The Mosaic Company
Q1 2014 Earnings Call Transcript

Published: 6 May 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to The Mosaic Company's first quarter 2014 earnings conference call. (Operator Instructions) Your host for today's call is Laura Gagnon, Vice President, Investor Relations of The Mosaic Company. Ms. Gagnon, please go ahead.

[Laura Gagnon:]

Thank you, and welcome to our first quarter 2014 earnings call. Presenting today will be Jim Prokopanko, President and Chief Executive Officer; and Larry Stranghoener, Executive Vice President and Chief Financial Officer. We also have members of the senior leadership team available to answer your questions, after our prepared remarks. After my introductory comments, Jim will review Mosaic's accomplishments for the quarter and our views on current and future market conditions. Larry will provide an update on our capital management and share insights into our future expectations. The presentation slides we are using during the call are available on our website at mosaicco.com. We will be making forward-looking statements during this conference call. The statements include, but are not limited to, statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date, May 06, 2014, and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in these forward-looking statements are included in our press release issued this morning and in our reports filed with the Securities and Exchange Commission. Now, I'd like to turn it over to Jim.

[James Prokopanko:]

Good morning. Thank you for joining our first quarter earnings discussion. I would like to start by expressing my gratitude to all of you, who have wished me well. I have been overwhelmed by the outpouring supports, and I can tell you that the encouragement I received from so many people in and around this industry has lifted my spirits, as I undergo treatment. I continue to feel fit and well and have no other updates on my health today. We will be sure to keep you apprised if anything changes. Now, let's get to our results. Here is what I'd like you take away from today's call. First, the business environment remains challenging. Second, we, at Mosaic, are focused on what we can control and we continue to make great progress both strategic and financial. Finally, our future remains extremely bright. The combination of increased crop nutrient affordability and weather-driven supply uncertainty significantly increased distributed willingness to take price risk. This demand strength combined with previously positioned product resulted in strong North American sales volumes, in spite of the well-known weather-related logistical challenges. In Canada, the extremely cold and stormy winter delayed many rail shipments. A condition exacerbated by shortage of locomotives and a congested system due to increasing grain and commodity volumes. As a result, our international volumes were low and we faced short-term containment issues in Canada. We continue to see diversion trends at our two nutrients. In phosphates, the price rally that began in earnest late last year continued into the first quarter, with average selling prices in the quarter reaching $414 per ton. Producer margins expanded from unsustainable lower levels. Logistics challenges faced by some of our global competitors and strong demand fueled the increases. We are beginning to see prices leveling off. A seasonal impact, as we move through the North American spring, with the second half outlook expected to be a function of several factors, notable a rebound in Indian demand and the impact of Chinese exports. In this environment, we are very well-positioned in the best cortile of the cost curve with a distinctive large and growing premium product offering. In potash, shipment volumes remain behind plan. With one month behind us in the second quarter, we're continuing to ship at maximum current logistical capacity. Potash prices remain near the floor, established at the end of 2013, as supply and demand remain relatively balanced. We see upside potential, as these relatively low prices could drive even higher demand in the second half of 2014. Our product and geographic diversification is benefiting us, as we adapt and manage through these challenges. A quick note on economics. I keep insisting that fundamental economics will prevail. As I said, there are many factors influencing the price of potash and phosphates, from weather to politics, to fluctuating currencies and other events. In the end, the market set the price. And in the commodity business, like the fertilizer industry, temporary strategies to pursue higher volumes at the expense of profit maximization may indeed change market shares in the short-term, but a little to alter the long-term economics of the business. We're seeing that truth born out yet again in 2014. Despite the challenges and opportunities created by the external conditions, Mosaic delivered another solid quarter with prices and volumes for both phosphate and potash coming comfortably close to our expectations. For the quarter, we generated operating earnings of $267 million on revenues of $2 billion. We generated $627 million in cash flows during the quarter, as a result of earnings and lower working capital, driven by converting product positioned in North American warehouses to revenue and cash. At Mosaic, we continue to monitor and adapt to the environment, but we are focused on the things we can control. We continue to make excellent progress, delivering on the commitments we've made to you and our other stakeholders. We closed our phosphate acquisition in Florida and integration is moving along well. Larry, will provide more detail on this shortly. We announced an agreement to acquire ADM's Brazil fertilizer distribution business for $350 million, including $150 million of working capital. The acquisition, which complements approximately $100 million in expansion projects, already underway, would increase our distribution capacity in Brazil from 4 million tons to 6 million tons. The majority of which are potash and phosphate. Growing our Brazilian distribution business is one of our key strategic initiatives for a good reason. Plant nutrient use in Brazil has increased nearly 7% per year during the last five years and shipments are off to another fast start this year. Year-over-year total shipments were up 11% and phosphate and potash imports were up 77% and 48% respectively in the first quarter. Our previously announced projects are proceeding as planned. The Esterhazy K3 mines shafts are both more than a 1,000 feet below surface and they are successfully making their way through a major water formation. And construction is underway on the phosphate join venture in Saudi Arabia. We made still more progress towards achieving our balance sheet targets by repurchasing $1.7 billion of stock in the quarter. In the four months, after we were first able to repurchase shares, beginning last November, we've repurchased or committed to repurchase 52 million shares. That's over 12% of our shares outstanding. We have transformed our balance sheet and put billions of dollars of capital to work. This is another topic Larry will cover. We reached the decision to expand our MicroEssentials capacity to 3.5 million tons annually. We will convert part of our New Wales Plant to MicroEssentials production over the next year, adding 1.2 million tons of capacity. We have maintained a strong safety record and environmental performance, with a record low reportable injury rate during the quarter. Our performance reflects our continuous improvement approach to operational excellence and the well-being of our people, and we're implementing concrete plans to save costs. While many of the decisions we've made have been difficult, we're making the right moves to increase the efficiency of our operations, at the same time that we are taking substantial costs out of our corporate support functions. Obviously, our acquisitions bring with them additional people and expenses, and we continue to see inflationary pressures. That said, we are in the process of taking out $0.5 billion of cost across Mosaic over the next five years, with a focus of maintaining our best cortile cost position in phosphates and improving our cost group position in potash. These cost saving initiatives will result in elimination of more than 500 positions in the next 12 months. We will rely on attrition, elimination of contractors and early retirements, and regrettably there will also be impacts to our employees in the form of targeted layoffs in 2014. We achieved many strategic accomplishments in 2013, and we are not done yet. Our vision is for Mosaic to be the world's leading crop nutrition company, and I believe we are positioned to be just that. Now, I'll ask Larry to address financial topics and provide our guidance. Before we take your questions, I'll give you some thoughts on the markets and quarters ahead. Larry?

