The Mosaic Company F1Q10 (Qtr End 08/31/09) Earnings Call Transcript

| About: The Mosaic (MOS)
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The Mosaic Company (NYSE:MOS) Q1 2010 Earnings Call October 6, 2009 9:00 AM ET


Jim Prokopanko – President & CEO

Dr. Mike Rahm – VP, Market Analysis & Strategic Planning

Larry Stranghoener – EVP & CFO

Rick McLellan - SVP, Commercial Manager

Christine Battist – Director IR


Don Carson - UBS

Edlain Rodriguez - Broadpoint Gleacher

Vincent Andrews - Morgan Stanley

Steve Bryne - Bank of America-Merrill Lynch

Robert Koort - Goldman Sachs

Michael Piken - Cleveland Research

Jeff Zekaukas - JPMorgan

Dave Silver – UBS



Good morning ladies and gentlemen and welcome to The Mosaic Company's fiscal 2010 first quarter earnings call. (Operator Instructions) Your host for today's call is Christine Battist, Director of Investor Relations of The Mosaic Company. Please proceed, Christine.

Christine Battist

Welcome to Mosaic's fiscal 2010 first quarter earnings conference call. Joining us for the call this morning are Jim Prokopanko, President and Chief Executive Officer; Dr. Mike Rahm, Vice President, Market Analysis & Strategic Planning and other members of Mosaic’s senior leadership team.

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

We will be making forward-looking statements during this conference call. The statements include, but aren't limited to, statements about future financial and operating results. They are based upon management's beliefs and expectations as of today's date, October 6, 2009, and are subject to 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 yesterday and in our reports filed with the Securities and Exchange Commission.

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

Now I'll turn the call to Jim.

Jim Prokopanko

Good morning and thank you for joining us. Our results this quarter demonstrated sequential improvement over the fourth quarter of fiscal 2009 while reflecting continued short-term dislocations in the crop nutrient market, a theme which will likely continue into and through the second quarter.

Our confidence in the long-term outlook for the industry is unwavering. We continue to execute strategic plans that will drive strong cash flow and shareholder value. I will start by highlighting a few items from our quarterly results, then I’ll provide an update on our financial guidance.

Mosaic continues to maintain a strong balance sheet with $2.6 billion in cash providing ample financial flexibility. We generated $172 million in cash flow from operations this quarter despite weak potash shipments and a recovering phosphate market.

We still expect to fund over $1 billion of capital spending this year with operating cash flow. Though most of the cash flow won’t come until the second half of the fiscal year. Business segment results are summarized on slide five. Like many of you, we expected potash sales volumes would have returned to more normal levels by now.

Market conditions continue to evolve and until this environment changes, we will continue to sell lower volumes and operate at less then optimal production rates. Despite these factors, potash operating earnings this quarter were still healthy at nearly a 30% margin.

Potash sales volume increased modestly from the fourth quarter of fiscal 2009 while the overall average selling price for MOP declined. This reflects marketplace price discovery completed during the quarter with major buyers in India and Brazil.

The [Capotex] contracted price for India was $460 per tonne CFR, and adjusting for freight and loading net backs to about $365 per tonne FOB Saskatchewan. Our phosphate segment posted improved results from the fourth quarter. And the average selling price and sales volumes were within the guidance ranges we provided.

Its encouraging to see volumes rebound to year ago levels and our inventory levels decline. Gross margins improved to 14% this quarter and we expect further modest improvement in margin in fiscal 2010.

Offshore results improved, as we expected, posting a modest gross margin. We anticipate seeing further improvements in offshore results as we move into the high season in several countries where we do business.

We are also making progress on our strategy to more tightly integrate our offshore business with our production units. Now I’ll share some financial guidance for fiscal 2010 as summarized on slide six.

We estimate an average DAP selling price of $265 to $305 per tonne in the second quarter of fiscal 2010 and phosphate sales volumes of 1.8 to 2.2 million tonnes. Until potash market conditions stabilize we are not providing guidance on potash sales volume or MOP selling prices.

We are confirming the guidance we previously shared on capital spending and SG&A as noted in the chart. The effective income tax rate for fiscal 2010 is now estimated to be in the high 20% range, down from our prior guidance.

At Mosaic we are managing effectively through this period of weak results with our attention focused firmly on long-term value creation. Mosaic faces extraordinary opportunity given agricultural market dynamics, and we have the right people, assets, and strategy to drive strong results over the next few years.

