Good morning, ladies and gentlemen. And welcome to The Mosaic Company's Second 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 second 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 second 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 second quarter earnings discussion. I hope you've had a chance to review our post commentary and slides as well as our news release, and performance data all made available on our website yesterday. Today, I will provide some additional context before we respond to questions we received last night. And then we'll conclude with a live Q&A session. Mosaic has delivered excellent financial performance in the second quarter, and the second half of 2021 is set up to be one of the strongest periods in over a decade. Our earnings are driven by two key factors. First, strong underlying agricultural markets, coupled with tight fertilizer dynamics are driving fertilizer prices higher. Second, and just as important, are the results of our efforts to optimize our business to fully realize the benefit of these market trends. Throughout our long-term and ongoing work to reduce costs, we've created significant earning leverage. And this quarter's performance demonstrates that. Looking ahead, we expect further upside. Our third quarter order book is now 90% committed and priced. As a result, we expect the sequential increase of $90 to $100 per tonne in realized phosphate prices, and $25 to $35 per tonne in realized product prices. Beyond the third quarter, we are seeing buyer appetite for fourth-quarter commitments as well. All of this implies higher earnings in the third quarter and very strong results in the fourth and into 2022. The dynamics fueling the agricultural markets point to a period of strength that we believe will extend well beyond 2021. Grain stocks remain limited and global corn and soybean demand is growing, driven in part by surging Chinese demand and biofuels. As a result, agricultural commodity prices remain high and the outlook is promising for continued strong farm income. The world's farmers have a solid incentive to maximize yields from every acre and that is what drives fertilizer demand. Demand in the Americas is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set records for fertilizer shipments. Across the Americas, we saw a big recovery in 2020 and expected demand growth to moderate this year. The opposite has happened. Demand for potash and phosphate is up substantially compared with last year, and nearly all of the fertilizer delivered this year has gone to the ground, which means channel inventories in most regions remain below historic norms. In North America, demand continues to be strong. Following the completion of our CBD petition, U.S. phosphate prices now trade at parity with global benchmarks. And the domestic market is benefiting from elevated imports from a more diverse pool of suppliers. This is reflective of a healthy market that is responding to the market signals. In India, farmer demand remains very strong, but importer economics have negatively impacted available supply in the country, because of the disconnect in government subsidies. As a result, it is difficult for the Indian farmer to get the phosphates they desire. It is clear that more work needs to be done to rectify the imbalance, but we continue to see regions absorbing fertilizer supply. Given how depleted Indian inventories are, we see India as a source of pent-up demand for the future. Southeast Asian fertilizer demand is benefiting from the strength in palm oil and China is incenting farmers to maximize yield. While the demand dynamics for potash and phosphates are similar, driven by the strong underlying agricultural market, the supply outlook is slightly different for the two products. In phosphate, supply is limited and any new Greenfield supply addition will take several years to complete. Recently, Russia requested producers to prioritize domestic demand to stabilize in-country pricing. And while supply from Chinese phosphate exports during the second quarter was elevated to meet global demand, Chinese exports are expected to decline in the second half of the year, as in-country seasonal demand increases. This was reinforced by news last week that China's National Development and Reform Commission has begun requiring the export of fertilizer to be stopped to ensure adequate domestic supply. In potash, demand growth continues to exceed new supply. As a result, prices continue to rise. In fact, price increases have largely offset the financial impact of our early closure of K1 and K2 shops with Esterhazy. We recently resumed production at Colonsay and now expect our net production loss to be approximately 700,000 tonnes per year, down from our original estimate of 1 million. This also brings the sales impact down to approximately 500,000 tonnes, as we draw down available inventory. Our earnings are leading to significant free cash flow generation, which has allowed us to proceed with the early retirement of our $450 million in long-term debt later this month. We are currently evaluating additional actions for capital deployment. Capital expenditures are expected to total $1.2 billion. This includes accelerated K3 spending to speed up our ability to bring K3 to full production as well as approximately $75 million in additional high-returning opportunities within our businesses. Given the strong cash generation, we continue to evaluate opportunities that allow us to further strengthen our balance sheet, grow the business, and share with our investors. Overall, Mosaic continues to execute and perform very well in this robust fertilizer market. And we expect to continue building momentum from here. With that, we will move on to your questions.

