all we do, whether it’s running our plants, shipping our products or serving our customers. The last four quarters or proven performance are testaments to Mosaic’s capacity to deliver. We intend to fully realize this unprecedented agricultural opportunity and can assure you we will deliver. Thank you for your interest and for investing in Mosaic. Back to you Christine.

Christine Battist

That concludes our comments for this call. Now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Edlain Rodriguez of Goldman Sachs.

Edlain Rodriguez – Goldman Sachs

Thank you, good morning guys. Question for you in terms of what’s going on in the spot market but are you changing your strategy in terms of trying to take advantage of the spot market more than you have in the past? Because it seems like your price realization has been more than what we have been expected, so can you talk about what’s going on in terms of the forward sales and spot market?

Jim Prokopanko

Edlain we’ve been executing on our planned sales program and nothings much changed from what we’ve done for the last six months. We sell ahead as we see appropriate. Part of what you may be seeing is some of our phosphate contracts that are formula based contracts based off current reference pricing, industry pricing and that may be coming across as part of the reason for the higher than expected prices we’re seeing. But no, we haven’t changed our pricing strategy. We use a combination of what our production plans are, what the market demands are, what the logistics opportunities are to deliver what the customers need.

Edlain Rodriguez – Goldman Sachs

Okay thank you and also a follow up on potash, in terms of, I mean we know what [Kempotex] has been doing recently in the offshore market, can you talk about what’s going on in the domestic market? Could the last price increase we have you know there’s that $88 per metric ton effective March for April 1st, can you talk about what’s going on in the domestic market?

Jim Prokopanko

Prices, demand remains very, very strong. We are into a period now where dealers are well prepared, the pipeline is well stocked for the spring season and going into any purchases that may be yet come for spring season, the prices will be higher and we see given what’s happened in the international markets, we see prices in the domestic markets increasing through the summer months.

Edlain Rodriguez – Goldman Sachs

Okay thank you very much.

Operator

Your next question comes from the line of David Silver of J.P. Morgan.

David Silver – J.P. Morgan

Yeah, hi, good morning. I had a question I guess about the situation in India. And in the last couple of weeks there’s been a lot of transactions or significant contracts settled there and in the phosphate area they’ve recently taken rock price increases and significant phos acid price increases. And I was wondering if you could give us your view of how you think that market develops and you know what the signals, what the key signals are that we should take away from these recent transactions I guess in rock, acid and I guess second also potash.

Jim Prokopanko

David you’re right to mention or notice that there’s been a change in behavior in India and I think that’s coming with their as we’re seeing in so many parts of Asia, increased demand for food and they have recognized that they have to get ahead of the wave as best they can in ensuring they have supplies of fertilizer in country.

The high rock prices, the high phos acid prices is a serious challenge to their domestic granulation, phosphate granulation business and they’ve, it’s going to be a challenge for them to continue to justify based on the economics with these input costs, to justify production in country. So they’ve wisely chosen to secure supplies of phosphate early on. And in potash as well, they saw what was coming in the potash demand market and I think they were smart to take an early contract on potash.

David Silver – J.P. Morgan

Okay. I had another question I guess to get maybe a little bit more insight into your thinking about the most recent perspective plantings report, so I don’t know if this is Jim or maybe Mike, but you know you mentioned extremely strong demand you know for potash and all nutrients in the United States this year and you certainly have a robust comparison from a year ago. So when you guys saw the perspective plantings acreage numbers and I guess I’m thinking in particular the corn versus soy split, does this feel like an 86 million acre corn year to you guys or is this a market where we might see some shifting of additional acres over to corn, maybe in the 3 million acre range like last year or a little less or a little more? How do you interpret the business that you’ve seen domestically with what the plantings report indicated? Thank you.

Jim Prokopanko

David, Mike has some good thoughts on that, I’ll let him address that.

