Good morning, ladies and gentlemen, and welcome to The Mosaic Company's First Quarter 2021 Earnings Conference Call. At this time all participants have been placed in a listen-only mode. After the company completes their remarks, the lines will be opened to take your questions. Your host for today's call is Laura Gagnon, Vice President, Investor Relations of The Mosaic Company. Ms. Gagnon, you may begin.

Thank you, and welcome to our first quarter 2021 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat as well as open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer; and Jenny Wang, Vice President, Global Strategic Marketing; and other members of the leadership team will also be available to answer your questions. 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 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 furnished yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our first quarter press release, performance data, attached as exhibits to yesterday's Form 8-K filing also contain important information on these non-GAAP measures. Now, I'd like to turn the call over to Joc.

Good morning. Thank you for joining our call today. Mosaic delivered excellent results in the quarter with revenues up almost 30% year-over-year and the gross margin rate at the highest level since early 2020, and our momentum continues to build. Higher fertilizer prices driven by very strong global demand, tight supply and excellent agricultural fundamentals, combined with our significantly improved cost structure, lead us through a positive outlook for the remainder of the year. Laura, let's get on to the analyst questions.

Joc, we have received several questions about nutrient affordability, its impact on demand and sensitivity to commodity prices. Specifically, how elastic does developed market demand tend to be? And how much application elasticity do you see in emerging markets?

Thank you. Generally speaking, within normal ranges, grower demand for fertilizer is relatively price inelastic, whether that would be in developed or emerging markets. Accepting that changes to demand would then be driven by acreage and yield expectations. However, growers will look at the return on investment of fertilizer applications and particularly if prices of crops are elevated or, conversely, if they're down, they will adjust their rates higher or lower in order to maximize their yield potential. It certainly appears that last year and now this year, we're seeing signs of some of those upward adjustments to application rates. In India, maximum retail price is set by the government; as such, Indian farmer affordability may be negatively impacted this year.

Joc, a few of our analysts had questions regarding our phosphate sales volumes during the quarter. P.J. Juvekar from Citi and Vincent Andrews of Morgan Stanley both asked about our sales volumes being higher than our production volumes despite lower inventories and raw material constraints. Did Mosaic drive down further inventories? And will that offset the sulfur impact?

Thank you, gentlemen. Our inventories do continue to be below typical levels for this time of the year, but you must understand that this is normally the time of the year where strong spring demand means we will run down our inventory, and that’s typical in most years. At the end of the quarter, we certainly had lower than normal inventories. However, we also relied on 100,000 tons per month that flowed through the phosphate segment.

John Roberts of UBS and Joel Jackson of BMO asked for additional color around the sulfur market. Specifically, is the sulfur shortage only a North American phenomenon or are sulfur prices going up elsewhere also? Do we think the situation could extend into the second half of the year? And what plans do we have in place to resolve the Q2 sulfur shortage?

Thank you gentlemen. This year, the molten sulfur supply was constrained due to COVID impacts on refineries, and this was exacerbated by the freeze in February of 2021. So, when you ask if this is a local or global issue? Certainly, sulfur is played around the world, but particularly molten sulfur is very tight right now. So you will see that we actually melted more in our melters than we normally would, and that was actually up 27% from a normal of about 20%. Now, we do expect U.S. refinery activity to recover in the second half, which would take us back to more normal levels.

Joc, Michael Piken of Cleveland Research, Ben Isaacson of Scotia, Andrew Wong of RBC, and Steve Byrne of Bank of America, all asked for an update on Canpotex negotiations with China. In particular, they asked that with the domestic potash price in China now well over $100 per ton higher than the last import contract price and about $100 per ton above the recent India contract price. What are the implications for a new contract in late 2021? And what might the effect be on 2022?

