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

Thank you. And welcome to our Third 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. Glenn Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang, Vice President of Global Strategic Marketing, 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 third quarter press release and 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 third quarter earnings discussion. I hope you've had a chance to review our posted commentary and slides, as well as our News Release and performance data, which were made available on our website yesterday. I will provide some additional context before we respond to the questions we received last night, and then we'll conclude with a live Q&A session. Mosaic delivered excellent financial performance in the third quarter, with EBITDA reaching its highest level in more than a decade. Our business continues to benefit from the strong markets we've been discussing since the second half of 2020. With our North America Production recovering, and a strong order book, we expect the momentum to continue through the end of the year and into 2022. Before we get into our strong outlook, I want to briefly give you an update on the production issues we faced during the third quarter. As you'll remember, in June, our Esterhazy K1 and K2 potash mines experienced accelerated water inflow. We made the decision to stop operations approximately six months ahead of schedule. To help mitigate loss production, we further expedited the ramp-up of K3 and restarted Colonsay. The second shaft at K3 is now operational, which paves the way for us to reach full production in the first quarter of 2022. At Colonsay, we hit our targeted run rate in October. In phosphates, the damage from Hurricane Ida and the equipment failure at New Wales resulted in a 300,000-ton production loss in the third quarter. Thanks to the efforts of our team, the fourth quarter production shortfall has been reduced to 100,000 tons, and operating rates should be normal by the end of the year. In both phosphates and potash, our team has worked diligently to ensure any shortfalls resulting from issues outside of our control were temporary. As we head into the end of the year and into 2022, we are well-positioned to take advantage of the current market. Shifting now to agricultural markets, we continue to see strength extending well into 2022. Grain stocks remain limited and global corn and soybean demand is elevated, driven in part by surging Chinese demand and rising global biofuel demand. As a result, agricultural commodity prices remain high and farmer income remains well above historic norms. That strengthened crop markets, combined with global industry supply constraints, are the key drivers pushing fertilizer prices higher. In the Americas, demand is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set a record for fertilizer shipments in 2021. Grower economics remain profitable, despite the latest surges in nutrient prices. This has been reflected in the significant order book into the end of the year and into the first half of 2022. In North America, demand continues to be strong and prices have followed, reflecting a healthy domestic market benefiting from imports from a diverse group of suppliers. Grower economics remain favorable in North America, although not quite as favorable as during the first half of the year. However, persistently low inventories and capacity constraints are underpinning the tight supply-demand balance, as well as pricing. In India, while farmer demand remains strong, and the government has recently acted to improve importer economics for phosphates, availability is still lagging. Recent moves by the governments will likely help in the recovery of Indian imports, which lagged most of 2021 because of the disconnect between domestic subsidies and global prices. Given how depleted Indian inventories are, we see India as a source of pent-up demand, which should return to the market in 2022. In Southeast Asia, fertilizer demand is benefiting from the strength in palm oil prices, and China is incentivizing its farmers to maximize yields through subsidized crop prices. New supply of phosphates is limited. Chinese exports are expected to decline significantly in the fourth quarter and in the first half of 2022, reflecting the directive from China's National Development and Reform Commission that major producers halt all phosphate exports to ensure adequate domestic supply. In potash, demand growth continues to exceed new supply from higher operating rates announced by producers, and prices continue to rise. Putting this all together, we expect further upside in realized pricing for phosphates and potash. Our fourth-quarter order book is now about 90% committed and priced. As a result, we expect to see a sequential increase of $55 to $65 a ton in realized phosphate prices and $110 to $130 a ton in realized potash prices. We are seeing buyer appetite for first quarter commitments as well. All of this implies higher earnings in the fourth quarter, and a very strong result continuing into 2022. Our earnings are leading to substantial free cash flow generation, which has allowed us to make significant progress towards several commitments we've made. Earlier this year, we raised our regular dividend target by 50% to $0.30 a share. In October, our board approved an additional regular dividend target increase of 50% to $0.45 per share effective in 2022. In August, we repaid $450 million in long-term debt toward our target of $1 billion of debt reduction. Also in August, we announced an expanded share repurchase program of $1 billion. Since that announcement, we have repurchased more than 950,000 shares. In addition to strengthening the balance sheet and returning capital to shareholders, we continue to evaluate further investments in the business. Capital expenditures are expected to total $1.3 billion in 2021, of which roughly $450 million is growth-related. We continue to evaluate every opportunity that allows us to further strengthen the balance sheet, grow the business, and return capital to our investors. Now, before I conclude my opening remarks, I want to take a moment to recognize the many contributions of Laura Gagnon, and what she has made at Mosaic. As Head of Investor Relations for the last decade, Laura has been an invaluable advisor to me and to the entire leadership team. We are very grateful for her service and wish her all the best in her retirement. Paul Massoud has been promoted to lead IR, and Laura will stay on through the end of the year to help with the transition. Please join me in wishing her well. With that, let's move onto questions.