Mike Rahm

Hi David. Recall that the perspective planting survey was conducted around March 1st and at that time soybean prices were at or near their peaks. In fact the new crop price of soybeans on February 29th was I think $14.26. The new crop price of corn was about $5.65 so that would be a soybean to corn ratio of 2.52. If you look at those prices today, you know soybeans have come off significantly, new crop corn has increased you know new crop soybeans yesterday closed at $11.95, new crop corn closed at $6.10 for a ratio of 1.96.

So certainly the signals are a lot different today than they were around March 1st. And you know that certainly I think would point to the likelihood that we may see a few more acres of corn get put in the ground than what the perspective planting report indicated. Now obviously there are many other factors such as weather and so forth that come into play as far as what will determine corn acres but certainly corn pencils very, very well right now and we would expect maybe a few more acres than what the perspective planting report indicated.

David Silver – J.P. Morgan

Thank you.

Operator

Your next question comes from the line of Mike Judd of Greenwich.

Mike Judd – Greenwich Consultants

Yes, good morning. A question about sulfur contracts for your next, for this current quarter coming up, Jim any comments about that and then I have a follow up question.

Jim Prokopanko

Good morning, we expect to be paying more for sulfur is the short answer. And probably a good bit more for sulfur in the coming quarter. That said, we are well positioned for sulfur, we have all our needs identified, we’ve gone through some untraditional sources, block sulfur out of Alberta, other parts in Canada. So we’re securing our sulfur supply and we’ll just be paying more for the next quarter.

Mike Judd – Greenwich Consultants

Is it fair to think that margins should expand though because of a greater increase so to speak in DAP though?

Jim Prokopanko

Yeah the increased sulfur cost is being more than covered by increases in phosphate prices. All producers, domestically and around the world are facing the same kind of price increases or particularly internationally, even higher increases.

Mike Judd – Greenwich Consultants

And then just lastly you did a great job with pricing in your recent report and I believe that there was a significant beat on the pricing side for potash relative to perhaps you know where you thought you might end up you know a quarter ago or so and you last reported. Could you talk a little bit about what the drivers of that was please?

Larry Stranghoener

Mike, it’s Larry Stranghoener, let me clarify something. We provided some increased definition on potash prices this quarter by breaking out MOP separately from K-Mag where as in the past we provided a blended price. So we provided guidance on a blended price basis for this most recent quarter of 190 [overlay] and delivered about 212, so we did beat the guidance but not by as much as it might appear.

The MOP price that we realized in the quarter was 221, the K-Mag price was 145 and that’s what leads to that blended price of 212 which is the comparison to the guidance of 190-200. And so again the performance versus guidance was not perhaps that much better than what would first be apparent. That said obviously prices are moving forward, they’re moving forward aggressively, they’re continuing to move forward in the fourth quarter and we’ll enjoy the benefit of that when you see our fourth quarter results.

Mike Judd – Greenwich Consultants

Congratulations again on a good quarter.

Operator

Your next question comes from the line of Donald Carson of Merrill Lynch.

Donald Carson – Merrill Lynch

Yes, thank you, Don Carson here. Two questions, one is the sustainability of the phosphates cycle from a supply side and Mike maybe you could address this, you know we’ve got the much speculated upon Ma’aden project in Saudi Arabia perhaps in 2011. But then I guess the offset would be some of these high cost Indian producers not being able to produce in addition to not being able to get a subsidy, so Mike how do you see the supply expansion going globally and would Mosaic have any plans to bring back some of the shuttered capacity? And then I had an additional question on costs.

Mike Rahm

Okay hi Don, in terms of the sustainability, when you look out over the next few years, you know there are a few projects ahead of the Saudi, there are a couple of joint venture asset plants in Morocco that will get going this year. But the big one down the road is the Saudi project. One comment is I think you need to go back and take a look at the rock. We’ve been I think consistently indicating that that’s really the key S&D to follow and even with the joint venture plants in Morocco, you know there’s not a lot of new rock capacity coming on to support some of these upgraded tonnages.

