美盛公司 (MOS) 2003 Q3 法說會逐字稿

Good morning and welcome to the IMC Global 2003 Third Quarter Earnings Release Conference Call. All participants will be able to listen only until the question and answer session of the conference. The conference is being recorded. If you have any objections you may disconnect at this time. I would like to turn the call over to Mr. David Prichard, Vice President of Investor and Corporate Relations. Sir, you may begin.

Thank you operator and good morning to everyone, we are pleased to have you with us. I'm Dave Prichard with IMC Global, your moderator for this morning's conference call to discuss IMC Global's 2003 third quarter and 9 months results issued earlier today. I'm joined today by Doug Pertz, our Chairman and Chief Executive Officer, Reid Porter, Executive Vice President and Chief Financial Officer, and Bob Qualls, our Vice President and Controller.

If you haven't received or seen our results press release and financial tables so far you can call my assistant Vicky Bunker at 847-739-1817 and the materials will be sent to you right away. The information is also available via First Call and the IMC Global website at www.imcglobal.com. Finally, this conference call will be accessible on a replay format through next Friday evening, October 31st, by calling 402-998-1317, that's 402-998-1317. It will also be available as an audio webcast, that's available again through the IMC Global website.

As is our custom, we planned some opening comments before we turn to your questions. First, Reid Porter, who will discuss our financial results for the quarter, who will be followed by Douglas Pertz, who will discuss our operating highlights, key corporate developments, and the overall outlook.

As a reminder, this conference call will contain forward-looking statements that involve risks and uncertainties. Those statements are based on current expectations and actual results may differ materially. At this time, I am pleased to turn the call over to our Executive Vice President and Chief Financial Officer, Reid Porter. Reid?

Thanks Dave, and good morning, everyone. Earlier today IMC Global reported a net loss of $28.1m or 27 cents per diluted share for the quarter ended September 30th, 2003, which included a previously disclosed charge of $25.2m or 15 cents per diluted share for bond tender premiums and fees. Excluding this item, the company recorded a third quarter loss of $11m or 12 cent per diluted share. In the quarter of 2002, IMC Global reported net earnings of $8.1m or 7 cents per share. Our lower operating [inaudible] segment results, which we believe are inline are slightly better than the consensus analyst estimate, stem from our PhosFeed business. Similar to our first and second quarters, increased ammonia, sulphur, and natural gas input costs, as well as higher idle plant costs from our total shutdown of Louisiana phosphate capacity in July, more than offset an $11 per short ton improvement in average DAP pricing to $156 as well as a strong increase in potash operating earnings. Third quarter revenues of $495m improved slightly versus $490m a year ago.

In reviewing our results in more detail, I will first cover our business segments, then discuss our consolidated income statement, and conclude with comments on our balance sheet and cash flow statements.

IMC PhosFeed’s third quarter net loss of -- or rather net sales of $310m decreased 7% compared with last year, due to lower shipments partially offset by higher prices. Total concentrated phosphate shipments of about 1.3m short tons were 12% below the prior year level, but essentially unchanged sequentially from the second quarter. The volume decline was all domestic as volumes fell 30% reflecting IMC's efforts to balance market supply and demand. Export volumes rose slightly versus 2002 due to strength in the Brazilian, Japanese, and Indian markets, which offset the decline of China’s shipments of approximately 300,000 tons compared to last year’s third quarter. This lower volume was due to the absences of a Phoschem summer DAP supply agreement with Sinochem which also impacted 2003’s second quarter shipments. Phoschem in August announced a new supply agreement with CNAMPGC of China that included the shipment of 400,000 metric tons for the last four months of 2003. Doug will comment further on this.

Compared to 2002 the company realized an $11 increase in the average price per DAP to $156 per short ton, which was a slightly reduction from the $158 price realized in the second quarter of '03. Nonetheless, this price realization as was in the case of the second quarter was close to our best quarterly realization in four years.

PhosFeed third quarter gross margin losses of $1.3m declined significantly from gross margins of $30.9m in 2002, due to 67%, 65%, and 35% price increases in ammonia, natural gas, and sulphur raw material costs, and higher idle plant costs of about $5.2m from the total Louisiana shutdown in July, partially offset by higher phosphate pricing. About 30% of Louisiana concentrated phosphate output continued to be idled in August and September, as was the case throughout 2002 and in the first five months of 2003. This is a rate that we expect to maintain indefinitely into 2004.