Thank you. Look, Canpotex is committed through the third quarter, as they've said publicly, and we're seeing strong demand in North America, in Brazil, in Southeast Asia, all of which we're seeing prices go up. And this price strength is also occurring in the China spot markets. So, we see all of those markets as having high demand, which is shown by Canpotex's tight supply, and even in India now which had an updated contract is now well out of the money and seems to be outdated. So, we see all of these things as very positive for the potash market moving forward. And I expect they will lead to an earlier and more constructive settlement with the Chinese at some point in the fall or early next year.

Joc, I have a two-part question here. Michael Piken of Cleveland and Adrien Tamagno of Berenberg and Ben Isaacson of Scotia have all asked about Mosaic Fertilizantes. First, do you have guidance for Mosaic Fertilizantes from a pricing and margin standpoint? Or how should we think about pricing and margin progression as Fertilizantes?

Thank you. While we don't give specific guidance for Mosaic Fertilizantes, we have said that out of the pricing sensitivity we provide in our earnings materials per DAP, about 20% of that enterprise impact occurs in Mosaic Fertilizantes. Now, also we have historically seen distribution margins in the range of $25 to $40 per ton. We believe that those two together should give you the information you need to model our Brazil business. In terms of cost, our quarter one was impacted by a few short-term issues related to mine productivity and lower conversion rates, which are temporary in nature and should improve throughout the year. Also remember actions being taken for COVID will impact our costs short-term in Brazil as they are in a fairly serious spot with COVID right now. Finally, depreciation of the Brazilian real has offset the increase in inflationary pressures that we're seeing there.

The second part to that question, Joc, was a follow-up. Could you discuss the seeming disconnect between the magnitude of price appreciation per MAP versus a much smaller increase in average realized selling prices for Mosaic Fertilizantes sales?

Thank you. Our average selling price includes blends that have a significant amount of nitrogen, potash and lower-grade phosphate materials in them, part of which will vary throughout the season, and can have a real impact on our realized pricing. Beyond that, a significant portion of Q1 sales were committed in Q4, which contributed to the pricing lag, and that is typical in Brazil due to logistical constraints in that country.

Joc, we have received several questions on India. In particular, John Roberts from UBS and Andrew Wong of RBC asked about our outlook for India's agriculture business, fertilizer demand and nutrient affordability resulting from higher retail prices. They would also like to know if COVID is having any impact.

Thanks, gentlemen. Look, good monsoons and strong prices continue to indicate favorable farmer economics in India. Certainly, COVID is disrupting activity as the country goes into lockdown, and we've seen a bit of a pause in the near-term activities. So we're waiting to see how the country addresses recent outbreaks. While COVID is a near-term headwind, the underlying demand for nutrients remains significant as indicated by the extremely low inventories and still strong crop prices. We will not speculate on subsidy changes, but believe the government is committed to maintaining domestic food security.

Joc, P.J. Juvekar from Citi, Seth Goldstein from Morningstar, and Michael Piken from Cleveland Research have all asked for thoughts on Chinese phosphate supply and demand. What are our expectations for Chinese phosphate exports in 2021? And are we concerned that attractive pricing could lead to higher operating rates?

Thank you. Our base case for 2021 shows phosphate exports relatively unchanged, and we expect them to stay at around 9.3 million tons, which we saw in 2020. Now clearly, and even the latest reports show, the operating rates in China are up probably exceeding 80%, but most of that is going to internal demand inside the country. So we have seen so far exports that are right on our expected target. Also, there have been several structural changes that occurred last year in China, and I'm going to let Jenny just give a little bit of background on some of the major ones there.

Sure, Joc. We're seeing some structural changes in the Chinese phosphates market since last year. On the supply side, the largest producer of DAP has shifted their production from producing DAP and MAP fertilizer to other industrialized uses of P205. For example, they have shifted production to purify phosphoric acid, not only for use in the food industry but also in the emerging growth of electric vehicles and the 5G station demand for batteries. We see this continuing in 2021 and going forward. Therefore, we are going to see less P205 produced for DAP and MAP. That change is really on the demand side. Domestic phosphates have grown in 2020 which has hit most of the increased production in Q1 at home, hence we see really little export increases in the first quarter.

