The Mosaic Company
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good morning ladies and gentlemen, and welcome to The Mosaic Company's Third 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, you may begin.

[Laura Gagnon:]

Thank you, and welcome to our third quarter 2014 earnings call. Presenting today will be Jim Prokopanko, President and Chief Executive Officer and Rich Mack, 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. Rich will share his insights into our results and 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, October 30th, 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 the 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.

[Jim Prokopanko:]

Good morning and thank you for joining our third quarter 2014 earnings discussion. We reported solid earnings for the quarter, given the challenging business environment across agriculture. We drilled progress on costs and delivered good operating performance, while we will provide some color on those results, I realize the elephant in the room is not our third quarter results. The elephant in the room is the near term future, so we’ll spend a significant amount of time there. We want you to take away three important concepts from this call; first, we believe the current negative sentiment that is pervasive amongst agriculture investors is overblown and that the weakness in Ag equities provides compelling opportunity for companies and investors alike. Even the more recent U.S. -- forecast indicate farmer income this year will be the fourth highest in history. The uncertainty is for 2015, where today farmers can still pre-sell their corn for around $4 per bushel and their soybeans for around $10 a bushel. Second, this is a cyclical business and we at Mosaic have been through many cycles. Agricultural commodity prices are indeed lower. The cycle will play out and prices will rise again. Third and most important, Mosaic is in excellent condition to whether the current economic environment sees opportunities as they arise and outperform when conditions improve. We manage for the long term, because the long term holds great opportunities for this business. Before I explore those topics in more depth, I’ll provide a bit of an insight into our performance for the quarter. We generated net earnings of $202 million or $0.54 per share on net sales of $2.3 billion, compared with net earnings of $124 million and net sales of $1.9 billion in the third quarter of 2013. We continue to generate strong operating cash flow of $489 million during the quarter bringing our year-to-date cash flow to $1.9 billion, a $400 million improvement over the same period a year ago. We are putting our cash to use by continuing to invest in the business and repurchasing our shares while still retaining $3 billion of cash and cash equivalents on hand as of the end of the quarter. Global demand for potash and phosphates remained strong during the quarter. Our shipment volumes came in at the low end of the original guidance range. In potash because of primarily weather related production issues in Saskatchewan and New Mexico which underscore the tight inventory situation we highlighted on the last call, and in phosphates because of the timing of some quarter and the shipments. Phosphate prices declined somewhat even as costs rose for raw materials especially ammonia. As we announced last month, we will curtail phosphates production in response to these conditions and we will continue to produce with economic discipline limiting the amount of high cost inventory we carry into the spring season. In potash, prices improved, and as we discussed during our last call Canpotex was fully subscribed. Customers in North America saw [clock] in potash for fall application early, because of the fears of our overburdened rail system as well as low producer and channel inventory. Indeed potash inventories are very low. We are producing at high rates just to meet current demand. In terms of global shipments, we lowered both 2014 and 2015 global phosphate shipments forecast by roughly a million tonnes in part due to India importing more phosphoric acid for NPK production and we are maintaining our outlook for global potash shipments. Now, I’ll turn to our views of the current agricultural markets. Farmers in North America are finishing a record harvest, spurred by mostly favorable economics when farmers were making planting decisions and ideal weather in the growing season across the corn belt. This will be the second bin busting harvest in a row, and while that bounty is good for global food security, it brings with it prospects of lower income for farmers in 2015, so what happens from here? We know farmers are going to farm and when they do we are confident they will follow good business economics and work to maximize yields from every planted acre. Certainly farmers will tighten their belts. We expect land rents to decline, we expect some land to be taken out of production and equipment purchasing decisions to be deferred and we expect farmers to ring every penny a value out of the cash they commit to inputs. Think about it this way. If you buy a thorough bred race horse, you are not going to try to recoup your cost by not feeding it, so we disagree with the belief among some analysts who suggest potash and phosphate useful crop in 2015. In fact, we expect global demand for potash and phosphates to remain strong and even grow in 2015. Here’s why, first, the USDA expects the 2014 global harvest to come in a few bushel shy of 3 billion tonnes, a record on top of last year’s record. That much grain takes enormous amounts of nutrients from the soil and those nutrients need to be replaced. When farmers plant their fields, they will fertilize. Second, precision agriculture technology has made tremendous progress since the last downturn in grain and oilseed prices. Today, in pursuit of maximal efficiency and sound nutrient stewardship farmers test soil and apply precisely the nutrients for soil needs for the next growing season. This approach has the effect with smoothing demand for our products across the cycle compared with earlier cycles. Third, the argument that unused phosphorous will carry over in the soil from one season to the next is much too simplistic. The phosphorous cycle is complex chemistry but suffices to say that phosphate must be applied for each new crop. The benefit of skipping an application cycle is deminimus at today’s prices, a much different story than when DAP was $1100 per tonne. You can read more about this topic in the most recent addition of Market Mosaic which is available on our website. And finally, at current prices, potash and phosphate remain affordable just as we want them to be. Our views are playing out in the market. Global demand remains strong until the fall of season for both of our nutrients and prices are stable to reflect the demand. I want to be clear. We fully understand the situation facing grained farmers and we know they will have to make tough decisions as they prepare for the next planting cycle. We also know that this trough of the cycle is the first series dip in many years, so observers who entered the business in boom times are having difficulty seeing a longer horizon, but the agricultural environment can change quickly. One poor global crop would change sentiment and global food security dramatically. Overtime regardless of the current crop outlook we know that demand for food and crop nutrients will rise and therein lies the opportunity I mentioned earlier. As we demonstrated with our many strategic moves, the engines of growth are cheapest to build at the low part of the cycle. We are making good progress on our strategic initiatives. I’ll provide a few updates. We are on track to complete the acquisition of ADMs distribution business in Brazil and Paraguay by the end of the year. We are well along the process of planning for integration. Once complete the acquisition will enable us to expand our distribution in Brazil from 4 million tonnes to 6 million and capture a bigger percentage of the incremental value from our premium micro essentials products and one of the most dynamic agricultural markets in the world. The remaining potash expansion our key three shots at Esterhazy continues on budget and on time. We closed the sale of a decommissioned Hersey, Michigan line and have signed an agreement to sell our distribution business in Argentina. We are on pace and realizing the targeted synergies from the CF phosphates acquisition. The proximity of assets and the excellent cultural fit are proving quite valuable. We are also making investments to create further efficiencies in our phosphates business. We are investigating further de-bottle necking for ammonia production because we like the stability of supply we generate from manufacturing a portion of the ammonia we require. We are in the process of converting two granulation facilities to produce more micro essentials. And we are investing in sulphur melting capacity to give us greater sulphur sourcing flexibility At the modern project we are ramping up hiring and a significant portion of the capital required for the project will be put to work in 2015. We are already seeing steel and concrete rising from the ground. All these moves contribute to our well defined strategy. They provide us with growing production capacity, increased operational efficiency and growing and a stable market access. We are beginning to realize the benefits of these investments and are positioned for strong volume and cash flow growth as the cycle moves forward. Finally, I’ll leave the details on capital and expenses to Rich, but I want to mention that our capital structure continues to improve and we are ahead of schedule on our efforts to remove about $500 million in expenses from our two business units and our corporate functions. Now, before I offer some closing thoughts, Rich Mack, our CFO will discuss our results.