With respect to the Saudi project, you know you probably have as good of information as anyone. Our expectation is that probably will be some time in 2011 that that project comes on. You know capital costs continue to go up but in this environment, certainly, continues to improve probably what the project economics look like there. That said, you know we expect to see phosphate demand growth continue to increase over time driven by these fundamentals and there certainly will be the need for you know some additional capacity to meet that demand. With respect to our own plans, you know we are looking at de-bottlenecking opportunities and I guess I would characterize those as de-bottlenecking given the amount of phosphate rock mining capacity and phosphoric acid capacity that we have. Maybe Jim or others may want to comment on that.

Jim Prokopanko

Yeah we have a few plants that have been shut down although those are in mothball condition we do not have any intentions of restarting any of our high cost mining operations or chemical plants right now.

Donald Carson – Merrill Lynch

Okay and then a follow up on cost, just in the most recent quarter I mean ex raw materials your phosphate costs seem to come down quite a bit sequentially but it was the reverse on potash, so if you could just comment on both those areas and how much of the potash operating cost increase was the province of Saskatchewan’s resource tax?

Larry Stranghoener

Don its Larry, your observation is correct on the phosphate side, we saw very good operating performance especially on the mining side, much of that relating to mining more tons than in the second quarter and so yes you’re right, sequentially cost performance did improve. On the potash side we had headwinds as you suggest because of resource taxes which were up substantially in the third quarter versus the second quarter. And we’ll continue to grow substantially in line with potash prices moving up substantially.

Donald Carson – Merrill Lynch

And Larry are those mining improvements in phosphates sustainable, should we think of this as a new run rate in terms of unit costs?

Larry Stranghoener

I think that partly it’s a function of mining more tons than we had expected to mine but generally speaking as you know there’s been a great focus on the phosphate team on operational excellence and efficiency improvements and I think we’ll be seeing the benefits of that and should continue to see the benefits of that.

Donald Carson – Merrill Lynch

Okay, thank you.

Operator

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

Mark Connelly – Credit Suisse

Thanks, just quickly you mentioned ocean freight forward in part of your mark to market conversation, is that something that we should be watching for, was it a meaningful part of the numbers?

Jim Prokopanko

No, we do some ocean freight contracting, not a significant amount, so that should be an unusual item somewhat. We’ve seen ocean freight quite erratic over the last couple weeks, up and down and we’ve been in a down period for a little bit now but don’t anticipate, there will be some small swings but nothing meaningful.

Mark Connelly – Credit Suisse

Okay and then just I wonder if you could just give an update on the brine situation at Esterhazy?

Jim Prokopanko

The brine inflow is been responding very well to our remediation efforts. There has been no material change to it. It continues in the historic ranges of what we’ve experienced over the past couple decades. And we’re quite satisfied and very pleased with how it’s proceeding. We’re watching it very carefully, giving it a lot of attention.

Mark Connelly – Credit Suisse

Okay, a lot of good news, thank you.

Operator

Your next question comes from the line of Brian Yu of Citi.

Brian Yu – Citigroup

Great, thanks guys and congratulations on the good numbers. Following up on Don’s question earlier regarding costs, it seemed like you have pretty good cost control also on ammonia and sulfur side even though they’ve gone up and the costs in the quarter were behind what we would see in the spot markets and my question is does that reflect lags or some competitive advantage? And should we expect to continue on a go forward basis?

Jim Prokopanko

Okay Brian. Good question and observation, we have, that’s a blended price with some inventories from past quarters. So it doesn’t entirely reflect spot prices of product bought this quarter. Second is that on the sulfur side, we do have we believe a competitive advantage in the infrastructure and network for molten sulfur handling equipment. We have barges, molten sulfur barges, molten sulfur storage and very good relationships with sulfur providers, suppliers in North America. So I believe we do have something of an advantage over others and but we’re not completely immune from what’s happening worldwide in sulfur prices.