Turning to our other business segment, IMC Potash reported a strong third quarter performance. Net sales increased 15% to $204m versus last year due to strong worldwide shipments. Total sales volumes of 2.1m short tons increased 17% overall as export in domestic shipment improved a strong 28% and 12% respectively. The average selling price including all our potash products was $72 per short ton. This was essentially flat with last year. As most of you know, the company announced a $10 per short ton [inaudible] for potash, domestic price increase effective July 15 and an additional $7 MOP price hike effective September 29. We believe strong third quarter domestic shipments were in a large part a pre-buying response ahead of a major price increase that was viewed as the one that would be successful. Current potash sales to domestic ag customers are being shipped with a $10 per short ton increase. But we are optimistic about the sustainability of higher domestic net tax. Third quarter IMC Potash gross margins of $49.8m improved 27% versus prior year due to the higher sales volumes and the gross margin improvement of 2.4 percentage points. Effective foreign exchange hedging, good cost controls, and lower resource taxes more than offset a higher Canadian dollar and natural gas costs versus last year's third quarter.

IMC Potash continued to balance supply with demand by taking 15 weeks of mine shutdowns in the third quarter, unchanged from prior year. This lead to relatively flat production versus last year. That, coupled with strong demand, led to a 29% decline in potash inventories year-over-year. During the quarter we had notified employees at our IMC Potash Carlsbad mine that about 75 positions, predominately hourly, would be eliminated by year-end in connection with our sale of the remaining Carlsbad SOP business line to Compass Minerals. This will eliminate a negative margin business and enable Carlsbad to focus on its profitable K-Mag and MOP product line.

Doug, will provide additional analysis and perspective on both the third quarter performance and the outlook for our PhosFeed and Potash businesses in the months ahead. I would now like to comment further on our consolidated results and various corporate items. SG&A expenses of $21m were up 14% from prior year due to one-time consulting fees related to our operational excellence initiative. SG&A expenses in our business segments and at corporate continued to be tightly managed and controlled. A 7% increase in interest expense year-over-year stemmed from higher bond refinancing costs previously disclosed. The company reported a modest non-cash foreign currency translation gain, which was a significant change from the first two quarters, which were impacted by large year-over-year non-cash losses from a strong Canadian dollar. Third quarter results in foreign exchange compare unfavorably versus 2002 by about 4 cents per diluted share, where currency translation was more favorable. As noted in previous quarters, we continue to successfully hedge our currency exposure from Canadian dollar expenses in order to limit our cash exposure. This is recorded in IMC's potash cost of good cost of sold pursuant to FAS 133 and has been favorable for all three quarters of 2003. However, IMC does not hedge monitory assets where translation gains and losses have no cash impact.

Restructuring charges of $2.2m were incurred in the third quarter. This reflects additional severance associated with organizational restructuring that was initiated earlier this year. The diluted net loss per share also includes $2.6m of preferred dividends associated with the company's mandatory convertible preferred shares. Continuing operations reflect an income tax benefit of $13.3m. We continue to apply an effective tax rate of 32% to our operations and expect to do so again in the fourth quarter. Regarding our balance sheet, cash and cash equivalents were $56m at quarter end, our main bank revolver of $210m remained fully available except for letters of credit, which totaled about $80m. As previously announced IMC retired $414m of 2005 debt and issued $391m of new debt that is due in 2013. Our next significant public debt maturity is $150m due in 2007. Long-term debt during the quarter was reduced by $43m and an additional $37m in cash was used for debt premiums and fees. We are very pleased to have proactively dealt with our large 2005 debt maturities now, rather than later, and eliminate any marketplace concerns about the issue in any potential acceleration of our 2006 bank debt maturity. Net receivables and net inventories continue to be held in tight check. Receivables were slightly down year-over-year, despite higher selling prices. Inventories increased $20m due to higher phosphate inventories, partially offset by a reduction in potash inventories. We expect phosphate inventories to decline in the fourth quarter with the fall season and heavy international commitments. Gross capital expenditures of $33.4m declined 3% from prior year and remained well below third quarter DD&A of $42.9m. Nine month capital spending is down $18m versus last year and we expect to finish this year at about $120m which would be $55m below our DD&A of $175m. Third quarter results will have us in compliance with all bank covenants and our fourth quarter guidance projects that we will be in compliance with all covenants at year-end.