[Richard Mack:]

Thank you, Jim and good morning to you all. This morning I will provide a brief discussion of our business, segment financial results for the third quarter share some insight on our capital and close by providing guidance for the fourth quarter. In the phosphate segment, our results were in line with guidance. Volumes, prices and margin rate were generally consistent with our expectations. We are encouraged with what we see in phosphates and view this to be in increasingly positive story for Mosaic. That said however, and as we previewed in our press release on September 30, we believe that raw material prices particularly ammonia continue to be out of line with the price levels and other agricultural commodities, which is why we decided to curtail some phosphate production during the fourth quarter. This disconnect is compounded by the fact that we are entering a seasonally slow period for phosphate sales. For clarity, we are going to take a measured approach to the curtailment. We will produce enough fertilizer to meet customer needs and we do not plan on curtailing our micro essentials production. We will evaluate our production levels daily with the objective of entering the spring application season with minimal high cost ammonia in finished product inventory. In the potash segment our results were close to our expectations aside from isolated production issues, which were primarily weather related. That impacted our operating rate by several percentage points. We lost some production days during the quarter at both Belle Plaine and Carlsbad because of summer storms. While our year-over-year cash cost per tonne were roughly flat, in September for example the potash team delivered cash costs of $103 per tonne, including Brine management cost of $19 per tonne. These costs are at their lowest level in recent years even with lower operating rates and demonstrate that our cost reduction initiatives are beginning to take hold. Now, I’ll move on to our capital. I provided a fairly in-depth discussion of our capital philosophy a quarter ago, so I won’t repeat all that information today. Instead, I would like to make just a couple of points. First, to reinforce Jim’s message the low [Arkenles] cycle clearly provides opportunities for the strongest companies and Mosaic has a very strong financial foundation. We’ve put a lot of capital to work over the past 18 months and we will continue to do so as compelling opportunities arise. This is how we built this business in my years at Cargill being financially sound and looking for opportunities at the low end of the cycle. In this regard we have worked hard to optimize our balance sheet with the addition of $2.8 billion of attractively priced debt over the past 12 months including $800 million in the third quarter. We are using this cash to execute on strategic initiative, CF, Ma’aden, the ADM distribution business and an attractive Mosaic share price. On that note we have been repurchasing shares in the open market during our open trading windows as well as through a recently implemented 10b5-1 trading program. Since our last earnings call we have repurchased 3.5 million shares in the open market. That makes our total share repurchases $2.6 billion in the last 12 months or about 13% of our outstanding share account. Second, as a result of the CF and ADM acquisitions we have decided to slightly adjust our capital management philosophy by increasing our targeted liquidity buffer to $2.5 billion from $2.25 billion as a result of increased working capital requirements. This change increases our on-balance sheet cash target to $1 billion. As of the end of the third quarter, we have approximately $1billion and excess cash above this newly revised liquidity buffer after taking into account cash that will be used to fund the ADM acquisition by the end of the year and funding a trust fund for our asset retirement obligations which is likely to happen sometime in 2015. Now I’d like to provide our guidance for the fourth quarter which tends to be a seasonally slow period for us. In phosphates we expect margins to be in the mid teens, while operating rates to be in the 70% to 80% range, which is a lower and wider range due to the curtailment we have discussed. Sales volumes are expected to range from 2.5 to 2.8 million tonnes for the fourth quarter. This compares the 3.4 million tonnes in last year’s period when volumes were unusually high as low prices and sentiment changes led to a significant sales in North America. We expect our realized prices for DAP to range from $430 to $450 per tonne. In potash, we anticipate that our mines will operate at high rates to begin to replenish extraordinary low inventory levels and to meet global demand including and expected new contract with Chinese customers. In the fourth, we expect to continue to make significant deliveries under the old contract which will increase the proportion of international standard sales in our product mix negatively impacting our expected average MOP pricing. We expect potash sales to be in range of 2.0 to 2.3 million tonnes during the fourth, compared to actual volumes of 1.9 million tonnes in the same period last year. We expect average realized potash prices to be in the range of $275 to $295 per tonne. The gross margin rate for the potash segment is expected to be in the mid 30% range. Our operating rate in potash is expected to be in the range of 85% to 90%. We are narrowing our 2014 Canadian resource taxes and royalties to be in the range of $175 million to $200 million, compared to prior guidance of $170 million to $210 million. And our guidance for full year brine management expenses is unchanged at approximately $200 million. We are also lowering our estimated SG&A expenses to a range of $380 million to $395 million for calendar 2014, with the midpoint of the range down $25 million from the beginning of the year as a result of our progress on cost savings initiatives. Note, these numbers include $10 million in charges incurred to achieve these cost savings initiatives, so we are off to a good start on this front. For the year we estimate an effective tax rate excluding discrete items continuing in the high 20% range. We continue to expect a normalized tax rate in the low to mid 20% range for 2015 and thereafter. And finally, our expectation for capital expenditures and equity investments remains in the range of $1.0 billion to $1.2 billion including investments in the Ma'aden joint venture. In closing, I have a couple of miscellaneous remarks. First as Jim noted, we anticipate that we will close on the ADM acquisition by the end of the calendar year. Assuming that to be case, we plan to manage and report a new international distribution segments starting in 2015. This approach will provide enhanced disclosure and transparency in our phosphates business, as well as with our larger international distribution business. We anticipate providing you with historical data during the first quarter of 2015. And second, from time-to-time in my new role I hear questions relating to a perceived remaining overhang resulting from the Class A share held by Cargill family members and trusts. If such a perception exists, it should not. There are less than 35 million Class A shares outstanding and they are held by several separate and distinct owners and trusts. In November, 2014 just next month 17 million of these shares will convert into freely tradable common shares and a year later all of the reaming restricted shares will also convert to common. While this diversified group of Cargill family owners and trust will obviously have full discretion over their ultimate disposition we would not expect significant selling given the tax implications associated with these shares. With that, thank you for time this morning, and I’m going to turn the call back over to Jim for his concluding remarks.