Brian Yu – Citigroup

Okay and you also earlier indicated that you’re going to untraditional sources for some of your sulfur. Can you give us a sense of what percent of your requirements are from these untraditional sources?

Jim Prokopanko

It’s quite small. Its a couple percent of what 5-10% kind of range and this is really a safety buffer that we’re going to, that we’ve put in place that we could rely on over the next nine months or so. It’s augmenting our regular suppliers.

Brian Yu – Citigroup

Great, alright, thank you.

Operator

Your next question comes from the line of Kristen McDuffy of Goldman Sachs.

Kristen McDuffy – Goldman Sachs

Hello, your debt balance at the end of the fiscal third quarter was relatively flat versus your fiscal second quarter despite the fact that I think you prepaid $150 million of bank debt. Did you guys have debt balances that increased during the quarter?

Larry Stranghoener

Yeah Kristen, you’re correct and that reflects an increase in short term debt to fund offshore inventory positioning.

Kristen McDuffy – Goldman Sachs

And could you give us your cap ex and cash taxes for the quarter?

Larry Stranghoener

Cap ex for the quarter, I don’t have the cash taxes number for you yet Kristen so we’ll have to get back to you on that. The cap ex for the quarter was about $90 million.

Kristen McDuffy – Goldman Sachs

And just to go back, you said you increased short term debt to fund offshore what? Can you explain what it was?

Larry Stranghoener

Offshore inventories, just for capital needs in our offshore geographies, particularly in Brazil.

Kristen McDuffy – Goldman Sachs

Got it. And could you give us a projection for cap ex for next year?

Larry Stranghoener

We have said at this point that capital expenditures will be up substantially compared to the number for this year. We’re just going through our budgeting process at this point and so you should await further guidance on that number Kristen. But we do want to condition you to think that the number will be up quite substantially versus this year. And that’s because of the growth opportunities that we see ahead of us in the potash business particularly but also in the phosphate business and some opportunities offshore.

Kristen McDuffy – Goldman Sachs

It sounds like you’re spending a total of $3.2 billion on your potash expansions over the next 12 years. How should I think about the distribution of that spend, will it be weighted in the earlier part of those 12 years?

Larry Stranghoener

You should think of that as fairly evenly placed across those 12 years.

Kristen McDuffy – Goldman Sachs

Okay, thank you.

Operator

Your next question comes from the line of Charles [Nevery] of Morgan Stanley.

Charles [Nevery] – Morgan Stanley

Good morning. Couple quick questions on the sulfur side, I know some of the movement in sulfur pricing had been based on some sort of irregularities let’s say in the market, I mean when do you think that those might be rectified and maybe see sulfur pricing back off a bit? And I have a follow up as well.

Jim Prokopanko

Okay Charles. We’re expecting that it’s going to be through this calendar year that we’re going to be seeing elevated sulfur prices, I think towards the end of the calendar year they’ll start to moderate. Two things contributing to the sulfur pricing, one is strong world demand but that’s really been stretched with a number of R&M outages, plant outages at gas and oil refiners through North America.

Really quite an unusual set of circumstances that we’ve found plants concurrently coming down. This is starting to work through with some of the larger producers getting back on stream after the R&M outages. A little longer term, 18-24 months with tar sand projects, ultra low sulfur diesel plants coming on stream, getting debugged, we see the sulfur prices considerable sulfur supply coming on stream in those 18-24 months and back to frankly the good old days of excess sulfur supplies.

Charles [Nevery] – Morgan Stanley

I mean where do you think it could return to? I mean the $60 and $70 number probably isn’t likely but you know looking at international markets, well north of $600, where do you think those, not looking at the US, looking more at those markets, where do you think they might come back to?

Jim Prokopanko

We forecast 18-24 months we’re going to be back sub $100’s and I’d put it back to the range of $50-$100.