A number of analysts, including Adam Samuelson from Goldman Sachs, Ben Isaacson from Scotia, and Rikin Patel from Exane BNP are asking about fertilizer affordability. Specifically, globally, are you seeing any demand destruction due to affordability? Are there any regions or areas you're watching?

Thank you, folks. The way we look at this is actually that grain prices and higher grain demand are driving fertilizer prices. So from our perspective, it's demand for grains and oilseeds, and the price that's creating is driving fertilizer demand, which is of course, driving fertilizer pricing. So we see the supply and demand balance the other way around, if you will. Now, we may see at some point the impact of high prices. Today, tight grain and oilseed markets are going to remain tight for a while. They're not going to loosen in just one growing season, so this should last for a while. And with high grain prices, it seems that most growers have been comfortable with the prices that we're seeing for fertilizer. Now, one area of concern we've talked about is India. And this is not an affordability issue for the farmer, but an affordability issue for the importer, because of the Indian subsidy system. But sooner or later, local Indian inventories will mean that they have to buy fertilizer.

A handful of analysts, including Andrew Wang from RBC, John Roberts from UBS, and Steve Byrne from Bank of America have asked about Mosaic's realized price progression. It appears that price realization has lagged in potash when comparing spot price trends to the third quarter guidance. But stock prices and guidance appear to be fairly in line in phosphates. Can you discuss the underlying dynamics and what that means for price realization into quarter four?

The gap between the product prices we're seeing at the mine gate today and the actual international prices is driven by a couple of things. First of all, when we looked at international shipments through Competex, we faced delays due to port issues in Q1. In Q2, we're now seeing delays due to wildfires and rail impacts as we go through the British Columbia carrier. So these are starting to push shipments back. So there is a normal lag period that we're experiencing. Plus, you have to consider that these prices are the Asian prices, which are lagging as well from the Brazilian and North American prices. If we turn to North America, a lot of the times that we're delivering now, and what will be delivered for the third quarter are times that were sold in early May for August shipment to meet summer field demand. Of course, those were delayed further due to the K1 and K2 closure, which means a lot of the main volume won't be priced or shipped until October. So the pricing lag is higher than what would normally be expected. But I will emphasize that we are in our distribution business seeing and selling the $600-plus price that we're discussing being the spot market.

Joc, Steve Byrne, Rikin Patel, and Adrien Tamagno from Berenberg are asking questions about the impact of increasing ammonia volumes delivered under the CF contract. What do those increases mean for spot purchases? And are there any volume-related discounts provided or premiums required under the contract?

Thank you. Historically, our ammonia tonnes have been split roughly evenly between produced spot and CF. With the increased CF supply in the second half, which means for the following year, approximately 75% of our total ammonia needs will be based on a natural gas price and below today's market. This reinforces our competitive advantage in ammonia and the effectiveness of our hedging program to ensure that we have a number of supplies that buffer against times like this.

In another raw material-related question, John Roberts and Ben Isaacson are asking about the potential for future sulfur supply disruptions through 2021 and into 2022. What risks do we see? And how are we managing them?

Thank you. Today, our position on sulfur is much better than it was a quarter ago. At this stage, you can see by the sulfur price which just settled at about $195 per tonne versus $192 in the second quarter that the refinery rates and the demand balance for sulfur has really equalized. Now it's a little too early to forecast quarter four, but what I can tell you is that gold refinery operating rates have stabilized and returned to normal rates. We have really done a lot of work to build good inventory of sulfur in our system, which we did not have coming out of quarter one. If you remember the issue we ran into at quarter one, it was low operating rates in the refineries, some turnarounds in the refineries, and then freezing weather that shut down a lot of the Gulf refineries. So due to the combination of these three, what would normally be a tight situation was exacerbated quite a bit. So at this stage, we see the risk as significantly lower.

Joc, we had a number of analysts acknowledge accelerating cash flows. These analysts include Seth Goldstein at Morningstar, Mark Connelly of Stephens, and Jeff Zekauskas from JPMorgan. What will we do with it? How will we allocate it aside from debt reduction and small growth capital? And can you provide specific insight into how we are thinking about share repurchases and dividend increases?

Thank you, gentlemen. Our strategy is and always has been that we will balance our capital allocation between debt repayment, working on our balance sheet projects that offer great returns through growth, and then returning money to shareholders. In terms of specifics, let me hand it over to Clint, because I think he can give you a little more color on that.