[Jim Prokopanko:]

Thank you, Rich. The economic environment on the farm has changed. Corn selling at 350 per bushel remains us after a long run of remarkable farm profitability, that food supply can still get ahead of demand, if only temporarily. And tough times for farmers lead to leaner times across the Ag factor. We are ready for this at Mosaic. We’ve been through $3 corn and $9 soybeans. We’ve been through $200 potash and we’ve seen the over exuberance or $1,000 potash. Through all that, we’ve stayed our course. We will remain confident about the agricultural markets and we’ve made tough decisions when necessary and bold decisions when they held big promise. Listen, this is a tough business and a tough business to predict. Agriculture is subject to a myriad of forces, economic, social, political, environmental and otherwise. Farmers and agro business make decisions about the future with many variables unknown. But they and we return to the simple concept that the world needs all the food they can grow and it needs a lot more of that food in the coming years. I will skip the food story details for now and I will let this suffice. Short term volatility is a fact of life in agriculture, but long-term demand growth is also a fact of life and lives. Mosaic is exactly where we wanted to be, and we’ve made bold investments for growth. We’ve reduced our costs. We build an efficient balance sheet. We’ll become the world’s largest player in finished phosphates and build a strong position in potash. In short, we have built this company to succeed across the inevitable cycles of agriculture. Now, we’ll be happy to take your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Matthew Korn from Barclays. Your line is open.

[Matthew Korn:]

Good morning, everybody. It’s quite something to get first in line here. Question for you, if we do maintain acres and we apply proportionally more fertilizers and hold total demand kind of steady, is it fair – could we be headed for a wall of U.S. stock to use in the grain side, particularly if we see grain export sales may be limited by currency. And I guess the question becomes would it better for the business over the next two, three years to maybe see a substantial drop in acres this next year instead of planting 1991 and then anticipating an even bigger build in stock the following year?

[Jim Prokopanko:]

Well, good morning Matthew and congratulations for being number one. And it’s good way to start your Thursday. Your questions, really take a look at regional market North America in what we are competing in is a world market and I’m going to turn it over to Mike in a moment about that. But I believe the world with the demand growth we’re seeing in grain and oilseeds needs to keep their foot on the accelerator to continue to grow the kind of crops we’re growing. We can’t count on having two back to back or continued back to back record harvests. The record just aren’t there to support that just as we don’t have poor harvest year after year after year, we won’t expect to have these record harvest continuing. So, I think the right thing to do for farmers to take the market signals, produce all that makes economic sense to produce and we’re seeing it play out with the soybean markets with higher than anticipated soybean exports. So, just looking at the U.S. there’s other things happening whether its Southeast Asia, Latin America, Brazil now being challenged with dryer than normal planting conditions which we’ll see how that ends up. But we got to look at the whole market and we have the whole world as a market and not just focused on what’s happening with the U.S. corn and bean crops. Mike over to you.