[Lawrence Stranghoener:]

Thank you, Jim, and good morning, all. This morning, I would like to cover four topics

[James Prokopanko:]

Thank you, Larry. We've seen a number of recent reports expressing weariness with the long-term fertilizer story. I think I get it. We talk in grandiose terms about the need for global food security, the ever-growing global population, the slow increase in new land dedicated to agriculture, and we talk about it all the time. The reports I've seen, seem to imply we want to minimize the short-term challenges by diverting attention to long-term need. And I will concede, I think I've made the statement that we manage Mosaic for the long-term on just about every quarterly earnings call over the past few years. But the skeptic will say that the long term is like tomorrow, it never arrives. I'd like to address the skeptics with a few thoughts. First, as we've said many times, this is a cyclical business with higher highs and higher lows, as we move through time. That presents opportunity for all of us. Opportunity for strong companies to invest in the troughs, as Mosaic has done through this period and opportunities for investors as the cycle turns. The tendency we all have is to project current conditions on the long-term. To think that the present trends in global agriculture with commodity prices down will continue in perpetuity. History is not your friend, if you hold this view. Yes, agriculture is volatile, but its long trend is upward. Second, the short-term past and future has been and will be far less dire than has been portrayed for global agriculture and for the fertilizer industry, specifically. We remain solidly profitable at the lower end of the cycle. At Mosaic, we've generated consistently strong cash flows. We've used our balance sheet strength to make highly promising investments for the bright future ahead and we've returned significant capital to shareholders, all while generating good profits in tough times. And a further note on the short term. Farm economics, which lie at the heart of our business proposition, remain compelling today, particularly with corn prices back around $5 a bushel. The drop in commodity prices has been much discussed and it has decreased farmers' revenues, but at least as it relates to our business, the affordability of crop nutrients remains very compelling for farmers. That brings me back to the long-term. Listen, we tell the food story all the time, because we believe in it. Around, the world more people need to eat, more of them have the means to buy and consume protein and little additional land is being devoted to production agriculture. And therein is the sweet spot for crop nutrition. Sustainable intensification is essential to feed the world, and fertilizer used correctly is the most important means to that end. So what we have here around the bottom of the cycle is Mosaic generating solid profits and making big investments to achieve the tremendous promises of future. That's our story. It's true and it's compelling. One note, before we take your questions. I've been deeply touched and humbled by the outpouring of good wishes for my health, from those of you on this call and elsewhere. If people argue that the financial markets' crowd does not have a heart, I have proof to the contrary. I would now appreciate, if we can get straight to business with your questions. Thanks in advance for that. Operator, over to you.