Thanks, Joc. I think as we go further into the year, one thing to note is that as we generate free cash flow and cash builds on the balance sheet, we're not going to let it just sit idle. I think we've got options. Whether that is additional debt reduction for some of the maturities that are coming due, we have existing share repurchase authorizations, and we can always take a fresh look at the dividend. We also have a program in place to review some really high-returning internal projects, like our opportunity CapEx, which is relatively small dollars, but very high-returning projects that we will continue to look to invest in. But I think, as we look forward, we have a number of options. And again, I don't see us generating cash and letting it sit idle on the balance sheet. I would expect further into the second half of the year that we will provide more clarity on what that allocation program is going to look like.

Andrew Wang and Adrien Tamagno are interested in more detail about our opportunity capital spending. Clint, can you elaborate on the new $75 million gross spending allocation? Will phosphate capacity expansion ever be on the agenda? And what can we expect to be allocated to the new soil health initiatives?

Thanks, Laura. When we look at our opportunity CapEx investments for this year, overall, I would say it's about one-third in North America and about two-thirds in Brazil. There's a focus in Brazil. But generally, these investments are being made in various areas. I would include the following: a number of these investments are around automation, which we've spoken about some next-gen investments that we're making in our production assets, and that is ongoing and part of this program. Another example is down in Brazil, where we're looking to increase gypsum sales, and we need to make some investments in infrastructure to accommodate that. In potash, we're looking to increase some of the supplier capacity. Overall, those investments are generally modest, typically single-digit million dollar investments but with very, very significant returns, some in the triple-digit range on an after-tax basis. From a phosphate capacity expansion standpoint, we are focused on potentially increasing micro-essential capacity in the future. Demand for that product continues to increase, and to the extent that we need to expand capacity, we are looking at that. Beyond that, our rock and concentrate capacities are in fairly good balance at this point. As for new soil health initiatives, those are typically expensed and treated more along the lines of R&D. So overall, those are relatively immaterial investments, not additive to CapEx, and we see them as supplementing our R&D into new products for the future.

Joc, we've also had a number of questions related to our potash assets, including questions from Adam Samuelson of Goldman and PJ Juvekar of Citi. This is really a three-part question. One, what was the driver behind changing your volume impacted guidance? And how does this change total production expectations for 2022? Second, what are the ARO costs associated with the closure of K1 and K2? And lastly, what does the cost structure look like in 2022?

Thank you, Laura. Our volume production guidance was adjusted basically for two reasons. First of all, the acceleration of our shaft and K3 allows us to move into production areas sooner in K3, which will increase the contribution from about mining in the fourth quarter. We have also been able to optimize some of our turnarounds at the mills because they are being fully utilized. The second part is a successful restart of Colonsay, which has come up very well. We've been very pleased with how quickly we've been able to get it into production. We have commissioned the mill just the other day, so we're fully ready to run there now. Between the two of them, we've been able to accelerate our ability to produce tons at those two operations, which has mitigated some of the loss from the early closure of K1 and K2. As for closure costs for K1 and K2, in the second quarter, there were $158 million, most of which was a non-cash write-off. $110 million was fixed asset write downs, and $37 million were ARO adjustments, with $4 million in contractor severance. Regarding the ARO itself, the $37 million brings a total up to about $120 million for ARO, with $70 million to $100 million projected to be related to the closure of those two mine shafts. About 40% of that will be spent this year, and the rest will be spent next year for final closure. For the third part of your question on our cost structures, if we reach the summer parts of our K3 mine, at 6 million tonne operating capacity, we will be among the lowest costs in the world. We are currently operating in the $50 range already. Belle Plaine is also very low cost and very well positioned on the cost curve, now at 3 million tonnes of operating capacity. Colonsay costs are still expected to be in the $100 per tonne range as per our previous guidance. We're looking at ways to reduce that amount. We estimate that 80% to 90% of our costs will be at that very first quartile, making up the difference with slightly higher costs from Colonsay at $100 a tonne, assuming we actually need those tons to meet market requirements. Let me emphasize that at these prices, Colonsay tonnes remain profitable and we expect to maintain a very good margin in today's environment.

Thank you, Joc. Operator, at this point we'd like to open it up for follow-up questions from the phones.