[Michael Rahm:]

Yes. Not a whole lot to add Jim, I thought it was a good response. What we say around here is that, we’re one great – one great crop away from a farm crisis and one poor crop away from a food crisis. And I think that really summarizes the nature of our business that if we knew what mother nature was going to deliver, I think we could answer the question, but we just don’t know, and I think that’s what markets are precisely signaling today that there is so much uncertainty in terms of what could happen that you could get a sharp inventory drawdown next year under a poor crop conditions.

[Jim Prokopanko:]

I just add to that Matthew, until 10 days ago it was well as me these corn and bean prices aren’t going to find the bottom and we get a few little surprises like higher soybean exports, dry conditions in Latin America and the markets turnaround and we’re seeing 10 or 15 days of some solid improvement in both corn and bean prices. So it’s a really a difficult one to forecast.

[Operator:]

Our next question comes from the line of Ben Isaacson from Scotia Capital. Your line is open.

[Carl Chen:]

Hi. This is Carl just stepping in for Ben and thank you for taking my question. Jim, can you please walk us through how you see the supply and demand dynamics involved between 2014 and 2015 for both phosphate and potash?

[Jim Prokopanko:]

Charles, good morning. I’m going to just turn that straight over to Dr. Mike Rahm who keenly follows those supply and demand dynamics and I’ll wrap up with some comments.

[Michael Rahm:]

Good morning, Carl and thanks for the question. I think in terms of our projections for 2015 you’ve seen our forecast for shipments, we expect that potash shipments will increase from I think our point estimate for 2014 is 57.8, we think there’s another million tonne increase in 2015 to about 58.8 or so. In the case of phosphates we expect to go from the mid 64 million tonne range in to the kind of 66 million tonne range. So, we expect demand growth maybe slows a little bit from the rapid pace that we’ve seen in 2014. And given that forecast when you lay that up against supply, we see more or less fairly stable operating rates. In the case of potash, I think that translates into about 82% operating rate or so worldwide, in the case of phosphates, about 86%. So, as we said, our long-term outlook shows a fairly well balanced situation. We think global potash operating rates are going to kind of range in that 80% to 85% range and in the case processed phosphate rates will be in the mid 80% range.

[Jim Prokopanko:]

Charles, we’re going to add one thing to couple of points to that. 2015 and phosphate is going to be another record year, although we moderated our forecast for the year to be up a 1million tonne less, it’s still going to be up a 1 million tonnes. And if you go back to 2007 the year before the big drop in shipments, we’re shipping 50 million tonnes approximately a year. Today we’re going to ship 65 million tonnes of finished phosphates. From 2008 we’re up almost 20 million tonnes, and on global potash, again, we’re going to see another record. And if you go to the 2008 year, we’re going to be up 10 million tonnes of potash shipments. So, yes, there is ups and downs, dips and valleys, but the trend is unrelenting. It is upward and it maybe is not every year, but we are seeing continued growth in potash and phosphates with record years being post-expected in 2015.

[Michael Rahm:]

I think the other thing I would add Jim is that when you look at global grain and oilseed production the big step-up in production pulled a lot more nutrients out of the soil as we mentioned before and that translates into this 8% increase in potash shipments in 2014.

[Operator:]

Your next question comes from the line Chris Parkinson from Credit Suisse. Your line is open.

[Chris Parkinson:]

Thank you very much. Can you further elaborate on your strategy for ammonia procurement specifically including some options for potentially debottlenecking of its Faustina and then also your appetite for more longer term index, supply agreements? Thank you.

[Jim Prokopanko:]

Good question Chris. I’m going to have our Chief Operating Officer, Joc O'Rourke speaks to that, those are projects he is keenly following.

[Joc O'Rourke:]

Thank you, Chris. Joc O’Rourke here. Yes, we certainly looked at how we add flexibility and let’s call it a natural hedge to our ammonia supply. We believe that by linking ourselves to the relatively high supply of natural gas in North America and low price of natural gas, we can do better in terms of ammonia procurement, and as such we are looking at debottlenecking our Louisiana plant. We believe we can add up to as much as 100,000 tons of gas-based low cost ammonia. So, we think that’s a really good project. Likewise we entered to a long-term supply agreement for 700,000 to 800,000 tonnes from CF industries that will be natural gas indexed or based. So that gives us a good balance between the ammonia market and natural gas based ammonia. So we feel about the right place.

[Michael Rahm:]

Hey, Chris, I’m going to add to that and just along that line of questioning not only we doing, looking at the debottlenecking and pursuing that, but we’re also in the same way going after sulfur alternative, ensuring that we have good optionality and where we can get our sulfur. With that, we’re making an investment in a sulfur melter in Florida, which is going to give us the flexibility to bring in [apparel] sulfur from other markets, Middle East and so on, other low cost markets and not just be reliant on molten sulfur coming in as well we’re investing in a couple of cross-Gulf barges that’s going to give us the availability or ability to move ammonia across from the Louisiana into our Florida operations. So the point is we’re looking for all the flexibility we can find to ensure we have low cost raw material inputs and I think both the ammonia de-bottlenecking and the sulfur melter are really going to position us for an advantage cost position on those two important raw materials.