Charles [Nevery] – Morgan Stanley

Okay, the other thing on a more near term basis, field conditions right now in the US, you know they had talked about a little bit of wet conditions in certain areas I mean where do you see things now and I know there’s plenty of time I guess to get ready but you know if we were going to the field, where would things stand in terms of the ability to get out and start doing your spring work?

Jim Prokopanko

We are ready to go. If it were to dry up across the country this afternoon, the pipeline is well positioned, dealers got way ahead of the game, filled their warehouses, we are in as good a logistic situation as we’ve been in. The railways are working well. [Liver] is opening a little slow but we are well positioned.

And you said it Charles, this is much too early to get too fussed about wet conditions, yes I agree it’s wetter than normal but it’s wet, it’s not a drought, I rather have slightly wet conditions than drought conditions. May 5th is the ideal corn planting date, you want your corn in before then and we’ve got a good bit of time to get it done. North American farmers are extraordinarily well equipped to get the crop in and we’ve seen the entire North American crop get planted within two weeks, so we’re in good shape.

Charles [Nevery] – Morgan Stanley

Okay very good. I appreciate it, thank you.

Operator

Your next question comes from the line of Paul D’Amico of TD Newcrest.

Paul D’Amico – TD Newcrest

Hi, good morning guys. Most of my questions were on sulfur and most of them got asked and answered. Let me approach it a different way with respect to the last comment on the sulfur supply, potential of the next 18-24 months. If I heard it right we’re talking a potential to make a $600 backdrop with respect to it, is it fair to say just to frame it, is it fair to say then given India being a non integrated producers pushing the DAP pricing up internationally that we’re probably looking at a finished pricing in the end regardless of margin but finished pricing in the end almost flat where we are right now domestically? Is that roughly how to frame it in terms of the backdrop with respect to costs coming down on sulfur?

Jim Prokopanko

Steve I’m not sure I quite get that question, I think Steve has the answer though. This is Steve Pinney our Vice President of Phosphate Operations.

Steve Pinney

If I understand your question correctly you’re asking what the domestic pricing on finished product looks like or what we think it looks like based on sulfur pricing going forward, is that correct?

Paul D’Amico – TD Newcrest

Yeah I mean if you got a $600, I mean it was $650 now versus $50-$100, 18-24 months, times a 0.4 delta, it’s like a $250 difference.

Steve Pinney

It would be in that range. You know the pricing going forward is going to be dependent upon the demand for fertilizer and the pricing of rock and ammonia as well as other things so I can’t say that we can draw a straight line relationship with the sulfur pricing.

Paul D’Amico – TD Newcrest

Okay. And also in terms of on the supply arrangements, is there any supply that you’ve got on a longer term basis that is not priced quarterly? Or not re-priced quarterly?

Steve Pinney

Yeah we have some of our rock, the sulfur block supply is not priced quarterly but the vast majority of our supply is quarterly supply contracts.

Paul D’Amico – TD Newcrest

Okay, thanks guys.

Operator

Your next question comes from the line of Bob Goldberg of Scopus Asset Management.

Bob Goldberg – Scopus Asset Management

Good morning. A couple of questions for Larry. Larry on the tax rate I know you gave guidance for the full year 08, 25-30%, what should we be thinking if we look out toward next year in terms of the tax rate assumption?

Larry Stranghoener

I think you’re safe using something in the low 30’s, 30-35% Bob.

Bob Goldberg – Scopus Asset Management

Okay and a broader question on the balance sheet, I know the transformation of Mosaic’s balance sheet has been a relatively recent situation, but I’m just curious as we look on the medium term, what do you think is an appropriate balance sheet structure for Mosaic? It looks like you’re going to be net debt free by the end of this fiscal year going into a net cash surplus as we head into fiscal 09. So maybe if you could just talk a little bit about how to use, how you see using the balance sheet to create some value for the shareholders and maybe a little bit more about some of the growth projects you’re looking at in international markets.