Our first question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thanks. Good morning, everyone. I was hoping to maybe ask about the fertilizer advantage business a little bit. You've called out in the script and in the prepared remarks an increasing inflation there. It seemed like you're moving from both phosphate conversion costs and rock mining costs away from your 2023 cost targets. And I'm just trying to get a sense of kind of what the plan is to maybe bend the curve on inflation and get back down to those 2023 cost targets over the next 18 months or so?

Thanks, Adam. Look, if you go back to our multi-part analyst presentations, I think you'll remember we did say that we would correct the expectations of these costs based on inflation. Over time, our expectation is that if there's higher inflation in Brazil, that will be offset by a weakening Brazilian real. So, I just want to highlight that we have accounted for inflation and were not expecting to account for inflation. This was a method of offsetting inflation. Therefore, you have to adjust those cost numbers based on that. But overall, we continue to drive very hard. I think you'll see in our results that we are pushing for those transformational benefits as we call them. A significant part of that is reducing our mining costs. I want to highlight that this quarter was exacerbated by lower rates caused by some downtime, which doesn't increase your costs due to fixed cost absorption.

Next question comes from the line of Mark Connelly with Stephens. Your line is open.

Thanks, Joc. There's a longstanding perception among investors that you experience more operational hiccups than other producers. You obviously can't control the supply of sulfur and such. But when you look at all the operating metrics internally and the changes you've made to your processes, has your Florida system become materially more reliable? I'm very curious how you would answer that question on the phosphate potash curve?

Yeah, thanks, Mark. Well, I would say definitely, yes. We've spent a lot of time, and a lot of the areas where our cost improvements have come from better operational reliability, better maintenance control, and better outcomes from turnarounds. There is a high level of unpredictability in any large system. Frankly, our system runs very close to its capacity. So, in the case of sulfur, given the very good spring ahead of us, a little sulfur hiccup impacted our tonnage. If you look at it over time, you'll see that we have run very close to our capacity and made significant improvements in that area. Likewise, in potash, if you look back at where we were running the three potash lines continuously, you had a lot of flexibility, which we don't have anymore. So we do need those plants to run consistently all the time. For the most part, we believe they do now, and I think those have represented big improvements to how we can maintain our costs at a much lower level.

Your next question comes from the line of PJ Juvekar from Citi. Your line is open.

Yes. Hi. Good morning. A question on phosphates. As phosphate prices move up, China may be opportunistically raising exports. We've seen that in other fertilizers as well in ammonia, as Chinese urea exports have gone up. What is your confidence level that Chinese exports will decline in the second half, which is what you said in your remarks?

Yeah, thanks, PJ. I'll talk a little bit about this, but I'll hand it to Jenny because I think she has a pretty good understanding of the world supply and demand and some of the forces at play here. But let me say the Chinese do need to get their domestic phosphate to their farmers for the growing season in the next quarter. Therefore, internal demand will be high. Essentially, one of two things must occur: either the price has to go up internally in China, or they will impose restrictions on exports. Our expectation, from a supply and demand perspective, is that internal demand is significant, and these exports should slow down. Jenny, do you want to talk a little bit more about their governmental interactions?

Sure, Joc. PJ, you're right. We have seen Chinese exports of both phosphate and urea increase in the first half of the year, driven by a very strong international market. The demand was so strong, and it's driven by pure economics. The Chinese government has become increasingly concerned over the supply availability for the domestic market, as well as the rising prices domestically. Therefore, as a result of this concern, the National Development and Reform Commission has instructed major nitrogen and phosphate producers to prioritize their domestic supply and supervise the prices. The government needs to maximize production in China, so that's their priority. Currently, NDRC's requests are kind of soft regulations directed mainly at state-owned enterprises. The government is closely monitoring whether domestic supply is improving and if prices have stabilized. If it isn't, we may see stronger measures taken by NDRC. One reason we have some confidence in this is from observations of the steel industry. Recently, the Chinese government imposed an export tax in May, which was weak at that time. They raised this export tax again yesterday. So whether they could impose similar measures on phosphate and possibly urea will depend on how much export is happening over the next two months. We expect a significant slowdown in exports in September and Q4 because shipments in July and August were likely committed before the recent NDRC requests.

Thanks, Jenny.

Our next question is from John Roberts from UBS. Your line is open.

Thank you. Could you talk a little bit about the Belarus potash sanctions and maybe compare and contrast that with the earlier U.S. sanctions on phosphates?