Joc, follow up on this topic, John Roberts and Ben Isaacson both asked about the marginal cost phosphate producers. Specifically, have costs for marginal producers tracked with phosphate pricing?

Thank you. Price increases for the integrated producers have largely outpaced production cost increases, including those in China, to the point that most Chinese producers there are experiencing good margins despite higher raw material costs. So now the marginal cost producers are predominantly the non-integrated producers in India, and particularly those that are reliant on imported phosphoric acid. Their DAP production costs of the new Q2 phosphoric acid contract price of $998 per ton is about $615 per ton, or about $50 per ton higher than the Indian imported DAP price.

Joc, we have two questions on global distribution businesses. First, Mark Connelly from Stephens asked what's the good across the cycle margin assumption for distribution now, even with our operational improvements in growth.

Thank you, Mark. Historically, we've targeted around $25 a ton for our distribution business, but we have seen that improve with economies of scale and efficiencies, and we've seen that margin expand recently. Scale matters, and this has led to this quarter's margin of $40 a ton and even higher for our combined business in India and China.

Andrew Wong from RBC also asked what China and India distribution contribute to earnings.

Thank you, Andrew. In this quarter, we had a combined gross margin of the two businesses inside around $30 million. But we have to understand that that margin was enhanced by the upward trajectory of phosphate and potash, which allowed for profit from the inventory that was held by those businesses.

Joc, we have a few questions on free cash flow generation and capital allocation. First, Vincent Andrews asks why net income increased by $300 million quarter-over-quarter, but cash flow from operations only increased by $130 million. What are the drivers of cash flow from operations this year versus last?

Thank you, Vincent. I'm going to hand this straight over to Clint to talk about our cash flow.

Thanks, Joc, and good morning, Vincent. I think there are specific to the year-over-year, a large part of that is inventory movements between the two years. Last year, we had very significant inventories where we were liquidating some of those excess inventories, whereas this year our inventory has built by about $180 million mostly in Brazil and Canada. So I think a year-over-year comparison that's what's driving a lot of it, but also recall that every year during the first quarter there are some pretty meaningful accruals that are actually paid out in the first quarter. Those accruals primarily being some tax accruals from the previous year that actually pay out and hit our free cash flow in the first quarter of every year, as well as our short-term incentive accruals that again were accrued previous year, but paid out in the first quarter of every year. So that's just something to keep in mind as these are recurring things in the first quarter of each year.

Second related question comes from Ben Isaacson of Scotia, who asks if Mosaic has revised its thoughts on capital allocation, given the strong free cash flow Mosaic will generate this year, especially as K3 CapEx winds down?

Thank you, Ben. The simple answer here is no, we're not changing our priorities. We continue to have our approach to capital allocation, which balances debt repayment, return to shareholders and investing in the business in high-return, quick payback projects. And there are a couple of things I'd like to highlight here. Earlier this year, we increased the dividend by 50%. We've committed to paying down $450 million of long-term debt that comes due in November. And the other piece is we've had a number of really good return projects in our transformation. We continue to invest small, but meaningfully in those high-return, quick payback projects. So, we completely remain committed to doing exactly what we've said all along, which is balancing off all of our positions. And frankly, that's what our investors have said they want from us.

That ends our fireside chat. Now, I would like to open the phone lines up for any further questions from the audience.

Thank you. Your first question comes from Steve Byrne from Bank of America. Your line is now open. You may ask your question.

Hi. You have reportedly some forward sales into the third quarter of MAP and DAP at prices with a five in the front that seems like a fairly lofty price, but I have no idea whether the volume is really light. Can you comment on how much forward sales you have into the third quarter right now and maybe compare that to historical levels? Are you seeing the distribution channel more interested in building inventories even at these prices than normal? Or are the high prices causing a pullback and a wait-and-see approach?

Standby. We've lost connection to the group. We will be right back.