[Operator:]

(Operator Instructions) Our first question comes from the line of PJ Juvekar from Citi.

[PJ Juvekar:]

A question on potash. If you look at Russian rail shipments of potash to China, I think they are down more than 40%. What impact do you think this has on the global supply demand and pricing?

[James Prokopanko:]

Astute observation, something we've recognized ourselves, although just to make a comment on that, and then turn it over to Rick McLellan, leader of our Commercial group. We've seen that, I think we are now approaching one year since there has been some aggressive actions by the Eastern Europeans to build share in the marketplace. I think one year since they've made that decision, they're finding that -- and I made it in my comments, market shares may have increased, but when they look at their last restatements, I don't think anything is getting to the bottomline as a result of that. And in fact, I think it's been negative to that. So I think people are starting to recognize that they got to be more thoughtful about not just how much they sell, but what they earn in selling it and that's impacted some of our competitors willingness to-go-market.

[Richard McLellan:]

PJ, we just got back from a trip with Canpotex to China and the rail shipments did come up when we were there. They are down year-over-year 46%. And whether that's a function of weather related, we're not really sure. But the one thing we do know is that the shipments by vessel are up, which frankly for us being a vessel shipper makes great sense, and we're pleased about that. We think that over the year, we're going to see real shipments start to ramp back up into the northern part of China, but it bodes well for more tons being needed to be shipped-in in the second quarter or in the second half. And I think that's the piece with China change in rail that will be helpful to the market or constructive.

[Operator:]

Our next question comes from the line of Kevin McCarthy from Bank of America Merrill Lynch.

[Kevin McCarthy:]

I guess two-part question. Can you speak to how you see the $500 million in cost savings flowing through over the next five years, and then a similar question for the CF synergies of $40 million to $50 million? And perhaps you could touch on the second quarter impact for each of those that you anticipate?

[James Prokopanko:]

Good morning. Kevin, welcome to the call. I'm going to ask Larry to help me out with detailing the timing of the $500 million. But this is something that the $500 million, as we previously announced at our New York Investor Day in October. The point I want to make is this has been a well thought-out plan, well detailed and considered. And in that context, at Mosaic, we pride ourselves in achieving what we say we're going to achieve, whether it's in strategy or operating performance. And I just want to stress that we are confident. We are going to achieve those $500 million of savings. We're really putting our shoulder to it, look to achieve much of those savings earlier rather than later. And I'll have Larry speak to the timing of that as well as what we are looking with the CF integration.

[Lawrence Stranghoener:]

Kevin, as Jim said, this is part of our program we laid out at our Analyst Day meeting. We're targeting $200 million-plus in each of the operating units over the next five years. We're targeting $50 million-plus from corporate over the next five years. As Jim noted, we'd hope to get, and expect to get, the bulk of that over the first two to three years. Note that, much of this program is intended to offset the effects of inflation. Particularly, in phosphates, we're already at the very low-end of the cost curve. And so the program there is intended to allow us to fully offset the effects of inflation and remain at the very low-end of the cost curve. In potash, we're currently on the wrong side of median on the cost curve. We intend to get to the left side of median on the cost curve. And so the desired effect is to offset the effects of inflation and then some. And in incorporate as we've discussed with you in the past, we've recognized for some time, we have an opportunity to do things more efficiently and more effectively, and we've gone about a program that's just being implemented, as we speak, to get the kinds of savings that we've outlined. On top of that, as you've noted, there will be significant synergy savings with the CF. We're delighted by what we've seen so far with CF and the opportunities that we have there. We expect to begin achieving meaningful synergy savings in calendar 2015, so some of those will extend into 2016 and beyond. Note that, as a result of this, this is a multiyear program. One should not expect to see substantial savings in the current year, certainly not in the second quarter. But you will see these savings over time, it will allow us to remain a very cost competitive player in this industry and that's our primary intention.