Finally, let me comment on several remaining asset disposal and cash proceed items. We continue to negotiate the sale of Port Sutton marine terminal and expect to close by year end with cash proceeds of $23.5m. This will also result in lower ongoing port operating costs and capital spending. At the end of November, we expect to receive additional proceeds of $5-10m, as previously disclosed, from working capital adjustments in connection with the sale of our SOP business line to Compass Minerals. Lastly, we continued to negotiate the sale of our remaining IMC chemical soda ash and boron chemical assets in California and Italy and are striving for a close by year end. But as indicated before we do not contemplate any significant cash proceeds from this disposition. And with those comments, I would now like to turn this discussion over to Doug.

Thanks Reid and good morning. In many respects our third quarter was like a tale of two cities operationally. We had a strong performance from our Potash business but a very tough three months from our PhosFeed segment in large part due to raw material cost. We have thoroughly reviewed our overall and individual segments results as well as overall financial results. I'd like to elaborate on some items and offer some additional context. While disappointing overall, our third quarter operating results were inline or somewhat actually better than most analysts estimates on an apples-to-apples basis. Our Potash segment had a very strong quarter, with volume of 17% and gross margin of 27%. These results and the overall market bode well for what is the common potash we continued strong volume and price increases. While PhosFeed continued to be disappointing at just below breakeven gross margin, the third quarter's sequential improvement over the second quarter was positive and we continued to be well positioned competitively.

More than 100% of the operating earnings short fall in the year-over-year results came from our PhosFeed segment, which similarly to the third, excuse me, to the second and the first quarters of 2003, reflected continuing improvement in DAP price realizations that were more than offset by the negative impact of very significant increases in ammonia, sulphur, and natural gas compared to a year ago. These three raw material items cost us $32m more in the third quarter and close to $110m more for the 9 months year-to-date versus the comparable 2002 periods just to give as a blunt measure of their impact. After adjusting for the one-time 15 cent per diluted share impact for the bond re-tendering premiums and fee, our operating per share loss in the quarter would be about 12 cents per diluted share. In addition, the third quarter also included a 4 cent per share unfavorable impact from the total shutdown in July of our Louisiana phosphate production and related reduced volume. The year-over-year change in phosphate margins of $32m, primarily due to a higher raw material and idle plant costs, impacted the EPS by about 15 cents per share, almost twice the idle plant adjusted operating EPS loss of 8 cents.

Our PhosFeed gross margins in the third quarter showed marked sequential improvement over the second quarter, moving from a 13% loss to just below breakeven gross margin in the third quarter. The positive trend was driven by lower production costs, slightly higher sulphur, and lower ammonia costs with almost flat DAP pricing. While sulphur costs were up 35% versus last year it is the continuing high cost of ammonia that most impacted phosphate cost. Napa (ph.) purchased ammonia was up 67% in the quarter versus last year, impacting DAP cost by over $16 per ton and has continued to increase. Tight worldwide supply and demand including the FSU regions has continued -- and continued idling of U.S. ammonia capacity due to high gas cost has kept the gas, the gulf region tight in ammonia supply and lifted pricing more than we thought would be the case in early summer. Some U.S. supply has now come back online with now less than 30% idle and more is expected to be brought back with current high ammonia margin spreads and new capacity is scheduled to start coming on in the latter part on next year. We did see softer than expected U.S. phosphate volumes in the quarter. Buyers hesitated on purchases to see what direction DAP prices would take if the harvest began and IMC continue to push to achieve its list prices. The lack of PhosChem DAP supply contract with Sinochem and the idling of our Louisiana operations during the summer also impacted our volumes, as expected in the quarter. Despite the third quarter Chinese shortfall strong year-over-year volume improvements in Brazil, India, Japan and Chile made up the difference. Despite our restarted Louisiana production August after a total shutdown for a period of 2 months, our DAP production in the third quarter was down 17% versus 2002 and our 9 months is in -- for the 9 months is down a similar 17%. Clearly, IMC continues to practice significant supply side management in 2003, as it has done since the down turn of the industry in mid to late 1999. As a result, as we’ve mentioned in the third quarter idle plant associated reduced volumes impacted our earnings by over $8m or about 4 cents per share in the third quarter. The recent signing of the Chinese multi-year DAP agreement, which included $400,000 additional fourth quarter tons, and with other business already booked, Sinochem is more than sold out for the balance of the year and IMC has no plans to curtail production of current levels. Despite the overall results in the quarter, we did see the projected continuation of improved DAP pricing year-over-year. Our third quarter price realization of a $156 per short ton was close to the highest in 4 years and was $11 per ton higher than a year ago. We began the fourth quarter with much higher DAP prices than a year ago, when realization was just a $133 per short ton. While pricing is inline with our expectations to date, additional improvements in supply and demand is desired and needed, plus an improvement on either supply or demand would have additional significant impact on accelerating price improvements.