Okay. Hello, operator. We're back.

That's perfect. And Steve Byrne, your line is now open. You may ask your question, please.

Okay. I guess you didn't like that question, Joc. Do you want me to run it by again?

I would love you to. I think I got two words into it, so it wasn't anything about your question. We love your questions.

Okay. It's really about your forward order book. There are some reported sales of phosphate, both MAP and DAP in mid 500s a short ton into the third quarter. How much volume have you sold forward, and maybe more broadly? How would you characterize the demand outlook into the fall at this point relative to historical levels? Is the ag cycle causing that distribution channel to aggressively want to rebuild inventories? Or is there a risk that we could see a pullback and more of a wait-and-see until later in the year?

Yes. Thanks, Steve. Again, I apologize for the loss of connection for a few seconds. Yes, in terms of the forward order book, late last week we started to have people come to us with summer fill needs. So the spring season is basically finished from our perspective, and now some of the larger retailers have come to us looking for material positioning for the fall. It is a little early for a fall program, and frankly, we expect some little dip in prices as you go into the summer low. But with the tightness that is in the market globally, and then in North America, we're starting to see people come to the market earlier. So we see this as a very good sign and a good sign for an early and aggressive fall application season.

Next question we have from the line of Adam Samuelson from Goldman Sachs. Your line is now open. You may ask your question.

Yes, thanks. Good morning. Maybe along the similar lines, Joc. I'm just trying to think about your phosphate realizations and the gap in your kind of what you're talking about in terms of your second-quarter price improvement versus what we're seeing in the pricing out of Tampa or NOLA. It seems like the benchmark prices have gone up more. Is that a function of the volume shortfall and pretty committed tons? I'm just trying to make sure we're understanding the gap there seems to be wider versus the published benchmarks in the industry.

Yes. Thanks, Adam. Well, I think there's a couple of things there. Of course, there was great demand earlier in the spring season than usual, I think, because of the low inventories we started off with. But there's always a big lag in this as we sell early Q1, even Q4, we're not recognizing them until well into this quarter. So there's always that, and then there's the people who are buying early, and that's when they buy when the prices get that high. So if we look at the ending price or the high prices in the 590s, it was only there for a short period of time. And it was probably for just-in-time deliveries, as opposed to the people who'd planned better. So we expect now we're going to see Q3 average net paybacks raise again as we sell into the summer fill. And basically, we won't have much lower price to carry over anymore, so the light will decrease.

Thank you. The next question comes from the line of John Roberts from UBS. Your line is now open. You may ask a question.

Thank you. It sounds like you're not thinking about any big investments, but since conditions are improving, when that time comes, do you think it will first be in potash or first in phosphate or distribution acquisition or maybe further back integration into ammonia? Where do you think the big opportunity comes from?

Yes. Thanks. Well, look, the way I would probably characterize this is I'd like to see the money in the bank before we talk about how we're going to spend it. So our first priorities continue to be that. We've talked about paying down debt. We've talked about the priorities being the return of money to shareholders, and we're not going to rush out and spend a bunch of money on anything until, and if the right opportunity comes where we believe that we can add real value and get an extraordinary return for the shareholders. So, I wouldn't think about any of those three as being our priority. I think we'd look at all opportunities, but they have to have great risk-adjusted returns.

Thank you. Next question comes from the line of P.J. Juvekar from Citi. Your line is now open. You may ask a question.

Yes. Hi. One of my questions is, if you look at OCP and Russians, at today's prices, they can import here, pay the CVD and still make more money than what they did a couple of years ago when they were exporting a lot. Do you expect those volumes to come in here as the market becomes tight?

Yes. Thanks, P.J. Start by saying there have been a number of new importers into the U.S. such that I think quarter one volumes of imports into the U.S. were pretty much on par with what they were here. So it's not that we've got less imports; it's just that we have different importers or different people coming into this market. In terms of OCP and Russians, I mean, they're welcome to come into this market, but it doesn't really make sense with OCP facing a 20% tariff that they wouldn't go to another market like India or whatever, which is not being tariffed right now. So I think they'll go to where their profits are the highest, which would not be North America at this point.