[Operator:]

Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.

[Vincent Andrews:]

Thank you. And good morning everyone, I’m wondering if you can speak a little bit about general and maybe post to CF acquisition, I thought it was notable that you sort of cutting or reducing your phosphate production in response for the higher input cost? And I don’t remember you being that aggressive in the past. So, if you could just kind of update us on your thought process and sort of the strategy going forward, and is this new or is there more to come or how should we be thinking about it?

[Jim Prokopanko:]

Good morning, Vincent. Glad to address that. On the strategy, the CF acquisition which we called project donuts and so was the whole in our donut we have mines and facilities all around that the CF phosphate facilities. That was just -- we are a natural parent and it worked well in term synergies. We’re anticipating synergy harvesting of about $50 million in 2015 and we’re well on track to that. It’s really been -- all we could have hope for plus more in terms of the cost efficiencies and probably more importantly the quality of talent we’re able to acquire with that assets. It’s really gone well. The integrations gone well and it really work for us. We’re able to get the cost synergies, we’re able to rebalance productions amongst various plans and facilities and it’s given us additional years of mining capacity and flexibility with in terms of differing a mine going forward. We really believe in the phosphates segment. We are always looking to grow our top line as we have with the CF acquisition and we think there is over time, there’s going to be more opportunities to grow the top line in the phosphate business. The Ma'aden project is another important element of that where we’re investing 25% of the cost of the Ma'aden project for 25% of the off take of the project in Saudi Arabia positioned us well to serve the India and Asian markets, Southeast Asia markets. So, we’re continuing to be strong believers in phosphate and look to grow the top lines on that. Next question you asked was about curtailment and what we’re thinking there. This is – we’re not straying from our strategy of producing to market demand. What we’ve seen is a delay in market demand for this fall season principally in North America. Delay in decisions and we could [recall] and could perhaps speak to that in a moment. But we’ve seen the delay in decision making to apply phosphates. We think it’s going to come. The phosphates would be bought. But for us to build inventories with high cost, sulfur and high cost ammonia not without commitments for those tonnes, we just didn’t see that as a prudent financial move. So we’ve throttle back our phosphate – finished phosphate production, so as not to build the high cost inventories, quite a simple as that nothing unnatural there. And perhaps I’ll just move into Rick – Rich McLellan, our leader of a Commercial operations and just talk about what we see happening on phosphate demand.

[Richard McLellan:]

Yes. Thanks Jim. And we – I think what’s going – what we see going on in the field. There’s a lot of talk about demand destruction everything else happening in the marketplace. We had a very delayed harvest and the farmers have been slow to come in and make their minds up on what they’re going to buy. That started to occur as we’ve got a good chunk of the soybeans in the bean and what’s happening is farmers are slow to come in, but when they make the decision they’re not cutting application rates. We’re seeing the same thing and planning in Brazil where the planting is delayed, yet farmers aren’t cutting back anyway on the amount of phosphates they use. So that’s what we see happening at the farm gate level. The other piece I think I’d add Jim to our strategy is we’ve continued to focus on building out our premium products, so that in phosphates in those key and growing markets in Brazil and North America in the Caribbean Basin, we’ve been able to supply a bigger percentage of our business as MicroEssentials and less is DAP.

[Richard Mack:]

And Vincent, this is a Rich Mack, one final point that I would make. I think it’s fair to say that we believe that our phosphate story is getting increasingly more compelling and we made a lot of investments Ma'aden, CF, ADM distribution business are in line with that. We are taking a lot cost out of the system and making good progress there. We’re capturing synergies from the CFDL. And so we think telling the story and providing more transparency to our segment is important and that’s one of the reasons why we’re going to move forward with this new segment on international distribution and that will provide much more direct line of sight into our phosphate business.

[Jim Prokopanko:]

Vincent, you’re not going to get a medal for being the first one to ask a question, but you get the prize for having the longest answer to your question. We’ll carry on.

[Operator:]

Your next question comes from the line of Don Carson from Susquehanna Financials. Your line is open.

[Don Carson:]

Question on potash, actually two questions, one is just do you see demand slowing at all in North America in the fourth quarter and I’m just wondering how much of this demand we’re seeing is really rebuilding pipeline inventories versus pounds in the ground. And then as granular has been very tight this year, standard not so tight, as we get into next year and if [indiscernible] advance going up and there’s 900,000 tonnes more granular out there, what impact do you see that having on the North American marketplace?

[Jim Prokopanko:]

Good morning, Don, good to hear from you. I’m going turn that over Rick McLellan, Leader of Commercial Group to answer those questions for you.

[Richard McLellan:]

Yes, good morning, Don. As far as demand slowing in North America, I think we came through spring season. And Larry and I talked about it on the last call that we traveled and we could not find potash in the month of July in anywhere that we visited in Illinois or Indiana. And so, I think what’s getting moved into place right now is going to the field or will go to the field in the next six weeks. So, we don’t see demand waning in North America, nor do we see that happening in South America. And the second part of your question was the impact of [Vanscoy] production coming on is a big project. They take a long while to bring on. So I don’t know whether that happens next year or not. The only thing that I’ll tell you is that we’re planning with all of our major customers and there is strong demand for granular both in North America and around the world. And little extra production is not going to impact very much would be a situation that we see the strong position we see for granular markets.