[Operator:]

Our next question comes from the line of Matthew Korn from Barclays.

[Matthew Korn:]

I was looking at the progress of your potash shipment forecast. It is very interesting to see that Europe looks like it's been a little bit lighter than expected, maybe that makes Brazil a little bit better. Could you discuss a little bit the reasons that those respective markets have been unfolding the way they have? And then, looking into the next year, if we've got conviction, and we've got to believe to rank it above say 60 million in tons total shipments. Are the hopes really pinned on Brazil kind of continuing the growth pace they've been on?

[James Prokopanko:]

Brazil is really a shining star, not just in potash, but phosphate as well. Both our nutrients are really firing on all cylinders, going into Brazil. I'm going to ask Mike to add his insights on, how the world is rebouncing in terms of potash demand? Mike?

[Michael Rahm:]

Let's start with Brazil, first. We're projecting that imports in 2014 will be about 8.4 million tons, so up from about 7.6 million. So Brazil, certainly, is the engine pulling this train. First quarter was fantastic. Imports were up 48%, 1.8 million tons versus 1.2 million tons a year ago. So Brazil continues to be a shining star. And we expect that, as we move into peak shipment months this summer, as they position product for their planting season, we'll see an uptick in those shipments. In terms of Europe and the FSU, we're not as close to that market. We tend to rely more on consultants for that. And just to give you some perspective, FERTECON is projecting that shipments in the European theatre, defined as Former Soviet Union, Eastern Europe and Western Europe, they are projecting 1 million ton increase in shipments from 10.2 million to 11.2 million. We've tapered that down a little bit and expect shipments to increase from 10.2 million to about 10.8 million, about a 600,000 ton increase. I think some of the same fundamental drivers in terms of decent commodity prices very low pipeline, all come into play in that theatre as well. And as you say, and as we look ahead to 2015, our preliminary numbers begin with a six. So we expect that the same fundamentals that are in play today continue in terms of very good farm economics, not only for the corn, soybeans and wheat. But if you look at things like palm oil, coffee, what not, you're looking at double-digit increases in those commodities as well as commodities like fruits and vegetables that are very heavy potash user. So I think there is unappreciated demand story out there developing, and we expect trends we're seeing now to continue into 2015.

[James Prokopanko:]

Matthew, I'm just going to add to that the principal hole in the potash demand story is, comes down to two countries, India and China. And that's where we've seen a lot, but we haven't seen the demand growth. In fact, we've seen retrenchment in demand. In the case of India -- in both India and China, it's not a matter of, if the demands are going to come back, it's going to be when. Messages coming out of India, post this national election, is that there will be material reform to the subsidy program. We think that's going to get corrected. The industry leaders in India believe that, the distributors believe it and most of the senior government people, I'd say, all the senior government people we talk to, they understand it. They get that they have to reform the subsidy system. So with the subsidy reform, we'll see demand come back. And in China, we're optimistic about the second half. We see a decent demand in this first half and with virtually all their contracts they have optional purchase agreements for the second half. But it's our view that they are going to exercise. So we're going to see, unlike we saw last year, only half-a-year demand from China. We expect full 12 months of good demand from China and see that market recovering.

[Operator:]

Our next question comes from the line of Joel Jackson from BMO Capital.

[Joel Jackson:]

If I look at some of your guidance for Q2, it seems that you're suggesting that North American potash volumes might be flat in Q2 year-over-year, and then phosphate volumes in North America might be up significantly year-over-year. Maybe you talk about some of the drivers for both of that? And also, if you see some residual pricing for potash reducing?

[James Prokopanko:]

I'm going to just turn that right over to Rick McLellan, Leader of our Commercial Group. Rick?