Joc. With continued strong nutrient pricing, we received a number of questions on affordability and risk of potash and phosphate demand disruption. First, in what geographies are you seeing signs of potential demand destruction and how do you think about the risks for both phosphates and potash?

Thank you. Let me start by saying the areas where consumption has been lower has been more about availability than it has been about demand destruction. Here, in China, because of strong pricing early in the year, the exports were high. However, the Chinese government has stepped in and restricted exports, and we expect the exports to go very low in the last quarter and into Q1 of next year, which will allow for a better supply in the domestic market. In terms of India, the inability to secure phosphates has not been about farmer demand, but importer economics. The inability or inadequate subsidies have really been what's driven the inability of the importers to economically bring product into that jurisdiction. However, what we do expect to see based on those two is increasing pent-up demand in both China and India for early next year and into the spring season. With that, I'm going to throw it over to Jenny to really talk about the details of fertilizer affordability in our key markets.

Thanks, Joc. I think you have covered India and China, and the reduced demand in 2021 is going to create pent-up demand for 2022. We feel very confident that the two markets will come back with a very strong demand in 2022. In the rest of the world, we have not really seen major signs of demand destruction. Even in Brazil, although that ratio is less favorable than in previous years, we still see demand from the growers, and we have sold over 10% of the summer crop nutrients already.

Can you compare and contrast 2021 with 2008 in terms of affordability, inventory, and soil levels?

Yes. Thank you. Let me start with soil levels. We don't have perfect insight into the soil inventory per se. What we do have are some studies by the likes of the University of Illinois that show that over the last 10 years actual soil inventories have decreased. This is particularly true as we adopt more precision agriculture which allows you to apply the right amount of fertilizer down but may also mean you have to replace it every year. In Brazil, with the depleted soil, that needs to be replaced every year. There is definitely on-ground demand that will be there next year. In terms of channel inventory, we see that as being low in almost every jurisdiction. There is no place around the globe where we see any kind of buildup of channel inventory. This is fundamentally different than it was years ago, where you had large amounts of inventory, not only of fertilizers, but large inventories of crops like grains and oilseeds. This turnaround is quite different. As we look forward, we see affordability fine right now, and we expect that affordability will be good because either price will have to go up for grains and oilseeds, which will drive long-term fertilizer demand, or they will plant less, which means that prices for grains and oilseeds will go up. In other words, the security for high prices is high prices.

Joc, how are India subsidies impacting affordability?

At a farmer level, it's a controlled market. So, it's very difficult to compare affordability at the farm level. Certainly, we know that on-farm demand for both phosphate and potash is very strong. At an importer level, the gap between global pricing and the retail price has been such that the importer economics are poor, which means they're not importing, which means that the product isn't available to the farmer. That applies to both potash and phosphate. As we move into 2022, there is a lot of pent-up demand in India, and we fully expect that the government will have to act and increase subsidies to allow the farmers to get the product they're going to need.

Another topic that generated quite a few questions, including from Adam Samuelson at Goldman Sachs and Vincent Andrews from Morgan Stanley: China's phosphate market, especially given the recent change in China's export policy. First part of this question is, what are our expectations for exports this year and next year? And how is that being impacted by changes in China's production volumes?