[Jim Prokopanko:]

Anything you want to add to that Mike.

[Michael Rahm:]

I can get some specifics in terms of what we’re assuming for demand for corn acreage. We think corn acreage will be off a bit in that 88 million to 90 million acre range and soybeans probably in the 80 million to 82 million and [oil wheat] in the 50 to 53. We don’t expect much of a decline in application rates. And as a consequence you put all that together. We think both phosphate and potash overall use could be down 3% to 5% in the North America in the 2014, 2015 year and that’s certainly pegged into our global shipment forecast.

[Jim Prokopanko:]

Just to put a point on it, Don, on to your questions. The pipeline stock, this is lowest we’ve seen in the number of years and that is low because in spite of the high production rates, so the demand has been good and its going to take us some considerable effort and good operating rates to continue to keep up with the demand and as well as fill a very, very thin pipeline. And then your question on [Vanscoy] that’s going to come up, I think they say in 2015 and we expect that to be replacing current imports into North America. So we’re – yes, there is some modest concern about where those tonnes are going, but I think that will as I said, displaces imports that we’re now seeing reach North America.

[Michael Rahm:]

Jim, I might add just in terms of the demand outlook we just talked about our global shipment numbers. In terms of the composition of that, I think the theme for 2015 is that the torrid pace that we seen in the Americas slows down a bit, but as we expect Asia is going to pick up, particularly India, we think the pipeline there is absolutely bone dry and Rich, you just got back from Malaysia, Indonesia, Burma, the demand prospects for [PMK] those markets remain robust. So we think India -- we think Asia is going to step up and offset some of the slowdown that we’re projecting for the Americas.

[Operator:]

Your next question comes from the line Jeff Zekauskas from JP Morgan. Your line is open.

[Jeff Zekauskas:]

Thanks very much. At the beginning of the call you were talking about your liquidity buffer. Did you say that you have $1 billion about your buffer? You bought back 3.5 million shares. And is it the case that you could spend, I don’t know 1 billion on share repurchase in the coming year or two?

[Jim Prokopanko:]

Good morning, Jeff Zekauskas, glad to have you on the call and we’re going to have Rich Mack speak to the liquidity buffer and perhaps just give you some color on the repurchasing.

[Richard Mack:]

Hey, Jeff, it’s Rich. I think the answer to your question is yes. You’re correct, as of today anyways we currently have roughly $1 billion in excess cash after you take into account the upward adjustment in our liquidity buffer. And what we do in fact going forward really would go back to our capital management philosophy and I would just refer you to some of our prior commentary about our priorities for investment which include maintaining our credit ratings and of our course our dividend policy, sustaining our assets, looking at organic growth opportunities, things like MicroEssentials and cogeneration, K3 for example. Strategic growth opportunities, we talked ADM, CF and Ma'aden. And to the extent that we have excess cash, you should expect that we will continue to move towards the balance sheet metrics that we have publicly provided. We had stated leverage ratio and of course our liquidity buffer. So, the way I look at it is in 2014 we have been extraordinarily active if you include share repurchases and you include dividends, we’ve returned $3 billion to shareholders, which is I think by far the most that you would find in our sector. And most recently after we got through the MAC Trust purchase agreement we’ve been involved in open market share repurchases. And so, I think I would leave you with the fact that we’ll balanced and we’ll methodical in our approach and we will be a strong generator of cash going forward and to the extent that we have excess cash we will look to return that to shareholders in the form of either dividends or share repurchases.

[Operator:]

Our next question comes from the line Paul Massoud from Stifel. Your line is open.

[Paul Massoud:]

Hi, good morning. Thanks for taking my question. I was wondering, given low producer inventory now and logistic constraints that we’ve seen in getting product distributed across the U.S. I was just wondering, as you look out over the horizon, did you think or have you seen any evidence that retailers may start to revert back pre-2008 practices by holding more inventory or do you expect that the inventory rebuild if and when it comes it’s going to come at the producer level? Thanks.

[Jim Prokopanko:]

Good morning, Paul. You ask a good question. Principally around a long and complex supply chain of - its one thing making it, and it’s one thing delivering it to the farmer at the dealer level. I’d say you gotten to be a whole lot more complex and uncertain about getting it between the producer and that dealer. And we are spending considerable effort and time internally looking at how we can avoid the hassle we faced last year with railway shipping product, railway shipping issues and what is becoming a growing challenge on the barge system. So there is a lot of uncertainties still remaining about our capacity this year to recover from the hole that was dug last year and not being able to get product to either domestic or international customers on a timely basis, particularly when I speak international customers I’m referring to potash shipments out of Western Canada. It’s a challenge we put to our dealer customers that we just can’t FedEx this product a week in advance of when they need to sell it to the supplier. We’ve got to take up over a month to six weeks to position or train, get it shipped and get it delivered. So you put your finger on a real emerging and developing issues what position the dealers take in storing product and this is – here is a good example of farmers delaying decision making, so dealers are reluctant to make the decision of loading up their warehouses if they don’t know the farmers are taking. So this is backing up the system and what we’re doing is where we can position products further in country closer to those dealers, with dealers and be ready for potential problems in the delivery. I’m going to ask Rick and Collin to add some color to what he’s seeing in the distribution system.