[Richard McLellan:]

As we look at the potash market and we look at our capability is to deliver, we're shipping into North America at frankly the maximum capacity we possibly can. We saw really good growth in the first quarter, 58% year-over-year growth in the first quarter into North America for shipments, and so some of that has to taper off. In phosphates, it was direct opposite. We saw about 17% increase. So we had more phosphates to deliver to the market in the second quarter. So we think overall phosphates or potash will be relatively flat. And phosphates are going to grow frankly because we're going to have the CF tons that weren't included in our forecast previously. As far as field potash programs, the price increase that we've got in place is holding. And frankly, I think with the issues that North American dealers have seen with rail performance, they're not going to wait to depend on the rail lines to improve. They're going to get product into place in the summer. And frankly, it looks that if at worst we see the price staying stable, than frankly, there is opportunities for it to move higher.

[Operator:]

Our next question comes from the line of Adam Samuelson from Goldman Sachs.

[Adam Samuelson:]

Maybe some questions on potash utilization and gross margins. I think in 2Q you're expecting gross margins to be basically flat quarter-on-quarter, despite utilization moving up to 85% from 70% in 1Q. Maybe help explain that? And on the same line, if you take the guidance for 1Q's utilization in the mid-80s and you on the came in at 70%, so can you just explain what happened on the production side, was that logistics and weather or anything else?

[James Prokopanko:]

We're going to have Joc O'Rourke address what's happening with those shipment numbers that you're asking about.

[James O'Rourke:]

So, Adam, let me start with the first quarter. We were in fact operating at rate of around 70% compared to a guidance of 80% that was almost completely logistics related. Our inability to move product out to the market, because of rail and the cold weather was just about the whole cause of that. And of course, what results from that is, a lower operating rate and of course a higher absorption of costs per ton. So that pretty much covers what happened to us in the first quarter. In the second quarter, we certainly expect that rate to come up, as we now here Chicago is clear from a rail perspective. So we expect that rate to go up to pretty much fall rates. And as Rick's saying, we'll fill the pipeline for those sales that will come through the summer and what not.

[Lawrence Stranghoener:]

Joc, I would just to add on the margin in the second quarter. I think it's probably a product mix issue, as we'll ship more internationally, where netbacks are lower. And so while operations will be performing at a higher level, I think we'll have some wins in our sales, because of the product mix.

[Operator:]

Our next question comes from the line of Ben Isaacson from Scotiabank.

[Ben Isaacson:]

Jim, when I look at what you've done strategically over the past few years in phosphate, which is I guess increased asset exposure offshore, move towards value-added phosphate products like MES and tightened up your Florida margins via the CF acquisition. And when I compare that to falling U.S. phosphate exports, are you preparing for a tougher U.S. export of phosphate market over the next decade, is it possible for the U.S. to get shutout by 2020? How do you see that developing?

[James Prokopanko:]

Those are rapid fire questions, and I'm glad you're asking about the phosphate business that we're quite excited about, very astute. Yes, we are building our phosphate muscles on the belief that we have a strong position in phosphate production, low end of the cost curve, and great assets in terms of 35 to 40 years of proven probable reserves ahead of us and a great location. No one better placed to serve the North American market than Mosaic. And for that matter, the South American market. We've looked at the world. We do see new production coming on stream. China has been a real dynamo over the last decade, increasing production of phosphates, not of the quality of phosphates that distinguishes Mosaic, but they've grown and going into some of the lower cost markets. And we've see the Middle East grow their phosphate business, and we've chosen to be part of that with our modern investment. So as we look with at the phosphate growth, we see supply growing at about the same rate that we see demand growing at. We think our home court advantage is principally the western hemisphere and we are extremely well-equipped with the assets we own and operate today to serve both Latin America and North America. Our investment in the Ma'aden project is going to give us the capacity to better serve the Asian markets. And finally seeing that the commodity phosphate market has become somewhat some competitive, we have turned much more of our attention to our specialty products, MicroEssentials, that we have just announced an expansion that will take us to nearly 4 million tons of production capacity. That will be up and operating, I think is within 18 or 24 months, Joc O'Rourke can correct me that if I'm wrong, but MicroEssentials has been a homerun for us, both in North America and international market. So yes, it's more competitive, but Mosaic has become more of a competitive company, both with the specialty products and the geographic dispersion of our production capacity.

[Operator:]

Our next question comes from the line of Vincent Andrews from Morgan Stanley.

[Vincent Andrews:]

Could you talk a little bit about the Southeast Asian market? It seems like prices just aren't finding footing there and they seem to be stuck in sort of a low-300 range whereas the other stock markets have been reverted nicely, following the Chinese settlement. What do you particularly think is going on there? And how do you see that playing out over the balance of the year?