Thanks, John. The Belarus sanctions were, I'm going to call them relatively toothless. They didn't impose significant restrictions, as the sanctions did not cover the vast majority of potash grades. I think they only affected about 20% of the industrial potash that Belarus might have sold. Overall, they had little impact. When it comes to food security concerns, I'm not surprised by that. Comparatively, the CBD is focused on unfair subsidies impacting the market, particularly harming U.S. producers. So I think there are very different situations and drivers at play here. With the CBD now, we are seeing new countries and companies importing into the U.S., and the market is now at essentially par with other major markets.

Our next question is from Steve Byrne from Bank of America. Your line is open.

Hi, good morning. That's actually Luke Washer on for Steve. I wanted to ask about your thoughts on Chinese import inventories of potash. Where do they stand today from what you can tell relative to history? And when do you think China should start looking to renegotiate a potash contract?

Yeah, thank you, Luke. I'll hand this over to Jenny a bit. Potash inventories at the port and probably in our country as well are starting to get fairly depleted. I think you're at a point where they'll have to dip into their National Reserve if they're going to continue supplying the NPK producers and the internal market. From that perspective, this situation is getting quite tight for China. I expect that they will need to start negotiating their next round of purchases sooner rather than later. Jenny, any comments on port inventories?

Sure. Specific port inventory as of today shows that it is below 2.3 million tonnes, which is 35% lower than the same time last year. The national reserve itself is 1.5 million tonnes, so the available tonnes are minimal. Thus, it's getting tight for China to maintain domestic demand. We believe imports in the second half will likely slow down significantly. As such, we expect that buyers and importers will have to consider renegotiating for new contracts sooner than many would have expected.

I'd like to highlight that the Chinese contract is probably $100 lower than the Asian price, which complicates their ability to receive the product they need at those prices.

The next question is from Joel Jackson from BMO Capital Markets. Your line is open.

Hi, good morning Joc. Joc, you talked about liquidity in the potash market. I appreciate your commentary earlier on the issues in Western Canada around the wildfires, the ports, and rail. Some of your competitors in potash have been saying that the benchmarks we're seeing reported every week just really aren't accurate. They are getting $600 in Brazil, now they're getting $500. Some Southeast Asian prices have been interesting over the last couple of weeks, possibly based on one or two deals. I want to know what the liquidity situation looks like in the potash market for what you're selling versus normal times. Are these benchmarks as liquid as usual?

Joel, thanks for the question. First of all, let me state that the liquidity question is very seasonal. We're not selling much in North America right now. I think we had a crew that was at the Southwest Conference recently. Most of our North American customers are probably 70% to 75% supplied for the fall season, so there isn't much activity outside of completing previous contracts. In other areas, there is liquidity in Indonesia, Malaysia, and some Asian countries which are more normal markets. In Brazil, we are currently between seasons, which has slowed business a bit. Therefore, I would say it hasn't been particularly liquid at this stage, though that isn’t unusual for this time of year.

Our last question comes from the line of Rikin Patel from Exane BNP. Your line is open.

Hi, Joc, hi Clint. Hope you're doing well. I just have one more question on potash demand. You have a shipment forecast of 69 million to 71.4 million tonnes for 2021. But I'm curious about what demands could look like in 2022. You flagged the lack of available supply as a constraining factor currently. Could you size what you think demands could look like for 2022?

Thanks, Rikin. I think that's quite relevant; supply has limited demand growth this year. We had around 6 million tonnes of growth last year, and we expected it to moderate significantly this year. However, demand growth has persisted. Looking ahead to 2022, we will likely return to more normal growth rates, with around 2% plus growth expected. An important aspect to note is that we haven't built up a substantial amount of inventory already, so channel inventory remains low. Based on agricultural markets, we have a positive outlook for growth in 2022. Jenny, any thoughts to add to that?

No, I think you've covered it well. We believe that with the ag commodity prices for corn, soybeans, and palm oil in Malaysia and Indonesia continuing to be strong, potash demand will grow strongly next year. Supply limitations may pose a challenge.

There are no further questions at this time. Now I turn the call back over to Joc for closing remarks.

Well, I would like to thank everyone for joining us on this call. I will say it has been a strong quarter for us. As we look forward, we still see strength going forward. We continue to drive for improvements in our operating performance. The markets continue to be positive for that. We believe we are well positioned for continued performance as we go forward. Thank you for joining our call. Please have a safe day. Go get vaccinated. Take care.

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