MOS
#Thank you, Joc, and good morning to you all
As Joc noted, our business performed well in the third quarter
I'll start with the Phosphate segment
Global demand remains strong as farmers seek to replace nutrients removed from the soil by large crops in most of the key growing regions of the world
Margins have been stable with the expectation of additional supply, healthy mead high demand
As we previously announced, Hurricane Irma impacted our phosphate operations in Florida
The combined effect of lost production time and damaged product resulted in approximately 220,000 tonnes of lost sales during the quarter
The storm tempered what was otherwise a very strong operating quarter for that business unit
In fact, for the first two months of the quarter, as you can see on the slide, the business operated at a gross margin rate of approximately 12%
The cost impact from the hurricane during the month of September was approximately $35 million with $26 million being realized in the third quarter bringing down our gross margin rate for the quarter to 9%
I would note that our phosphates team did a heck of a job in preparing for and dealing with the challenges that presented themselves during this period, which resulted in about a week's worth of downtime in our plants
I want to highlight the performance of our premium MicroEssentials product
Our MicroEssentials sales volumes are expected to reach another record this year, approximately 3 million tonnes and the margin compression we saw earlier in the year as expected, proved to be transitory
So with respect to phosphates, we are seeing improvements and we expect the actions, Joc described to drive further margin improvements in the future, keeping in mind some of the near-term expenses that need to be incurred to effect these changes
Turning to the fourth quarter, we expect phosphate shipping volumes to be in the range of 2.3 million tonnes to 2.6 million tonnes and we expect prices to be in the range of $320 to $350 per tonne
Our gross margin rate for the business is expected to be in the upper single-digits, including the estimated $9 million negative impact from Hurricane Irma, which will flow through inventory costs in the fourth quarter
During our last quarterly call, we reminded you that our ammonia supply contract with CF Industries takes effect this year
At the current market price of natural gas, we expect to pay approximately $330 per tonne FOB Louisiana and we plan to take about 200,000 tonnes of ammonia in the fourth quarter of 2017. These purchases will flow through our reported gross margins with about a one quarter delay, just like our other ammonia purchases
While the contract is underwater now, it was intended to generate shared producer economics over time, which remains our expectation
The contract provides us with reliable ammonia supply and protects us from volatility in nitrogen prices
Turning to the Potash segment
We continue to generate respectable margins as a result of well managed costs and improving price realization
Global potash demand remains strong as evidenced by the fact that many of the world's largest suppliers, including Canpotex are essentially sold out through the remainder of 2017 according to published reports
For the quarter, our sales volumes and prices came in near the top end of our guidance ranges and the business generated a gross margin rate of 21%
I want to emphasize the tremendous progress we have made on costs in this business
We took down higher cost production several years ago and to be sure this has had a real impact
But we have also made a wide range of innovative operational improvements and that is a testament to the hard work and creative thinking across our potash team
We look forward to applying a similar playbook to our phosphates business
During the quarter, we also recorded a $10 million charge comprised of a $40 million royalty expense, partially offset by a $30 million Canadian resource tax benefit, highlighted in the notable items table, related to an expected Canadian royalty resolution
The net cash impact is positive since we overpaid the province to avoid penalties and we will be collecting approximately $20 million in refunds in connection with the resolution of the matter
MOP cash cost per tonne were $101 and included $21 per tonne of expense for the royalty resolution and $15 per tonne of cash brine management expenses
For the fourth quarter, we expect potash sales volumes to be in the range of 1.9 million to 2.2 million tonnes and we expect prices to be in the range of $175 to $195 per tonne
The gross margin rate is expected to decline to the upper teens as a result of a higher proportion of higher cost Colonsay product flowing through the P&L during the quarter
And as a reminder, we made the decision to push out our Esterhazy turnaround to the fourth quarter earlier this year
In the International Distribution segment, our volumes and margins were at or above the high end of our guidance range, with third quarter being the seasonal peak for Brazil
We expect good performance in the fourth quarter in line with normal seasonal patterns
Sales volumes are expected to be in the range of 1.5 million to 1.8 million tonnes and we expect a gross margin per tonne of approximately $20. Moving on to full year guidance
We are further reducing SG&A and brine management expenses as a result of our ongoing focus on cost management
Other changes to full year estimates can be seen on the slide
In addition, after quarter end, we completed a lease finance transaction for the ammonia barge which resulted in a cash benefit of approximately $200 million
I also wanted to specifically address the underperformance of Vale Fertilizantes for the first nine months of 2017 and how Mosaic is viewing this challenge
Clearly, neither Mosaic nor Vale is happy with the reported results for an operation which historically has delivered significantly better performance
While there has been some turbulence in the phosphate sector in 2017, we absolutely believe that this business is strategically core to Mosaic and we are optimistic about its future, especially when viewed through the medium to long-term lens
We engage in a business that has been and likely will always be subject to cyclicality and we don't believe that 2017 should be viewed as an indicative year for this business
I can provide some examples
For instance, there are several unusual items impacting Vale Fertilizantes results, including major movement in the Brazilian reais, flooding at Miski Mayo, a plant fire at Uberaba, incentive compensation expenses tied to the iron ore performance, which obviously is faring better than fertilizer and operational costs that have been materially higher this year that should be transitory in nature
We believe that this base business being acquired should generate approximately $300 million in annual EBITDA when viewed on a through cycle basis prior to synergy capture and operational savings
The fact of the matter is that Mosaic is in the business of producing and selling fertilizer and Vale is in the business of running a successful iron ore business
We intend to approach the integration and roll-up of Vale Fertilizantes with an appropriate sense of urgency and apply Mosaic's operational model to accelerate business performance
Since we announced this transaction in December, we have been working diligently with world-class integration and consulting firms to identify and prioritize actions that can be implemented that are expected to drive significant positive financial improvements through this acquired business
Finally, I would like to reiterate Joc's message regarding the strategic moves we announced today
We are making these difficult decisions that have real impacts on many of our employees to make Mosaic as competitive as it can be regardless of where we are at in the cycle and part of that is improving our cash flow and reducing leverage
These moves will lead us to meaningful improvements in our financial performance and cash flow, which in turn will help us achieve our long-term capital management objectives
With that, I'll turn the call back over to Joc for his closing thoughts
Joc?