[James Prokopanko:]

The Southeast Asian market since six months ago was probably ground zero where we saw prices come down or weaken. And since that time of about six months ago, and I would say, probably Malaysia was the epicenter of where we saw some low pricing, I think we've seen some recovery -- not think, we have seen recovery as markets have tightened up. Rick McLellan just came back from trip to both India and China and he can give you some first-hand commentary on what we're seeing, as recently as two weeks ago.

[Richard McLellan:]

If you look at the Southeast Asian market, we think that prices are being floated in that 340 to 350 range right now. And there is getting some legs underneath those. It still has to play out about how well they're accepted. The key piece to understand is this is a true standard market. There is no granular heads to there. And so if you look in the granular side on the markets, getting the improvement in Brazil and probably in our North American markets is going to come because of overall tightness of granular, coarse product. And there is an issue with finding homes for all the standard product. So that's what created a portion of the impact in Malaysia. And the other piece though that's quite positive is the changes for Southeast Asia, which is really a major palm market, just the increase in palm pricing year-over-year, it's going to lead to demand. And China and India continue to be the other main markets for standard potash. And those markets are starting to move much better than they did last year.

[Operator:]

Our next question comes from the line of Jeff Zekauskas from JPMorgan.

[Jeff Zekauskas:]

How would you compare global utilization rates in potash and phosphate now and over the next two to three years?

[Lawrence Stranghoener:]

The question was how do we compare phosphate utilization rates between now and the next five years?

[Jeff Zekauskas:]

On an industry-wide basis, which is tighter and how might that tightness change over the next two to three years?

[Lawrence Stranghoener:]

The potash market, right now we're seeing over the next two to three years is a -- seeing the results of multiyear potash expansion program by most of the principal producer, so we see the next three years, absent any external force, something happening to a mine of somebody, possible plant mine closures, we see there being more supply than there is demand. It's growing modestly in the 2% and 2.5% range and it's going to take a while for that to tighten up. So it could be just purely supply and demand, some tough sledding. However, I think people are really getting a dose of some healthy medicine in terms of the kind of returns you get with efforts to try to build market share. There just isn't a return in doing it. So I think we have to just watch what sellers behaviors will be over the next six months and 12 months. In the case of phosphate, we see a tighter supply and demand balance. We haven't seen the expansions that we've seen in potash. We've had some Middle Eastern expansions. And they are working hard to bring those on line, but it's difficult, bringing a new phosphate plant on line and we just don't see material new tonnage coming out of the Middle East. And in China, we think the expansion run that they've had over the last decade, seven years on phosphate has pretty much come to an end and they pulled in their horns on that. I'm going to just ask if Mike Rahm has anything to add to that. Mike?

[Michael Rahm:]

No, I think that's a good description, Jim. Just if you want to put some numbers to it, our 57.4 million tons of shipments this year compares to our capacity estimate in that 69 million ton to 70 million ton range. So we're looking at utilization rates for potash in the low-80% range. We think they're going to stay in that range over the next several years. And I think the key question there is if you compare those rates to the really tight period when we think the industry is running at 95, how do you optimize production at those rates. And I think most of the potash players are working hard to try to optimize operating rates when you need to run at 82% to 85% rather than 95%. And as Jim said, in phosphate, we see a fairly stable situation at moderately higher rates over the next two to three years, as the demand outlook there continues to look very good. Our shipment forecast for this year is up about 2.3 million tons. And every year we get 2 million tons of additional demand. That is going to stop up some of the additional capacity that comes on. And as Jim said, the key feature of long-term phosphate outlook is the fact that we think the massive expansion program in China has come to an end and as demand continues to grow that growth is going to be met by new capacity coming from places like Saudi Arabia and Morocco.

[Lawrence Stranghoener:]

And I'll just add to that, Jeff. If you look at the history, and I think we've had seven consecutive years of continued phosphate growth in world demand and this is one that just keeps in the background, just keeps growing year-over-year. And that again just underpins our belief that the phosphate market is a very good market to have a position in. And I think going back to the previous question about the U.S. industry. We see the U.S. industry continuing to be a very large stable industry, playing a very steady role in the global market where growth and demand will be met by some of the new entrance or new capacity coming from the Mid-East and North Africa.