This year, we're expecting China's total exports to run just over 10 million tons. However, this has led to a fairly large deficit domestically. The government has stepped in, pulling on export restrictions which are now taking effect. We don't expect a whole lot of Q4 exports or probably in the first quarter of 2022. After that, we do expect things to return to normal. So, for this year, we're expecting a little over 10 million tons of exports. Next year, we think that we'll return back to about 9.3 to 9.5 million tons that we've had in previous years, down about a million and a half tons from where we were this year. We also see a long-term decline in production of phosphate fertilizers for agricultural use. That means that phosphoric acid is starting to find its way into a lot of other industrial products, including lithium-ion phosphate batteries. What we see is a declining production over time, and probably a restriction of availability into the phosphate fertilizer market. That means that over time, we should see a decrease of exports from China.

Chris Parkinson from Mizuho, and Michael Piken from Cleveland Research, both asked about the impact of ammonia on our phosphate business, and how much ammonia we'll need to purchase in the fourth quarter?

Let me just start by reminding everyone that our ammonia is sourced from three different sources. First, our Faustina ammonia plant, which is obviously at cost, including the cost of Henry Hub natural gas. Our CF contract, which we've maximized at 800,000 short tons per year at this stage, and open market purchases. This quarter, we're looking at approximately 20% to 25% of our ammonia will probably come from open market purchases. As such, what we expect to see is about a $5 to $10 increase per ton of our raw materials. That's based on market changes in ammonia plus a relatively flat sulfur pricing environment.

We had a handful of questions asking about our potash production assets, including questions from Seth Goldstein of Morningstar and Andrew Wong of RBC, both asking for details on how K3 will ramp up and how total production volumes and costs will evolve in 2022.

The ramp-up of K3 is going very well. We have just handed over the hoisting system to operations, so that is now operational. We expect to hit full production by the end of the first quarter. I want to highlight that we've also been very successful in starting up our Colonsay mine. That operation is now running at its expected rate of about 100,000 tons per month, or about a million tons a year. Between the two, we expect to have even more incremental production by the first quarter of next year.

Steve Byrne from Bank of America, Adrian Tamagno from Berenberg, and others are asking about our product pricing strategy. How do we think about forward sales, how far ahead have we sold, and how much of our first-half volumes might already be committed?

Availability is a big concern across a number of our regions. What we're seeing today is a lot of inflows, but we're being very careful about which geographies we're selling into and the amounts we're forward-selling. While the demand is there, we are still being cautious. I'll let Jenny give you the details on that.

Sir, Joc, we have seen strong demand from customers, especially in North America and Brazil. We began to sell some modest amounts of the tons for Q1 and even started selling into Q2 as well. These are all good indications of continuous strength in the market. We feel good about that.

Joel Jackson of BMO and John Roberts of UBS are asking about Mosaic's launches. Given the strength of our margins over the past few quarters, is this being driven by distribution or production? And how much are co-products when Jibson sale is contributing to this?

First, let me say Mosaic Fertilizantes is an integrated business. So, the combined benefit of distribution and production has really driven our results there. Other strength has obviously been the markets, but we've also made tremendous progress ourselves in transforming the business. We've found $300 million of synergies and recently exceeded our $200 million EBITDA improvement target through transformation. Remember, the pro forma at the time of purchase was about $60 million EBITDA per year, and we just achieved $300 million in a quarter. You can see where we've extracted significant value that drops straight to the bottom line. In terms of co-products, they are making a significant contribution, certainly at the level of $50 to $60 million of sales a year from those co-products.

A number of analysts, including Andrew Wong from RBC and Rick Patel from Exane, have asked about capital allocation. We'll break this up into a couple of questions. First, can you discuss what to expect for capital expenditures going forward in terms of new growth or major investments and sustaining capital?

Over the next four years, we do expect CapEx to trend lower. Growth CapEx will certainly decrease by the end of K3. However, as part of our capital allocation, we do expect to reinvest in the business over time. I'll hand it over to Clint for some of the detail.

Thanks, Joc. Over the next five years, we would expect CapEx to trend lower. The K3 investment is in the process of ramping down. We also have had a number of regulatory changes, particularly down in Brazil around some of our dams, which will require additional spending. We have a number of assets that have been leased long-term. As we evaluate how core those assets are to our operations, we believe a portion of those assets would make more sense for us to own instead of leasing. That will be part of our CapEx program going forward. Overall, we expect total CapEx to come down, while still seeking opportunistic investments in high-return areas as they arise.