We have the next question from the line of Joel Jackson from BMO Capital Markets. Your line is now open. You may ask a question.

Hi. Good morning, Joc. Maybe into capital allocation; the lock-up for Vale's shares has been over for quite some time. How much are you putting on maybe saving some cash and dry powder to check out those shares to clean up those shares in one day?

Yes. Thanks, Joel. Well, I think we've said before that we would certainly look at participating if Vale's shares came to the market. And I guess the way I would look at that is although they're really no different than buying back anyone else's shares, the reason for participating would be more to ensure that there was a more orderly and less disruptive impact on the market. So we think we would participate. We'll participate based on our cash position at the time. And at this stage, we don't have official word from Vale on what they're going to do with those shares or when. So they'll be public and they'll be the ones to tell us when they're going to sell them, and if they do, we'll certainly look at how much and how aggressively we participate.

Next question comes from the line of Mark Connelly from Stephens. Your line is now open. You may ask a question.

Thank you. Joc, I was hoping you could talk to us a little bit more about your aspirations for biologicals. We usually see seed and chemical companies focus on that. You've got a couple of partnerships. Now you're talking about nitrogen fixing, soil enhancements. Can you give us a sense of how broad your interest there goes for those things really run the gamut?

Yes. Thanks, Mark. Well, look, what we're looking at with that is how do we extend our product lines? How do we use our beneficial distribution system? I mean, we've got a big distribution system, for instance in Brazil where we can really help these products get to market. But I would say, look, it's early days; we are making some small, but well-thought-out investments. And what we're doing right now is trying to fill a pipeline, and that pipeline will be filled over time. And if you think about it, no differently than the micro essentials, which took years to develop, these will take years to develop. I think our Sus-Terra product is now just going to market. We would expect our sound products to go to market in the next, I guess, year or two. And then our Biome would probably go to market in the year after that. So, I mean, these are long-term small investments that are likely to do well over time, but we have to get into it first.

Thank you. Next question comes from Adrien Tamagno from Berenberg. Your line is now open. You may ask a question.

Hello. Good morning. Question will be phosphate division, please. Can you comment on expected evolution of utilization rate of U.S. coastal assets going forward? Thank you.

Sorry, I missed utilization – utilization rate, did you say of phosphates? Yes. Look, the U.S. is a relatively stable mature market, but what we are seeing and particularly with the advent of precision agriculture, farmers are really looking hard at what they need to do in terms of putting better fertilizers, better technology into their crops. And one of the things that's benefiting from that is probably a higher usage of phosphate fertilizers, particularly our micro essentials, which is an efficiency-improving fertilizer.

Thank you. We have a follow-up question from the line of Adam Samuelson from Goldman Sachs. Your line is now open. You may ask a question.

Yes. Thanks. Joc, I was wondering just with the improving kind of market outlook in the potash space how maybe kind of restarting or bringing back some of the idle Colonsay capacity and what it would take from the market to think about bringing that capacity back on?

Yes. Thanks, Adam. That's an important question that we're spending a fair bit of time on right now because the demand for potash has been strong. So, look, we fully expect to meet the demand of our customers, and we're seeing increased demand particularly internationally. So when we can legitimately bring back Colonsay, because it has a price or we now expect prices to hold long enough, we'll be doing just that. And right now we're able to supply our needs through our ramping up K3 and our Bell Plane. But there will be a time soon or in the next year or two, I suspect, where Colonsay may be required, but it will also require a sustained price probably a little higher than what it is even today.

Thank you. We have the next question from the line of Adrien Tamagno from Berenberg. Your line is now open. You may ask a question.

Hello. Thanks for the follow-up. So we already are, I was referring to the duration of your own operations, you probably got nothing in the market to lose down to 77% in Q1? Thank you.