No where is the potential greater then in potash. Despite near-term uncertainties the long-term potash outlook remains highly attractive for us due to robust demand prospects, as well as our position as an industry leader.

The cost to develop new capacity is high, and established players like Mosaic have a distinct advantage over potential start-ups and new entrants to the industry. Mosaic owns enough mineral reserves to run our Saskatchewan mines for the next 100 years.

We can develop new brownfield capacity at a substantially lower cost then greenfield projects. Indeed we are now executing a multi billion dollar, multi phased expansion plan at our three large scale mines in Saskatchewan.

These projects will increase our annual capacity to nearly 17 million tonnes by 2020. This capacity also includes at no cost, the impending reversion of 1.3 million tonnes of potash currently being supplied to a third party under its holding agreement.

In the cash of phosphates, Mosaic produces more new crop nutrient and animal feed products then any other company in the world by a wide margin. We rank amongst the lowest cost producers in the industry today due to the tight vertical integration of our phosphate rock mining and processing operations, the large scale of our mines and chemical plants, and the important location advantages we have in Florida and Louisiana.

In addition, our offshore distribution network allows us to ship product to key markets around the world on our own time lines affording increased production flexibility, and a greater ability to match supply with varying seasonal demand.

A key component of our phosphate strategy is to cement our competitive advantage for the next decade and beyond through a stepped up and focused effort on cost reduction and operational excellence.

Of course Mosaic doesn’t operate in a vacuum. Global market conditions support or value creation plans. There is evidence of economic recovery around the globe, which reinforces the bullish long-term food story.

An important but not well understood fact, is that the bountiful yields expected in North America this fall are in sharp contrast to grain and oilseed reductions and challenges in other regions. We believe this is an ideal time for Dr. Mike Rahm to provide a market outlook covering this point amongst others.

At Mosaic we have the best understanding of market conditions around the world and believe you will find this update valuable and compelling.

Mike Rahm

Thank you Jim and good morning. It’s a pleasure to share with you some of our insights about the agricultural and crop nutrient outlook on this call. Certainly the magnitude of the drop in phosphate and potash shipments last year surprised everyone.

However we’re beginning to see signs of a recovery from this deep decline. Phosphate demand clearly has picked up during the past several months, and our assessment is that potash demand is on the brink of a recovery.

The beginning of the recovery is evidenced in several metrics that Jim highlighted from our first quarter and we expect momentum will continue to pick up during the remainder of our fiscal year. Several factors are fueling the demand recovery.

The first is the expected upturn in the global economy. A leading macroeconomic forecasting company declared last month that the Great Recession was over. They estimate that the global economy grew slightly in the second quarter of 2009 due to strong upturns in key Asian economies and less severe declines in many developed economies including the United States.

As you see from slide 11 after contracting 2.2% this year, the global economy is forecast to grow 2.5% in 2010 or at a rate only slightly less then the compound annual growth rate since 1990. Growth is expected to accelerate after 2010 to about the same fast pace as earlier this decade.

The large and rapidly developing countries in Asia are leading the way. As you can see from slide 12 it looks like China will exceed its target GDP growth rate of 8% in 2009 and then hit double-digit growth in 2010 before reaching a steady state rate of about 9% per year.

The outlook for the Indian economy continues to improve and economies in other Asian countries also are expected to grow at higher rates due in part to the recoveries in China and India. Strong and steady growth in the developing world is expected to stress the world’s capacity to provide the basic resources needed to feed, clothe, house, and power a growing and more affluent population in these regions.

The upturn in the global economy is indeed a good sign for crop nutrient demand as well as for other basic materials industries. A second factor driving the recovery is the positive outlook for production agriculture.

Back to back bumper crops have built global grain and oilseed stocks and calmed agricultural commodity markets. However our analysis indicates that global stocks still are not at a secure level and farmers cannot afford to take their foot off the accelerator.

Slide 13 illustrates the step-up in global grain and oilseed production in 2008 and 2009 as well as potential production in 2010 for low, medium, and high scenarios. The line on this chart shows what we have noted on previous calls, that an economic downturn has limited impact on grain and oilseed demand.

Despite the deepest global economic downturn since the Great Depression, global grain and oilseed use continued its steady march upward increasing 1.9% or 47 million metric tonnes during the past crop year.

You can see from this chart that the record crop last year resulted in a build up of grain and oilseed inventories and another near record crop this year, is expected to increase stocks a bit further. However the projected stock build during these two years will add about 10 days of use to global inventories.