As a follow-up on this topic, how do we expect to deploy excess capital between the incremental debt paydown, share repurchases, dividend policy, and the type of growth projects that were just mentioned?

We remain focused on a balanced capital allocation approach between three key pillars. First, our Balance Sheet. We've demonstrated that by paying down $450 million of long-term debt this quarter. We intend to continue to pay down debt to the target of a billion dollars over time. In terms of growth investments, we've invested, or will have invested, $450 million in our business this year, including our spending on K3 and reserves in Florida. Finally, returning capital to shareholders: we've raised our target dividend for the second time by 50% to $0.45 per year in 2022 and we've started a share repurchase program based on a billion-dollar authorization over time. We've already repurchased approximately a million shares on the open market. We've demonstrated that we continue to use a very balanced approach, and that's what we will do going forward. Thank you. That concludes the prepared portion of this event. I would now like to open the line to Q&A.

Our first question comes from John Roberts from UBS. Your line is open.

Thank you. Joc, can you talk a little bit more about your capital return strategy, and do you have a targeted dividend yield that you want to get to?

Thanks, John. Let me start by saying our capital return strategy is based on two key pieces we expect. We expect to provide a regular target dividend that is affordable through the cycle. One of the things in a cyclical business we want to be careful of is that we don't establish a dividend too early that we may have to change if the market turns. We are looking at the affordability of the dividend and are also considering methods like share repurchases to reward shareholders for their investment in us. We do expect not to establish a huge dividend targeted as a percentage, but one that is affordable through the cycle, supplemented by share repurchases. Clint, did you want to add anything?

No, I think that's right, Joc. We view the return of capital to shareholders in the form of an affordable dividend supplemented by share repurchases, considering maintaining a level of fixed return as well as flexibility moving forward.

I want to reemphasize, John, though that we expect to move that dividend as our earnings potential grows and as some of our internal programs come to fruition.

Our next question comes from the line of Chris Parkinson from Mizuho. Your line is open.

Thank you very much. Can you briefly discuss how your order books for spot markets have evolved, considering the current demand dynamics and the inventory situation, and how this will impact Canpotex's future contract negotiations?

Thanks, Chris. Yes. Demand is very good. You've probably heard Canpotex is fully committed for quarter 4. We're probably at least 90% committed, and price for quarter 4, which sets us up for a strong position as we move into 2022. In terms of Canpotex and contract negotiations for major national contracts, it's also a good setup. There's a lot of discussion about early contract negotiations with China that haven't started yet, but we don't need that in the near term, so I think time is on our side, not the buyers in this case. Jenny, could you discuss that allocation?

Sure, thanks, Joc. For both North America and Canpotex, we're fully committed for the fourth quarter in 2021. Canpotex has started sales into Q1, which will reflect the latest spot market prices, effectively setting a benchmark price relative to realized prices expected in Q1. Inventory levels in the contract market in India are 60% lower than the same point last year, while in China, inventories are over 25% lower compared to the same time last year. Given this low inventory situation, we believe contract settlements will be needed for these markets earlier than in previous years.

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

Good morning. I wanted to get a little bit of a sense for where we are in Brazil? There's been some talk about the logistics and the ability to get products into Brazil. Given that you have some in-market production and some of these challenges bringing product in, the higher freight rates, how are the net puts and takes, and do you think the farmers are going to get enough fertilizer to be able to plant the safrinha crop moving forward a couple of months from now? Thanks.

Thanks, Michael. You've hit the nail on the head. We have a great logistics advantage, which was one of the key benefits of investing in-country in Brazil. We have ownership or part-ownership of a port in the region, as well as access to a port in Santos. This gives us an advantage in getting product into Brazil much more effectively than others who are selling at the coast or have to come in through public ports. Overall, Brazil will be tight for fertilizers. There are concerns, particularly with any restrictions on Belarusian products and ocean freight has at least doubled. That said, it's going to affect everybody equally and comes into our overall calculation of the economics for Brazilian farmers. At this stage, we believe their economics remain quite strong.