Yes. Our expectations, Adrien, are that we will run those plants probably pretty hard for the next six to nine months because the limit will be, like we've said earlier, I think the limit to production may be at least in the near term the sulfur availability. So we expect to run those allowing for turnarounds and regular maintenance, but we expect to run those close to full capacity.

Thank you. We have the next question from the line of Jeff Zekauskas from JP Morgan. Your line is now open. You may ask a question.

Thanks very much. Given your sulfur shortages, you said that your second-quarter tons would be about equal to your production. What’s the current level of production? And then secondly, in terms of the tariffs on phosphate in the United States, can they be changed over the next few years or are they in place for the next five years for the base case?

Okay. So, let me answer. First of all, I think our sales in the last quarter was about 2.1 million tons, of which I think production was in the range of 1.9 million tons. I think what we can be looking at in the second quarter probably is slightly down from that; we may drop into about 40 slightly, but I would expect that same range in that 2 million ton mark would be probably above where our production will be, accepting what we're predicting for sulfur limitations. And recognize those will need sales. The second, Jeff, just repeat your second part of your question. I was rushed to write it down.

Thank you. We have the next question from the line of…

Jeff, let me finish the story. Sorry, the CVD question, I locked it down quick enough. So in terms of the CVD, there is a yearly review of that amount. And even as we move forward, there is an opportunity for some level of review of those both the damages and the actual numbers. So there could be some change on either from the Department of Commerce in terms of what they look at, and we believe we have actually been reasoning why the CVD rates should actually be higher. So we'll see what happens there, but I suspect there wouldn't be major changes in that in the next year or two. But after that, there will be annual reviews that will tell us whether they continue or whether they can be modified.

Thank you. And we have the last question from the line of Rikin Patel for Exane. Your line is now open. You may ask your question.

Hi. Good morning, and thanks for taking my question. Just one on potash, and with your upgraded shipment guidance for 69 million to 71 million tons, I am just curious what sort of puts and takes are required to get used to that 71 million on the upper end? And maybe just more broadly speaking on the phosphate business, given ammonia is a key input, and over that longer time, I'm just curious how you think about decarbonizing that production process and any thoughts around green ammonia and how that might factor into your thinking going forward. Thanks.

Okay. Thanks, Rikin. Well, let me start with our potash. If we look at the expectations on potash this year, I'd start by saying North American demand appears to be very strong, and that's one of the gain areas. Brazil will be strong; again, we're expecting record use of fertilizer in Brazil it seems year after year. We're seeing a big rebound, let's call it in Southeast Asia, particularly Indonesia and Malaysia with their palm oil. But all the way across Southeast Asia, we’re seeing good demand. Again, that’s probably the only place where it'll be flat year-on-year is probably going to be India. Although we expect a decrease in phosphate use, we sort of expect use in potash. So overall, those would be the drivers. And if those do better, we could get up to the 71; otherwise, we'll probably be more in the 69 to 70 range as our base case. In terms of decarbonization, if you will, we set some fairly aggressive ESG targets. We said we would reduce our greenhouse gases by about 20%. A lot of what we're doing there involves how we're running our phosphate businesses. We've put a lot of effort and resources into how we can use recycled heat to make power. And over time, we see that along with just other uses to use less power, et cetera. In terms of nitrogen, I guess a couple of the nitrogen producers are talking about bringing green nitrogen. At this stage, those really haven't got to the market yet. I would assume that if we can buy a lower carbon intensity nitrogen for our usage, ammonia for our uses, we would certainly go that direction.

Thank you. We don't have any question as of the moment from the queue. Please presenters.

Yes. So thank you everyone. I guess we're going to give you back a little bit of time. Let me just close by saying, we – what we're seeing today is the culmination of all the effort we've put into for a long time. And now that these markets have started to move forward, we're starting to really reap that benefit. And we see that strength going well into the second quarter and through the rest of this year. So with that, have a safe and productive day. Thank you very much for listening.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.