In Potash, our strong 27% increase in gross margins reflected higher volumes and lower operating cost despite a slight rise in gas costs with selling prices essentially flat year-over-year. The domestic volume strength was impressive driven partially by pre-buying in front of the summer price increase. However, buying has continued to be strong with a second increase being implemented. China, Brazil, and Japan were markets with strong demand in the quarter on an export basis and Canpotex and IMC are on track with overall annual volume records in 2003. We again demonstrated supply-demand commitments in the Potash business in the third quarter with about 15 weeks of mine shutdown similar to 2002. These shutdowns together with strong market demand saw our inventories drop 29% in the third quarter. And North America Potash inventory levels also dropped 201m tons, a 6 year low; this will help pave the way for support in the domestic price increases in the fourth quarter and beyond.

Natural gas and other inflationary costs were more than offset by productivity improvements and spending controls across IMC Potash, which reduced cost per ton and help grew those gross margins in the quarter. As Reid mentioned, successful Canadian dollar hedging activities fully offset higher operating cost resulting from the strengthening of the Canadian dollar. Importantly, again we continue to see steady improvements in domestic price realizations with MOC -- MOP prices improving nearly $3 per ton in the third quarter versus the prior year.

Very significant third quarter developments impacting the future of both P&K with the signing of historic multiyear supply agreement with China. Phoschem inked a 2004 and 2005 DAP supply agreement with CNAMPGC, providing a base load of 1.6m tons per year with options up to 1.9m tons and market share in the [T clauses] above these levels. Also included was an additional 400,000 tons in 2003 above the 1.1m tons already contracted for, which will make our fourth quarter shipments very strong. Pricing will be based on these contracts on international export pricing at the time of shipment. We are pleased with this new longer term relationship with CNAMPGC, China's largest farm distribution agency and primary co-op which is doing a great job of branding Phoschem DAP and selling at a premium to other DAPs in China. Canpotex also signed a major three year MOP supply agreement with Sinochem, providing a minimum 1.5m metric tons per year similar to this, with options for 10%. The agreement also ensures Canpotex maintains its market share in China as Potash import demand grows in the years ahead. Both of these agreements are very significant for IMC in ensuring strong and solid P&K base loads into the world's largest fertilizer market.

Let's now turn to the outlook for the balance of 2003 and some general observations about 2004. The overall ag environment continues to improve with overall grain inventories at historically very low levels and world stocks to use ratio at a 28 year low at around 17%. Commodity prices in some areas have moved up, especially soybeans, and are positioned to potentially move up higher based on historical trends. U.S. farmer income is relatively heavy – healthy, supported by higher commodity pricing and increase government support.

P&K soil nutrient levels need to be replenished and farmers know that they must start spending more input dollars in this area. All of these are good macro industry drivers for the fertilizer business and IMC is well positioned to benefit from the overall improved market in a longer term positive outlook. However, the very near term phosphate pricing and raw material cost trends are not improving as we enter the fourth quarter. While we expect a significant year-over-year and sequential improvement in phosphate volumes in the fourth quarter from a pickup in the U.S. fall and from very strong November, December Chinese shipments. We've also seen purchased ammonia cost continue to rise with another $10 per metric ton increase already in October. [inaudible] ammonia prices are currently priced about historical level for current gas prices, reflecting expanded margins and excess idling of North American supply. Pricing should begin to ease if gas prices remain at or below current levels, pushing margins back to more normal levels, and as idle capacity returns to production. Further out we believe ammonia prices [released] further as significant new capacity starts up in areas such as Trinidad and Venezuela and the FSU.