In other words, increase stocks from about 62 days of use at the end of 2007, 2008 to 72 days of use at the of the 2009, 2010 crop year. We often are asked what constitutes a secure level of grain and oilseed inventories.

Our definition of a secure level is one that can absorb a supply shock without causing a disruptive spike in agricultural commodity prices. Based on this definition, and based on our scenario analysis, global grain and oilseed stocks at the end of 2009, 2010 will not be sufficient to prevent such a spike if there is a production hiccup in 2010.

We think future markets agree with that assessment. For example, futures prices for the next three crops remain at relatively high levels; about $4 per bushel for corn, and $9 per bushel for soybeans. Again, markets are clearly asking farmers to keep their foot on the accelerator.

In addition to these positive demand fundamentals, a third factor driving a recovery in [P&K] shipments is the need to restock inventories. Our read of available statistics combined with customer feedback, indicates that P&K inventories from the beginning of the global distribution pipeline all the way down to the farm field have been drawn down sharply, if not emptied, during the past year.

The speed and ultimate strength of the recovery in P&K demand still hinges on a number of unpredictable factors such as weather, macroeconomic conditions, and government policies. As a result, our customers remain cautious about restocking warehouses.

Nevertheless we project a strong recovery in shipments this fiscal year due to these improved demand drivers and we believe the only uncertainty is how much of this rebound hits during our second, third and fourth fiscal quarters.

The recovery is expected to vary by region, so let me shift to some country-specific comments. In the United States farmers are expected to harvest a record crop this year, despite planting delays caused by a wet spring. Growing conditions in many regions during the summer were ideal for a late maturing crop with timely rains in August and record growing degree days in September.

US farmers planted fewer acres this year, but have or are expected to harvest record yields for spring wheat, and corn, as well as near record yields for soybeans and several other crops. However as you can see from the chart on the right side of slide 16, grain and oilseed production outside the United States is expected to decline about 29 million metric tonnes this year.

Although harvested area outside the United States climbed to record levels this year, average yields declined in some countries due to drought, pests and other factors, including lower crop input use. In China, the prospect of double-digit GDP growth, coupled with a disappointing harvest this year, is likely to focus more attention on long-term food security and food inflation policies.

Chinese grain and oilseed production declined this year for the first time since 2003 and that has opened a significant gap between use and production. In the near-term China is expected to fill this gap by importing record amounts of oilseeds, drawing down course grain inventories, and even importing feed ingredients such as dried distillers grain with solubles.

In the long run, planters are expected to direct attention and resources to programs that boost agricultural productivity. Such a policy thrust has important implications for crop nutrient suppliers. First, planters are expected to keep farm economics profitable in order to stimulate grain and oilseed production as well as overall nutrient use.

Second, we expect a renewed effort to achieve more balanced nutrient use, especially programs to get potash use back on track. The sharp drop in potash imports combined with reports of significant channel inventories, implies a collapse of Chinese potash use.

Finally, officials appear committed to maintaining a large strategic reserve of crop nutrients. Such a program, coupled with good demand prospects and expected structural changes in the phosphate industry, suggest to us that exports of DAP and MAP from China likely will remain at moderate levels.

In India grain and oilseed production is expected to decline about 5% or almost 13 million tonnes this year due to the worst drought since 1972. A late revival of the monsoon has averted a disaster, but rainfall this year is expected to be down 23% from the 50 year average.

The poor monsoon reduced planted area during the Kharif season and lowered cotton, peanut, rice, and sugar yields. The rice harvest is the smallest in five years and world sugar prices have increased sharply in response to the prospects of a smaller Indian crop.

The drop in production during the Kharif season, which runs from April 1 through September 30, has heightened efforts to maximize area and yields during the Rabi season, which runs from October 1 through March 31.

The combination of high domestic grain and oilseed prices and low maximum retail prices for crop nutrients, produces highly attractive farm returns. As we’ve said before, farm economics in India are as strong if not the strongest, of any where in the world. It is not surprising that crop nutrient consumption continues to climb despite the volatility in global prices.

For example we project that DAP and MAP imports combined will total about 6.5 million tonnes in 2009 and remain at this record level again in 2010. Potash imports are expected to rebound from 4.3 million tonnes this year to about 5.5 to 6 million tonnes in 2010.