[Richard Mack:]

Thanks, Jim. I’ll just take where you were at with the farmers delaying decisions. And the dealers have been good at stepping up and placing the inventory, but they really are looking for the farmer to do something. And so, when the farmer puts the brakes on or delays making decisions during the harvest period like this, dealers are really reticent to take on inventory to hold it for those customers. So, I think that what we’re going to see is that farmers can see the logistics problems aren’t going to go away, then you will see a change in dealer mentality. And I think that’s the part that we have to look at going forward. And it involves the whole chain you can’t the dealer is not going to step in just like we talked about not building phosphate inventories with high priced raw materials and so the key piece is getting a much better seamless move from production through to the farmer.

[Jim Prokopanko:]

Rick, just add some of the – some ideas on what we’ve been doing and whether it’s positioning barges, unit trains ex-base contracts and how we’ve been trying to work around this?

[Richard Mack:]

Yes, it’s a good point Jim. What we’ve in North America attempted to do is as Jim says we’ve moved it closer, moved the inventory closer to the customer. And but we’ve what we have done is we focused on getting the inventory in place that’s going to be used for the fall. And in the past we would fill up inventory no matter whether it was going to be used for the fall or not. And so, we put [prior] dates on what if we place inventory in new warehouses on when they should get invoiced. And so it’s helped us put some discipline around it and in that way we don’t have the inventory misplaced somewhere in North America when it could be used to go to India. So, Jim those are the things that we are doing in on potash, we’re moving product up where we’ve got the ability to into the dealers warehouse, but right now it’s we’re producing it and we’re moving it and it’s going to the ground.

[Operator:]

Your next question comes from the line of Michael Piken from Cleveland Research. Your line is open.

[Michael Piken:]

Yes good morning, thanks for the question. Just wanted to dig a little bit deeper into your thoughts regarding kind of the timing of maybe the next China in India contracts and what your expectations would be for Chinese potash imports in both 2014 and 15 and then the same for India in terms of imports as opposed to just consumption? Thanks.

[Jim Prokopanko:]

Good to hear from you Michael, and a good question. Yes, China contract is right before us but all I can say on it is that one, China has been using good amounts of Potash this past year. Demand has been strong and we’ve also seen those inventories as a result of that diminish. So we expect there to be a good appetite into China. Timing wise we are very hopeful that we are going to see a contract, a normal type of contract over the next by the end of the calendar year, fingers crossed, discussions are underway and in terms of pricing it’s going to be above where our last contract was which is a low bar, but we expect a higher price and I’m not going to say much more about the negotiations at this point.

[Operator:]

Your next question comes from the line of Mark [Gulley] from BGB Financial. Your line is open

[Unidentified Analyst:]

Good morning. Had a discussion about inventory at the producer level although you as an organization, as an industry kind of backed off on reporting that and a lot of talk about channel inventory, but no discussion about soil inventory, mostly P&K has the industry or perhaps Mosaic ever attempted to take a look at what might be the available levels of P&K available for the next crop that’s already stored in the soil let’s say for example in North America.

[Jim Prokopanko:]

Insightful question, Mark and something that we watch carefully. I’m going to have Mike Rahm to speak to that.

[Michael Rahm:]

Well I guess the best, hard evidence is what the research at IP&I has done over the years where they have done a very careful accounting of what crops have removed from the soil and what nutrients have been applied to the soil both in the form of chemical fertilizers as well as manure and so forth. And those have shown consistently that nutrient removal has exceeded what has been applied for several years and there are many parts of the world where or many parts of the country where P&K soil tests are relatively low. I think what we said earlier about record crops removing record amounts of nutrients is really relevant. Farmers have adopted the use of precision technology, the old view that you just kind of [indiscernible] the P&K and build up soil levels and keep applying at certain constant rates. I think that’s changed a bit with the precision technology that’s been available. So as we said earlier this whole notion that the P&K levels in the soil are adequate to feed a 215 crop just doesn’t seem to square with all the facts.

[Jim Prokopanko:]

Yes, I’m going to add to that Mark that when you look at the state of technology on the farm today, there isn’t a lot of room for one tank you put in high test, the next tank you put in low test and we are talking about this for example seed. If you put in some of the high value multi trade seeds farmers are going to be spending $420, $410 a bag a seed, if you apply that to 2.5 acres that’s a $150 to $160 per acre per seed and this is the point I made in my opening comments. When you put on a $160 of seed value you are not, not going to feed it. You are going to give it the best bite you can so you get the maximum value of it. And with these record crops what you have seen just as Mike said, we have extracted record crop nutrients. So, yes there may be just a little bit of dip and little economizing farmers might have to do that, but there just isn’t the room to tighten the belt like there used to be. These are highly technical businesses that farmers have to maximize economic yield and that’s using the best seed and the best nutrition for those excellent seeds.

[Operator:]

Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.

[Adam Samuelson:]

Yes thanks, good morning everyone. A question on the cost saving kind of target the -- out of the 500 million by 2018. And I think in the press release you alluded to starting to realize those benefits in the quarter, maybe quantify that, quantify maybe what you are expecting in 4Q where looking for pretty sharp improvement in potash unit cost? And then as we think about ’15 and beyond what the capital cost of actually achieving some of those targets might actually look like? Thanks.