[Operator:]

Our next question comes from the line of Mark Connelly from CLSA.

[Mark Connelly:]

Couple of things. Jim, with respect to distribution in Brazil, I think it was around the time of the Cargill split. You said that you weren't sure that distribution was necessarily at the top of your core competency list, which is why you were moving carefully. So as you ramp up in Brazil, do you now have the expertise you need or do you still need to add people to take that business where you want to bring it? And then a second question, can you talk about how this new cost reduction program differs from the old operational excellence initiatives?

[James Prokopanko:]

Couple of good questions. Distribution, I'm glad you bring that up. We're quite proud of what has been accomplished in the last 12 months. Two things, we had program that I think we identified is about a $300 million green brownfield expansion of our distribution into Brazil. And that's been somewhat moderated or has been moderated with the ADM expansion or the ADM acquisition. Why Brazil, why are we so determined to expand our distribution. Well, you've seen what the history of increased imports into Brazil are. Ag continues to grow in Brazil at probably one of the fastest growing rates in the world. We think that's going to continue for some while. Brazil is a very challenging country to get product from an offshore position into the farmer's hands. They've got challenging -- they have issues with logistics, they don't have a great rail system, they don't have a Mississippi flowing through the country, and having access into the direct farm markets or into the farming region is an important part of getting our product to the marketplace. Having port access, which is just terribly congested in Brazil, having our own facilities, having control of our own facilities is important and the expansions that we've put in place, both our internal expansions in the ADM acquisition will allow us to get product and be assured of getting our product to the market. That's number one. Number two. It is a hand in glove with our CF acquisition. We will be able to meet the increased demand that we're forecasting with CF tons. And to the third point, that we have the talent in management to execute on that. The expansion and addition of ADM is going to challenge us. We've got a leadership team that's been effective in the business that we have been operating at present. We know that we have some holes that we'll have to fill and augment and some new talent we have to bring in. We've got this deal with ADM closing in the end of this 2014 calendar year and that gives us good time to plan for integration and ensuring that we have the right leadership team. I have got a background as Rick McLellan does in distribution and retail operations and we understand that the task at hand and we'll execute on that. The other question is the operational excellence program, how is that different than our current cost reduction program that we have in place. We've been continually focusing on the cost side of our business. This one is a right-sizing effort that has a different approach than we've had in the past. We are looking at the next three and five-year forecast. We are right-sizing our business to what we think will be a stable operating rate both potash and phosphate. And its 10-year since Mosaic was formed, it has allowed us to just better understand the business that goes without saying, but also we've established some tremendous functional support systems in place. We've put a newer ERP customer relationship management program, new HR systems. We didn't have these six and seven years ago. We've got them in place. We got them debug. We've got them operating. So we're just much more effective at running our business and not spending as much time as putting new systems in and new processes in place. So I think we know where we can become more efficient. I think we've always been very effective, but now it's all about efficiency gains and harvesting all the investments we've made in better operating systems and better IT systems. And third, we have some far better talent running the business, virtually every mine and chemical plant has a new leader in place over the last five years and some real talent has risen to the top. So we will see these improvements hit the bottomline. And another difference is we've been very specific about and very detailed about where the savings are going to come from. The business unit leaders have each, potash, phosphate functional leadership and they're all committed to very specific savings and a time line to achieve that we might not have been so detailed and specific in the past. Good questions, Mark. We've got time for two more questions. Operator?

[Operator:]

Our next question comes from the line of Jacob Bout from CIBC.

[Jacob Bout:]

My question is on your U.S. potash strategy. And if I remember, if we go back to your last Analyst Day, you talked about increasing market share there and talked about the strength of distribution. Just wondering what your thoughts are currently and especially if you think about the ramp up of [indiscernible] here that's going to happen over the next 12 to 18 months? And then maybe your thoughts on the sustainability of premium potash pricing in the U.S. going forward?

[James Prokopanko:]

Good to here from you, Jacob. It seems like it's been a while since we've chatted. The two questions you're asking about what we see or you asked about market share that we had a plan to increase share in North America. I'm not so sure that it was a plan to increase share as to increase our returns and our profitability in North America and that's what drives us. Market share, yes, it's an important, but it doesn't add to EPS by just having more market share if you can't do that with the greater gross margin. And I'm going to have Rick talk to that. We've had a good quarter. Our program of exclusive space and supply contracts and early placement of potash, the fourth quarter and early in the first quarter served us well this year. We've seen a nice increase in our uptick in sales of potash. I'm going to ask now to turn it over to Rick to talk about just that market shares and then let him address the premium pricing in North America over international pricing.