In Brazil and Argentina, the 2009 harvest was hurt by severe drought as well as cutbacks in crop input use. Argentina was especially hard hit. The Argentine harvest was the smallest in 10 years and yields for key crops such as soybeans and wheat, were the lowest since the mid 1990’s.

Weather conditions in Brazil were not as harsh as in Argentina, nevertheless the 2009 Brazilian harvest although still the second largest ever, was down about 8% from the 2008 crop. Prospects for 2010 in South America are much improved as farmers begin to plant the crop in earnest this month.

The drought has broken and soil moisture has increased to normal levels in most regions. Farm economics also are attractive due to the expectation of a recovery in yields, relatively high commodity prices, and lower input costs especially for [bliphosate] and crop nutrients.

That completes our walk around the world. As noted at the start of this journey we estimate that the recovery in P&K demand this year has either started, or is on the brink of starting, in key geographies due to the improved economic outlook, continued strong grain and oilseed fundamentals, and low pipeline inventories.

We project that this recovery will pick up momentum during the rest of our fiscal year. The timing and ultimate strength of that pick up will depend on a number of unpredictable variables such as weather, and its impact on the window for fall application and level of agricultural commodity prices.

This final chart summarizes how we expect these developments to impact import demand for key phosphate and potash products in 2010. We project a strong rebound in demand due to the improved outlook in nearly all of the key importing regions.

Back to you Jim.

Jim Prokopanko

Thanks Mike for the extensive review of what is happening in key markets around the world. We find that our in depth, balanced view of market trends is highly valued by our customers, as well as by many investors and is an important input to our financial and strategic decisions.

Its worth mentioning that the work of the recently deceased Nobel Laureate, Dr. Norman Borlaug, is as relevant today as it was when he began his pioneering work back in the 1960’s. The world population will grow by one billion people by 2030.

To meet the needs of a growing and more prosperous population, a second green revolution is needed. And crop nutrients are as much a key component now as they were in the first green revolution

In summary, we are seeing signs of recovery in the global economy that will have a positive impact on the crop nutrient business. Our balanced portfolio on phosphates and potash is advantageous in the current environment when compared to single nutrient companies.

The combination of several factors will trigger how soon we see a full recovery. I am proud of Mosaic’s capacity to adapt to the changing environment as well as our leadership and financial strength while we keep our sights on the long-term, positive outlook for agriculture.

We continue to make significant investments to expand our potash production and are actively exploring avenues to enhance our phosphates operations, and further align our distribution with our production assets.

We are confident this balance approach with two principal nutrients will serve our stakeholders well. Now, we’ll be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Don Carson - UBS

Don Carson - UBS

First a housekeeping question, and then a question on phosphates, on the cash flow statement you outlined $38.6 million in derivatives gains, yet in your discussion on the segments you talked about a 4.6 gain in phosphate and 1.6 loss in potash, just wondering what that difference is. And then I just wanted you to expand on your comment that on slide nine, where you want to extend your phosphate reserves. Is this because you think it will be too difficult and expensive to add capacity in Florida and I know you’ve talked in the past about accessing some reserves in South America. With the impending [Biobar] start-up, would that rock be suitable for Mosaic and do you think that that can help lower merchant rock prices.

Jim Prokopanko

With those two questions, I’m going to ask Larry Stranghoener to address the first question and I’ll follow-up with some comments about the permitting ore reserves or phosphate.

Larry Stranghoener

The answer lies in the difference between unrealized and realized gains. We noted the unrealized gains and losses in the press release. The realized gains we just include as part of cost of goods sold and I think its best just to handle the details on that offline after the call.

Jim Prokopanko

To your question on what our intentions are and thinking is looking abroad for phosphate rock reserves, we presently purchase about one million tonnes of phosphate ore from other parties, mostly Morocco. And we mine and process about 17 million tonnes in a normal year, so about 5% roughly is purchased.

One we’d like to find some alternatives to that if we could and so we are looking just to diversify our holdings of ore in other geographies in the world. Second, why not pursue extending our mining in Florida, at present we have about 30 to 35 years of proven and probable ore reserves, something like approximately six or seven years depending on operating rates of permitted reserves ahead of us.

And we just think having a balanced approach with some alternative supplies outside of the Florida geography is an appropriate thing to do and we think there’s some cost effective alternatives to continue in Florida.

We’re going to continue in Florida. This will just help extend the life of our total rock reserve. Does that answer that?

Don Carson - UBS

I guess the one question, do you think [Biobar] and more merchant rock coming online, do you think that that puts a cap on what you might have to pay for merchant rock, which I guess is good news, but then potentially would that then recap rock price around $100, $125, does that kind of cap that margin outlook as well.