Thanks, Joc, and happy Halloween, <UNK>
I think, Joc covered it
I would simply add, I think it's comparing us to today versus April
I would say, it's been a market leader and been proactive and responding to the current market environment
And so, I think that Mosaic has had a track record of taking tough decisions when needed and we believe that the transformational actions that we're talking about today are going to have a very positive impact in the marketplace
Right, and <UNK>, I think you're asking a very good question for context
And so when you set these synergy targets, you're doing it with a limited amount of due diligence that as you're signing up the transaction
And what's happened during the course of 2017 is we have had an ability to have hands on access to a lot of additional information particularly after we got antitrust approval which was only in August
And so we've had some very in-depth work with consulting firms that have identified the operational transformation that Joc highlighted
And obviously there is a lot of opportunity on the external spend amount
And so you're right, normally you would close the transaction and come out with numbers, but with the underperformance of this business in 2017, we thought it was important to try to put a little bit of context on how we're viewing it for today's call
<UNK>, we would expect – there's a number of different benefits that come as a result of the idling of Plant City
In the short-term in the fourth quarter, we'll have a severance charge of somewhere in the vicinity of $20 million and then we would expect that we will see cash savings in 2018 of roughly $40 million to $50 million and that's comprised of capital, less capital spend and it's also comprised of working our best assets in Florida harder and reducing our conversion costs
And, Jeff, I guess I would just add
We will provide more detail once we get the deal closed with respect to Vale Fertilizantes on a little bit more of a deep dive into some of the expense categories and numbers and costs to achieve
But as Joc noted, I think the vast proportion of the targeted $275 million savings by 2020 are going to relate to things that don't require a lot of investment
I mean certainly there will be severance costs related to any people impacts that could be associated with that
But when you start talking about the external spend categories, raw materials, chemicals, MRO supplies, logistics, energy those are just aggregating our purchasing power along with what is currently maintained by Vale Fertilizantes and harvesting a lot of savings that don't require any upfront capital or expenses associated with it
And then similarly, when you start talking about the bottlenecking operations or increasing wrench time, better asset utilization, again this is operating philosophy and maximizing your per unit costs as much as possible
And there will be some small capital expenditures that will be associated with that, but we do not believe that it's going to be significant
So, more details to come in a few months
Yeah, <UNK>, it's going to – it really depends what spot ammonia prices were there at and as they fluctuate in the money or out of the money calculation is going to move
And so I would think of it as shared producer economics, not solely producer economics and it's really tied to the movement in natural gas prices plus what spot ammonia prices are
And today, yes, it's underwater less so with some of the most recent ammonia price increases that we've seen in the last couple of weeks
But over time, we expect that there will be periods where we are in the money and there will be will be periods where we're slightly out of the money
So, <UNK> just some context I would give, 2017 has not been a good year at Vale Fertilizantes
This is an asset being held for sale, their leadership, their principal leader and their financial executive, I think were gone in the April or May time horizon
And if you take a look at it historically, it's have a lot of volatility, there's no doubt about that, there have been years in the last five or six years, a couple of years north of $500 million of EBITDA contribution, the low watermark in that period of time was probably in the $150 million or so range and only one year that we see any sort of performance below $200 million in EBITDA
We do not believe that there is anything structurally wrong, at least as best that we can tell from our vantage point today
And we have had a number of kind of interesting issues in 2017. FX is one, we can't control FX and by the way our numbers on the $275 million do not include any improvement from a financial perspective in terms of foreign currency, so we're not banking on that
But Joc noted, I think the principal ones, they've had a number of production challenges both on the chemical side of it and also on the mining side
Miski Mayo, we know that that has flooded, that's a multiple millions of dollars
There is incentive compensation based at this subsidiary – based on the parent company's performance which is tied to iron ore, that's a significant chunk of money that is influencing their financial performance this year
They've had a couple of fires that have had some downtime with respect to their operations and Joc talked about the transition from mining operations which are inherently inefficient
And so, our base would be, we would say $300 million and normalized annual EBITDA should be what you see on a through cycle basis, some years higher, some years lower
And the actions that we're taking, the Mosaic imprint on it should be on top of that base
I hope that's responsive to your question