Larry Stranghoener

I agree Bob we will likely be a net, have it being a net cash position which is a very comforting position to be in given the credit market, the state of the credit markets these days. I think that our capital structure will likely vary over the course of a cycle in this industry. We’re very comfortable holding lots of cash. We believe that we will have ample opportunity to use that cash to make sound investments in coming years and intend to do so. We’ve outline some of our capital spending plans particularly on the potash side. We’ve got de-bottlenecking opportunities in phosphates as well. We’ve got opportunities offshore as well. We will maintain a very disciplined approach to capital spending decisions that we make.

We will target appropriately high hurdle rates when we see opportunities to invest money at high investment return rates as we look out over the next couple of years. I think in addition as we mentioned in the script, we will develop some sort of a shareholder distribution policy. Dividends, perhaps a share buyback plan although it’s questionable how much sense that might make with a controlling shareholder. But we will, we expect to implement a program whereby we regularly return cash to shareholders as well. We having built this balance sheet strength we intend to maintain it, we intend to strengthen it further to take advantage of opportunities that we see coming forward in the next few years.

Bob Goldberg – Scopus Asset Management

Great, thanks Larry.

Christine Battist

Grace Ann, we’ll take our last call.

Operator

And your final question is a follow up from the line of David Silver of J.P. Morgan.

David Silver – J.P. Morgan

Yeah, hi. I have a question here about international fertilizer pricing and maybe price elasticity from your major customers and I think I’d like to focus on the situation in Argentina. You know so we hear about farmers rioting in the streets because of government policies that kind of interfere with their returns from their crops and we also know that Agrium has been asked to cap their selling prices from their nitrogen facility there.

So this is a broad question but I guess you know I realize that you guys operate an SSP facility down there as well. So you know microscopically have you guys been asked to do anything at the behest of the government down there? And have you been shorted on natural gas or other utilities? And then more broadly speaking how common is this situation as we go around the world? And what types of demand destruction have you noticed as potash and phosphate pricing have ticked up?

Jim Prokopanko

Okay there’s about four questions there David, I don’t know if we’ll get to them all. You asked about our SSP, have we been asked by the government to do anything in terms of our pricing, the answer is no, we haven’t. If you wondered what we would do, well we buy rock for that business, phosphate rock to make SSP and we are not going to operate that business at a loss.

If that was expected, no we won’t operate it as a loss. Yes the high fertilizer prices have gotten the attention of various governments, but we’ve not seen any actions to control those high fertilizer prices. And what you’ll get I’m afraid if you were to control those is less fertilizer and I think governments understand that lower the fertilizer prices in this period of strong economic or strong demand is not going to be serving their purposes. Natural gas, we do not use much natural gas in the manufacture of SSP. So that’s not been a serious concern for us.

David Silver – J.P. Morgan

And then any comment about potential demand destruction from other markets as DAP and potash pricing reach new highs?

Jim Prokopanko

Yeah, I’ll let Mike comment to that, he’s got some thoughts.

Mike Rahm

Yeah David I can make a few comments on that. You just going around the globe, maybe let’s start with India where as you know the Indian farmer is pretty much insulated from the big increases in nutrient prices. They have a maximum retail price, they’re headed into an election and farm economics in India are as strong as, probably the strongest of anywhere in the world.

When you look at some of the other big Asian markets, what we’ve focused in North America on corn and soybeans and wheat, you look at some of the key prices driving fertilizer demand there such as rice prices and palm oil prices. And they’re at absolutely record smashing levels. So farmer economics around the globe despite the high crop input prices still remain very strong and you know we certainly discuss and try and analyze demand destruction but frankly we have not seen a huge amount of evidence that demand is being destroyed at these levels yet. It’s something that we’ll continue to monitor very carefully but at this point we’ve seen minimal impacts.

David Silver – J.P. Morgan

Thank you very much.

Christine Battist

And that concludes our call.

Operator

Thank you for your participation in today’s conference, this concludes the presentation and you may now disconnect.

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Source: The Mosaic Company F3Q08 (Qtr End 02/29/08) Earnings Call Transcript
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