Jim Prokopanko

I think that phosphate rock price is going to be driven one, by the cost of the rock and two, by the price of phosphates. Once the plant gets, the mine gets built, the product will move at some price. So I think there’s a few moving parts there that prevent me from saying that will cap the price of rock. Its going to largely depend on demand for finished phosphate products.


Your next question comes from the line of Edlain Rodriguez - Broadpoint Gleacher

Edlain Rodriguez - Broadpoint Gleacher

I have a quick question on China, can you talk about the latest you have on domestic potash prices. I’m just trying to understand a typical relationship between domestic prices and imports.

Jim Prokopanko

The question what do we know about domestic Chinese potash prices, as I recall they’re in the mid 300’s, is what the farmers are paying. Potash in China is largely consumed in NPK compound blends. Unlike North America where its bought directly, its bought through those that take it and process it.

With the recent high prices in the mind of Chinese producers, higher prices of potash, they’ve reduced the consumption of NPK blends and we’ve seen reduced potash application and farmers have gone to putting more nitrogen and phosphate on.

And I think that’s created and exacerbated an imbalance of nutrients supplied to the field and we’ve now seen the second year where potash applications have dropped materially and we have great doubts as to whether they can afford a third year.

So it’s a matter of the markets rebalancing in China and either the grain prices go up, and to prevent grain prices going up, they’re going to have to grow more, and that’s going to require, I believe more potash applied and better balance in the nutrient applications.

So I think there’s some adjustments to go on in China or as we’ve seen this is the first year since 1993 I believe where we’ve seen a reduction in grain production in China. It has to be very concerning for the leadership in China.

Edlain Rodriguez - Broadpoint Gleacher

Second question, just trying to understand the impact of the mix shift in your potash business, can you give us some color regarding the price differential between ag and non-ag volumes. ]

Jim Prokopanko

First I’m going to ask you if you can just clarify that, I’m going to have Rick McLellan, our commercial leader address that.

Edlain Rodriguez - Broadpoint Gleacher

Just trying to understand the impact of the mix shift in potash because I think you mentioned that non-ag was a bigger proportion of the mix, just trying to understand like what’s the price differential between ag and non-ag volumes.

Rick McLellan

Thanks for the question, I’ll answer it in two ways. One, the percentage of industrial tonnes that we shipped are non-ag tonnes this quarter were about 20% of our total business. The second is we have as far as pricing goes, we don’t talk about pricing for industrial alone because we have some long-term contracts that don’t allow us to do it.

But those long-term contracts are being replaced in the next few years with newer more market driven contracts. So we’ll so those net backs improve.


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

Vincent Andrews - Morgan Stanley

Maybe somebody could just characterize what you’re hearing from US dealers about restocking, whether its for the fall or ultimately for the spring and characterize what, presumably their hesitancy is price related, and maybe you could just characterize how you expect that to play out.

Jim Prokopanko

I suppose at the end of the day it is price related but what it, I think fundamentally is a psychological aversion to taking on risk. Where last spring we saw the distribution pipeline, dealers buying three tonnes for every two tonnes of sales, I think now and after with the price corrections to inventories in the marketplace, we’re now seeing dealers that want to have no inventory at the end of the season.

They’re just not, they’re avoiding the chance that there’s some downside. Dealers stuck their neck out last year. Prices dropped and they had to recalibrate to the farmers. This year the dealers want to ensure they have a ready sale at hand before they bring the product in and so I think until there’s some greater confidence and comfort that we are firmly in a phase of recovery that there’s more upside then downside, or at least that the downside is moderate, people aren’t willing to step into the water.

Its just the story in much of the world economy. People are very risk averse given this past drop in commodity financial markets, etc.

Vincent Andrews - Morgan Stanley

Maybe if I could just ask a follow-up on the psychological aspect from a producer perspective, and I guess my question would be, prior to the price cut in India, one could have made the argument that some type of price cut could stimulate global demand and we’ve seen that proved not to be the case outside of markets that had to buy such as Brazil, so do you think psychologically from a producer perspective its become apparent that a further material price cut would be unlikely to stimulate demand but rather would just stimulate more perception from the buyers end that the price could go even lower.

Jim Prokopanko

I think there’s two, you have to look at the two nutrients, phosphate and potash. On phosphate I think there’s an acceptance that look, the price is not likely to go down much lower. Ammonia is at relatively low prices and just above 300. Sulfur is near zero so the input costs aren’t going to go down much more.