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

Yes, thank you. Good morning, everyone. Joc, can I maybe follow-up on Brazil? There are two parts to this. First, the affordability point about some Grower Industry Associations telling farmers not to apply fertilizer at these price levels. Do you view that as not having a material impact on actual consumption and off-take? Second, regarding your distribution business and a potential slowdown in demand or flat demand next year in your market outlook, how do we think about the profitability of that distribution business in a declining price environment?

Let me start with affordability. With the rise in commodity prices and the Brazilian currency's devaluation, Brazilian farmers benefited from extremely good profitability, which has decreased this year. Due to rising fertilizer, fuel, and seed prices, they've been squeezed more than usual. However, our belief is that farmers are not going to sacrifice yield by not fertilizing; it is simply not a good economic solution. If anything, that would exacerbate their profitability issues. Thus, we think this trend will continue as normal. While we don't expect growth to be as strong in the next year or so, we view Brazil as a great market and ultimately a significant food source for the world.

Joc, can you provide a longer-term question regarding lithium iron phosphate and its impact on the capital markets in the last few years? Can you give us a sense of where you think LFP could be in 2030, in terms of incremental demand for phosphorous and its manufacturing needs?

Thanks, Joel. I'm going to turn this over to Jenny to discuss the growth of the lithium iron phosphate battery market. You may be aware that Elon Musk has shown interest in using LFP in the Model 3 manufactured in China. These developments indicate that the LFP market is on the rise. In terms of purified phosphoric acid, we are conducting research on how to create it, though it's still early for us to communicate costs or capital requirements. But Jenny can elaborate on the LFP marketing.

Sure, Joc. The increasing demand for LFP batteries has been one of the primary drivers changing the Chinese phosphate industry. This year alone, we anticipate around 300,000 tons of purified phosphoric acid will shift to LFP, equating to 0.5 million tons of demand. We've also fielded questions related to phosphate fertilizer production in 2022. The trend of shifting to LFP is substantial and will likely alter the phosphate industry broadly, particularly impacting the U.S. as the demand grows.

Our next question comes from the line of Adrien Tamagno from Berenberg. Your line is open.

Hello. Good morning. I've got two questions. First, since you restarted Colonsay, how should we think about the cash cost of production, and what is the target for 2023? Can you remind me of what to expect as the run rate of K3 for 2022, annually? Thank you.

Thanks, Adrian. Once Colonsay ramps to 100,000 tons per month, we believe cash costs will begin to decline. We're currently going through a transition, but I would expect Colonsay to represent about 10% to 15% of our total production. This change will slightly increase our costs, about $4 or $5 per ton overall. This will be offset by a reduction in costs from K3. Regarding K3, as mentioned, we expect to reach full production by the end of the first quarter, and we anticipate approximately a million tons of new capacity by the end of the third quarter.

What do you see as the greatest returns on investing new capital in growth?

As we prioritize new capital, a few areas stand out. We're nearing a point where our MicroEssentials production capabilities align with our sales goals, and we'll consider expansion reviews shortly. We also see opportunities in distribution in Brazil, which would be relatively lower cost and capital intensity. Extending our reserves in Florida is another priority, which although doesn't raise output directly, secures longer-term viability. We currently aren't looking to expand production capabilities significantly in potash, as our current operations, such as Colonsay, are ramping up adequately. Lastly, we'll evaluate investments in technologies to accelerate our next-gen transformation, particularly in automation. These areas will be pursued with a focus on high returns and rapid payback.

As a follow-up, how do we expect to deploy excess capital between incremental debt paydown, share repurchases, dividend policy and growth project?

We remain focused on a balanced capital allocation approach. We’re committed to paying down our debt target of a billion dollars over time. Regarding growth investments, this year, we will have invested $450 million, including expenditures on K3 and reserve extensions in Florida. On the shareholder return side, we’re increasing our target dividend again to $0.45 per share for 2022, complemented by a billion-dollar share repurchase program, in which we’ve already repurchased approximately one million shares. Our balanced approach will continue moving forward. Thank you. That concludes the prepared portion of this event. I would now like to open the line to Q&A.

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