[Richard McLellan:]

As we think about our programs into the North American market, our warehousing agreements are working just fine. And they've allowed us to position product as we saw in the first quarter ahead of demand, which is exactly the way we described it as we rolled it out. And that's worked for both phosphates and potash. So we're really quite comfortable with those agreements as they go forward and it helps us make sure that our customers are properly served. I think the surprise that everyone had in distribution is the fact of how serious this winters impact was on the rail systems and that's yet to play itself out, but we feel very good about those warehousing agreements. The second question is one that we look at. And on the premium for prices versus international, I think that as you think about it, North America was always the highest price market in the world, Europe has passed that now, and both have something in common. They are granular markets that have distribution businesses that don't buy in vessel quantities. They buy in railcar and train quantities, some times truck. And so the issue that we see there is there should a premium in North America from a logistic standpoint. And because there is imports coming to the center Gulf, the price reflected in North America when you back away the freight, net backs to those international producers at a price that's very much equal to delivered Brazil. And we've talked about that before and we just have to remind ourselves that the North American and European markets are true granular markets.

[Operator:]

Our last question comes from the line of Christopher Parkinson from Credit Suisse.

[Tom Ackerman:]

This is actually Tom filling in for Chris. So looking at the phosphate market based on what you see in the preliminary basis, would you have expected India to have been a little bit more active thus far? I understand they've picked up, but are you seeing any sort of acceleration?

[Richard McLellan:]

Just coming back from India about two weeks ago, I got a flavor for what was happening there. Right now we're seeing them stepping in to buy tons. And so the things that are driving that are, first, the government have put out and published the subsidy rules and pricing for P&K and nitrogen. So that led to them stepping in. And secondly, is that India will get served by tons coming from China and from the Middle East first. And those contracts are going into place now. We expect India to import through the year between 5 million tons and 5.1 million tons of DAP. And we expect in this period from arrivals from July through November, which means shipments from June through October that they will purchase 4 million tons. They've yet to step in to buy that amount of tons and it's because they're becoming a spot market. The one real positive is that last year when we were in this period, we saw a weakening trend in the rupee and ahead of this year's election, you've got a rupee that's at 60 to the U.S. dollar, which is much stronger than it was last year, which frankly is going to be one of the drivers that leads to increased demand in India.

[James Prokopanko:]

Rick, I'm just going to add one other item. And that's what we've seen developed recently is the Indians differentiating pricing based on quality. China has been growing, we've said a couple of times have grown their phosphate market and it's a real grab bag of quality. There is some very good quality and there is a lot of very poor quality, low nutrient content, lower than normal nutrient contents and a poor granularity in the product. The Indians now are differentiating and they're calling out various tonnages that they are looking for by quality. So Mosaic being a high quality phosphate supplier, I think is leaving us in a good position and giving us a competitive advantage. And with that that's going to conclude our call. I'd like to reiterate our key themes for this morning. First, despite the external challenges, Mosaic continues to deliver solid results. And I'd just like to call out, here we are at a cyclical trough we believe and we are posting very strong operating cash flows of $627 million this quarter. And I think that's up over last year and has been about close to eight quarters since we posted that kind of a number. Second, we've taken advantage of the downward part of the cycle to make great investments and financial progress in our strategy and in our balance sheet. From joint venture in Saudi Arabia, and acquisitions we've made in the Florida and in Brazil, to major share repurchases and our significant effort that's now being applied to reducing cost, Mosaic really is making some strong moves and delivering on what we have said that we would do in the past. And finally, our strategic and financial strength of Mosaic, positioned to accelerate as the cycle turns upward. We're achieving our vision to become the world's leading crop nutrition company. And I'll just make out a strong point that we have our assets in some of the most stable, politically stable, economically stable markets in the world, countries in the world, Canada and the U.S., rule of law assured, reliable operations that our customers are coming to appreciate in this day and age more and more. With that, I'm going to thank you all for joining us this morning. And please, have a great and safe day. Thank you very much.

[Operator:]

This concludes today's conference call. You may now disconnect.