That explains part of the comfort with dealers being willing to put phosphate in their warehouses. On the potash we would have thought that India would have set the bottom, that didn’t happen. China deferred and I think left the impression that there could be a further drop. I guess that’s arguable whether, time will tell.

We’ll see if there’s going to be a further drop but I think with North America being the market right ahead of us now, all thoughts and efforts are focused on the harvest and farmers and dealers really haven’t turned their mind to the potash piece.

I’d add also one other item that right now potash, its unnatural in the minds of some farmers and dealers to see potash at a higher price then either nitrogen or phosphates. That’s never been the case. We’ve always seen nitrogen and phosphate above the potash price and I think people just aren’t comfortable with that.

So its, wait and see. The markets will decide what the value of potash is and we don’t think there’s much room to see significant erosion from where it is today so we’re, as a producer, we’re waiting and holding on that China will buy and that will set the base.


Your next question comes from the line of Steve Bryne - Bank of America-Merrill Lynch

Steve Bryne - Bank of America-Merrill Lynch

Couple of financial questions on potash, what do you expect to pay this year, in this fiscal year, in the provincial resource tax, the production tax and it was quite low in this fiscal first quarter but even if you back it out, your unit costs in potash were quite high, about $50 a tonne higher then in the prior two quarters. Can you explain what was driving that.

Larry Stranghoener

Resource taxes will be down this year versus last year, probably in the mid $200 range, $250 to $300 million versus something in the low $400 last year. And that’s a function of course of all the different things that go into the resource tax calculation; volume, profits, prices, as well as the super depreciation deduction we get for capital spending.

The potash cost trends that you’re seeing are a function, a continuing function of just very low production volumes and when we’re operating at such low volumes, our unit costs are high and items that wouldn’t normally even be material in terms of explaining quarter over quarter changes, become more material.

So labor costs were up a little bit, water management costs were up a little bit, other items such as that explain the cost per tonne increase versus the fourth quarter.

Steve Bryne - Bank of America-Merrill Lynch

And when you look at that net back, on the shipments to India that are almost $100 a tonne of what is freight, is some of that just absorbing the fixed costs of Canpotex on low shipments, is that also abnormally higher then normal.

Larry Stranghoener

Yes, that’s exactly right. All of our interaction with Canpotex is through the selling price and so their own overhead issues come to us through a price adjustment and so you’re exactly right.

Steve Bryne - Bank of America-Merrill Lynch

And then just one last one, I know the harvest is just underway in the western corn belt, but in that region are you seeing any indications of some shipments out of your warehouses of P or K in that region for a fall application.

Rick McLellan

To answer your question, as we’re seeing the wheat planting in the west get started we’re pleasantly surprised by the activity of phosphates and questions about resupply. So we, it’s the first indication in the marketplace of activity and its probably been a very positive surprise for both ourselves and the dealers.


Your next question comes from the line of Robert Koort - Goldman Sachs

Robert Koort - Goldman Sachs

Couple of quick questions, one I think maybe we’re expecting to see a weaker fall season which will pressure the spring season, and so how do you get comfortable, how uncomfortable should your customer base be about deliverability and logistics issues this spring.

Jim Prokopanko

This is something that comes up every couple of years for the last 30 or 40 years and North America has been, in the case of North America, we’re very fortunate for just and outstanding logistic system and in transportation infrastructure between the railways, highways, and the Mississippi.

Now that said, looking at phosphates, I think dealers we’re well positioned with product in-country as far as dealers having it or us having it in inventory in dealers’ warehouses. Potash is a little tighter. I think that’s where there could be a, where there potentially can be a challenge but the North American fertilizer producers have become very adapted at moving product and we’ve got a great transportation system.

So at this point we’re not anticipating any serious dislocations. Abroad, we’re seeing it takes much longer to organize and oversee shipment and we’re seeing that in countries like India, that is quite intent on having product shipments, some of them moved up and timely deliveries and so it’s a little tougher and we need a little longer-term planning, but its working out.

We’re not calling for any problems.

Robert Koort - Goldman Sachs

If a Chinese farmer wanted a tonne of potash or an NPK mixture in April, when would it actually have to start getting loaded in Saskatoon.

Jim Prokopanko

Well it would take 10 days, we’ve got product in Regina, so its about 10 days to ship from Regina to Vancouver. You’re going to have to get organized and assemble those cars and have it [rating] so that’s another maybe 20 days, so 30 days.