[Jim Prokopanko:]

Hey good morning, Adam. I’m going to turn that right over to Rich Mack our CFO who’s pursuing this initiative.

[Richard Mack:]

Hi, Adam. What I would say is first of all we’re off to a very good start I think in terms of trying to achieve these cost saving initiatives and I’ll remind you that a portion of these are real or absolute cost reductions and a portion of these are intended to offset future inflationary pressures in our businesses. And I think what I would also say is from a management perspective we are working very hard to front end load as many of these costs as we possibly can. So things like shutting down our Carlsbad MLP production by the end of the year. The portfolio optimization actions that we have taken, so the sale of Hersey, the signing of a purchase agreement to divest our Argentinean operations, shutting down our Chilean operations we’ve gone through a very significant corporate function, cost review and we are implementing the actions to take significant costs out of our SG&A. And so it’s resulting really across the board and in headcount reductions that would be included at our corporate offices, in our business units and in our international locations. We’ve set up a shared services center as another example down in Florida to look at places where it is more friendly from a cost perspective to do business. And another example I throw out as we recently shut down our [Hooker’s] prairie mine in Florida. And so in the end what we are trying to do is we’re being systematic, we are looking for things like attrition, early retirements, less use of contractors and so bottom line off to a very good start. When we get to a few years out in terms of capital, I think that you are going to see that there should be a step function change in terms of what our capital requirements would be, again, it’s all dependant on what sort of opportunities we see in terms of organic growth and strategic growth opportunities but you -- we should see some of the cost savings that we are achieving results in 2015, 2016 or probably thereafter I mean these targets remember are 2018 targets and less capital being used by the organization.

[Jim Prokopanko:]

Yes with that Adam, I’ll just say net, we are very pleased with how the organization has responded to the cost savings initiatives. We are ahead of plan and we are pushing to have most of these savings harvested before the five year time horizon. We’ve got time for one more question folks, and then we’ll wrap it up.

[Operator:]

Your last question comes from the line of Andrew Wong from RBC Capital Markets. Your line is open.

[Andrew Wong:]

Hey guys, thanks for taking my question. I just wanted to ask actually about the Indian potash and phosphate market and the subsidy expectations you’ve built into your demand forecast for next year. Do you expect the subsidy to rise along with the prices like in particularly with the potash market and if it doesn’t how will that impact demand and will prices have to adjust to accommodate dealer margins, just wondering your thoughts? Thanks.

[Jim Prokopanko:]

Okay, Andrew good morning and welcome. I’m going to turn it over after just the opening comment here to Rick and to Mike Rahm. It’s something we are watching carefully with the change in leadership in India we are seeing the – we are starting to see the signs of real reform and we are hopeful and pragmatically hopeful that we are going to see true reform to the subsidy program. The new leadership there is some small things that have already been signaled, we’ve gotten distribution rights for potash and into India something that we’ve been trying to achieve for a couple of years, new leadership in India and quickly we saw that request met. So that’s giving us a real hope that we are going to see changes to the entire agricultural system and specifically nutrient reform. Rick, do you want to add some color on that?

[Richard Mack:]

Yes just add a couple of things. There is – I visited with some of the industry people from India in Singapore on Monday evening at a [Capitex] event and they talked about finally being in a position that the government is going to focus on real change. And what that means is trying to get to the balance crop nutrition that they have set off, that they need to get to. And people are very, very positive that’s going to happen. I think probably what’ s more so then what’s going on with prices of P&K they are going to have to deal with the difference between nitrogen pricing and P&K pricing. And so what that change looks like I think we have to be patient for it to take place but if you used 2014 as a guide we saw it growth in both P&K imports and applications and a change to the nitrogen subsidy would only support that continuing.

[Michael Rahm:]

And Rick, I’d just add a couple of points. As I said earlier, we are banking on India for picking up the pace in terms of their P&K imports. We think phosphate imports will be up to around 5.5 million tonnes of DAP in calendar year 2015 and MLP imports probably in that 4.5 million tonne range. The one thing I would add farm economics in India are great. Their minimum support prices are at relatively high levels, more moderate international prices are more stable, rupee has really caused import economics to work. So in terms of our demand forecast we don’t see changes, any changes in subsidy policy jeopardizing the demand outlook in India. The other thing I would add is that with the crop and petroleum prices, it takes a lot of pressure off the government in terms of its overall subsidy bill because petroleum takes up a pretty big chunk of that. So I think there will be a little bit less pressure to squeeze the balloon a little bit harder on the P&K side.

[Jim Prokopanko:]

Okay and with that I’d like reinforce our key messages and thank you all for the questions and the interest on this call. First, we believe the current negative sentiment in agriculture markets is overblown and the low valuations present compelling opportunities for Mosaic and investors alike. Second, we always have to keep in mind that this is a cyclical business. Agricultural commodity prices are indeed lower. This cycle will play out and prices will certainly rise again. Third and most important Mosaic is in an excellent condition to thrive across the cycle. We have the resources, the assets and talent to whether the current economic environment sees opportunities as they arise and outperform when conditions improve. Thank you all for joining the call. I hope you all have a great and safe day. Good day.

[Operator:]

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