And then you have a couple of days shipment, and its going to take probably three months. So I think to have it into the interior of China, for April 1, you’re going to have to have that shipped some time in January.

Our estimate is that there’s about, call it two, just a bit less then two million tonnes of potash in-country in China right now so that’s a bit of a buffer, but you’re getting to a point that the Chinese are going to have to start bringing product in I’d say no later then January. Shipments will have to get underway given the current stock situation.

Robert Koort - Goldman Sachs

You mentioned the economics in India are quite favorable which includes a very hefty subsidy and there’s been some discussion around a change in the subsidy policy there, can you talk a little bit about what that change might mean for the industry.

Mike Rahm

That’s a good question and certainly there’s been a lot of talk. I think the direction that planners in India want to go is to make it a nutrient based subsidy so that its not specific to any particular product. They want to make it flexible, they want to fix the cost or liability to the government. So that if international prices go up or down, there would be some consequence to the retail price Indian farmers pay.

And then the third component of that is they want to direct it or pay it to farmers directly. So it’s a very ambitious reform proposal in theory. We think its going to be much more evolutionary in terms of how the policy unfolds.

We would not expect any significant disruption in the near-term due to subsidy policy changes at this point.


Your next question comes from the line of Michael Piken - Cleveland Research

Michael Piken - Cleveland Research

Thanks for the color this morning on the call, a couple of questions for you. I guess just taking a look back at kind of the [phos acid] markets and it looks like we had a couple of months where the price sort of inched up, and then this month sort of the price went a little bit sideways. I’m just trying to figure out the competitiveness of the non-integrated competitors right now. Could you talk about what the economics look like for an integrated producer versus a non-integrated producer right now.

Mike Rahm

Without giving you specific numbers our sense is that for the non-integrated player, at current delivered rock prices and current delivered acid costs, there’s not a whole lot of fun in the business that most of the returns are going to the rock and acid suppliers. Sort of bottom line. I guess we can get into more details offline if you’d like.

But that’s our assessment.

Michael Piken - Cleveland Research

So then is it fair to say then that maybe, or give us a guess as to what the operating rates look like, let’s say in India right now among non-integrated players right now.

Mike Rahm

Those have increased. I think in terms of some of the recent monthly production numbers, they have been up substantially from a year ago when there were [phos acid] pricing drawn out pricing negotiations and so forth. I think our assessment is that we expect DAP fabrication in India probably to be up a good 20%, 25% this year.

That said, one of the things we’re seeing is with the settlement of the Indian potash contract, they are producing more NPK’s and less DAP so we expect that DAP production in India, it probably will taper off a little bit from the peak level that we’ve seen earlier this summer.

Michael Piken - Cleveland Research

One last question as it relates to Brazil and it sounds like maybe you got a little bit more cautious in terms of your second half outlook for 2009, I’m referring to here on Brazil, is there any update on where that is and why things may have slowed down. It looks like the sugar farmer returns look pretty good and soybeans there’s some currency issues, and the prices rolled over but, is it a function of that or is it just more that the dealers don’t want to restock sort of similar to what’s happening in the US and that sort of [P&K].

Rick McLellan

Yes, in Brazil we’re seeing that same caution from the dealer level of not wanting to be willing to miss a sale verse have inventory in the warehouse at the end of planting season. It is the same there. The economics for sugar, the economics for soybean production and corn [nearby] an export position are still very positive and the demand will come there.

But because people want to manage their inventories down, that’s what’s tempered our outlook for 2009.

Mike Rahm

The additional comment that I would have is that the movement to Brazil has been in kind a trickle as opposed to a rush that I think a lot of people expected, so they have imported phosphates and potash and they’ve also worked down stocks we think to very low levels, especially in the case of potash.

We think they will be absolutely empty at the end of this application season.


Your next question comes from the line of Jeff Zekaukas - JPMorgan

Jeff Zekaukas - JPMorgan

I have two short questions, the first is your tax rate is down, why is that, it was going to be in the low 30’s and now its in the high 20’s.

Larry Stranghoener

As you might know, every quarter we need to project full year taxes and then apply that tax rate to the current quarter and so its just the interplay of expected pre-tax income and the deductions we expect that leads to that lower tax rate. There’s nothing unusual about the item at all. Its simply that explanation.

As you might know our depletion benefit is our single biggest tax benefit that we get and so what we see is a function of the depletion benefit playing out against expected pre-tax income and that’s what drives the rate more then anything else.

Jeff Zekaukas - JPMorgan

Maybe I’ll follow-up on that afterwards. Secondly, you sold about a little less then two million tonnes of DAP this quarter which is sort of what you did in the first quarter of last year, and last year you made a little less then a billion dollars and this year you made $60 million in the first quarter and I would imagine the value of the rock that went into selling those two million tonnes was probably triple the operating income you made. So how long are you willing to sell this level of tonnage at these returns or are these returns and these tonnages acceptable to you.

Jim Prokopanko

I don’t understand how the rock is triple the operating cost. The rock cost has been fairly stable. Our cost of mining and delivering the rock to the plants, that hasn’t changed depreciably. And its still leaving a positive earnings and a positive cash flow for producing the product so we are, you’re right, we’re selling about as much as we did a year ago and the prices are down, so our earnings are down.

Jeff Zekaukas - JPMorgan

I guess what I meant to say is you need a couple of million tonnes of rock and you’re only getting $60 million for that.

Jim Prokopanko

Well, it’s a situation where we do not expect to make the kind of earnings we did last year every quarter. This is a business that is cyclical and that there’s ups and there’s downs and our task and what we look to accomplish is to achieve a good return on through cycle economics and we’re not going to turn the facilities off because of a weaker then what our best year has been.

So its just through cycle economics we continue to serve our customers, continue to produce product and enhance the efficiencies of our facilities.


Your final question comes from the line of Dave Silver – UBS

Dave Silver – UBS

I have two questions about potash, one domestic and then maybe one international. On the domestic side, I guess if you look at the industry data, we’re kind of getting to the point where its more then one consecutive year, more then 12 consecutive months of sharply reduced domestic use for potash and I know you mentioned the dealer issues and maybe the psychology issues of the potash price. I’m wondering if growers are, in your opinion, are growers taking the message from this year which is that sharply reduced potash applications don’t prevent all time record high corn yields. And maybe they’re looking at their soil nutrient levels or they’re not paying quite the same attention to what they’re local [agronomist] tells you. In other words, has the growers’ psychology in your opinion changed as a result of the experience in the fields this past year.

Jim Prokopanko

I think the science hasn’t changed. Crops grown, take nutrients out of the soil and I think farmers are very well informed and astute in terms of what, the health and the agronomic condition of their soils and I think they say the high prices, they saw some declining grain prices, and they decided to just rely on the reserves of the potash and for that matter the phosphate that’s in the soil.

These are nutrients that have a residual effect in the soil and there’s residual amounts left after the first year of application. Farmers know that, and they said this is a year to cut back and they did. I don’t think that’s a sustainable strategy, depending on the nutrient reserves in a field. Some farmers can afford to do it for one, some can do it for two, some can do it for three.

But eventually, like your car, you can run on a quarter of a tank, an eighth of a tank, and fumes for a period, but then you run out. And farmers know that they can run out of nutrients and they won’t let it go too far.

So I think they’re being good business people, moderating their inputs and they will apply what’s necessary to grow a good crop.

Dave Silver – UBS

And then the last question, in the last few year’s there’s been a number of new potash projects proposed and in the last year or so, the existing producers have had a lot lower shipments and revenues with which to fund those projects, so if you could exclude the real speculative brand new producers, new projects group, but if you could maybe look to the announcements in Russia, the announcements in Latin America, etc., can you identify any projects where you think the development or the debottlenecking has taken a notable step back or where the schedules may be a little too aggressive at this point.

Mike Rahm

That’s a tough question, we certainly follow all of these projects very closely. In terms of our longer-term analysis, I think you’re correct that we have, we think very few greenfield projects will be on stream by the end of the next decade and most of the additional capacity that’s going to come on is based on brownfield expansions.

We have not dramatically altered our expectation, at least at this point, in terms of the timing and start-up of most of those. So we have not identified any dramatic delays or push-backs at this point. Its not to say that it couldn’t happen over the next six months to a year. But at this point we haven’t changed our views.

Jim Prokopanko

With that we’ll conclude our Q&A session. I’d like to remind you that we continue to have a great deal of confidence in the long-term outlook for our business. The need to produce more food has not abated. The world is not getting less hungry.

Mosaic is playing a significant role to meet this demand and is well positioned to create value for our shareholders and customers for the years to come. Thank you very much and have a great day all.

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