In the fourth quarter, it appears ammonia costs will continue to have significant negative impact on phosphate margins. While not concluded yet, fourth quarter sulphur contract prices will at best remain flat with the third quarter and possibly increase no more than $4 per ton even then we believe there is ample supply available in the Gulf region. [Price] shortages, competitive actions, auctions, excuse me, and producer shutdowns seen earlier this year are no longer issues, supporting an improved market supply situation. We anticipate sulphur pricing will continue to decline through next year and beyond. After showing firmness throughout most of the third quarter, DAP pricing, especially in the export spot market, has recently fallen over $10 per metric ton and is generally been relatively soft. US producers have found an increasing difficult goal to maintain SOP levels at earlier numbers because of surge in export freight rate, as indicated in a recent Financial Times article.

We are hopeful that the already booked Chinese demand in November-December, together with a late season buying from India, Pakistan, and Brazil, as well as Australia and US demand improvement will combine to make the current pricing levels a seasonal bottom, and support improvement back closer toward the $180 per metric ton level as we move through the fourth quarter. Nonetheless, year-over-year the export spot price is some $18 per metric ton higher today than fourth quarter of 2004 and should you end -- and should end the year with DAP prices much above year ago levels, a good platform to begin the 2004 front.

China, with expected DAP imports of just under 3m metric tons this year, down from 4.1m tons in 2002 is expected to move back to over 3.5m tons in imports in 2004. Reporting this, our very low end of the season and end of the year domestic DAP inventory levels of less than 500,000 tons, and also increased grain prices in China. We are confident that our long-term relationship with CNAMPGC supporting strong distribution and product branding will also support increased PhosChem sales in China. In India, significant production shortfalls, primarily from high raw material cost and continuing problems at Oswal, who remained down for environmental and other reasons. An increased demand in the Indian market have also resulted in very low year end inventory levels. While India will import close to 800,000 tons in 2003, up from 350,000 tons in 2002, the probable shortage at the farmer level and very low inventories together will reduced domestic production should support increased imports in 2004. Brazil and South America should also continue to increase demand next year as they did in 2003, driven by higher soya bean pricing and plantings. These indicators support analyst projections of improving phosphate world supply and demand in 2004 and another year of price improvement in the $10 per ton range.

However, strong raw material pricing, especially ammonia, at top of the cycle pricing, suggested higher cost producers should seriously consider the impact of their weaker margins. IMC is not prepared to reduce production from our current levels and in fact as mentioned earlier, PhosChem is more than more than fully booked for the rest of this year. Our fourth quarter Potash performance is expected to be improved versus 2002 as volumes and cost should be favorable. Most importantly, however, are the positive trends in domestic MOP pricing, as I mentioned earlier. Recent current domestic ag MOP shipments are moving [north] for a short time increase versus earlier levels. We've announced and implemented an additional $7 per ton increase that we anticipate will help us share the full impact of the summer increase, while also having some added impact in the fourth quarter. This is particularly important in our potash business given our strong leverage to the domestic market with over 5m tons of annual shipment in the United States and Canada. While the summer price increase pulled shipments into the third quarter, shipments in October post the increase have continued to be strong. Ultimately, as our earnings release indicated, the magnitude of our earnings or loss for the fourth quarter will largely depend on the relative direction and magnitude of change in DAP pricing and raw material cost, primarily ammonia and gas, for the rest of the year. If DAP pricing and raw material cost maintained current levels through the balance of the year, losses from continued operation should be similar to the third quarter, in the range of 12 cents per share.

Before closing my remarks, I want to again emphasis our continued strong drive to achieve lower overall cost and offset inflationary cost. Earlier this year, we announced several significant new cost initiatives in addition to our Six Sigma continuous improvement programs designed to do just that. The first was an organization restructuring program which included the eliminations of over of around 100 positions and related overhead expenses. Annualized savings will be more than $10m or about 5 cents per share in 2004 and beyond.

Second program, called Operational Excellence, is a multi year core business reengineering initiative that is on track to deliver over $15m in savings this year with ongoing process changes that will lead -- yield similar additive cost savings in the next several years to come. Finally, we continue to expand our Six Sigma, Workout and other lead process team programs, the foundation of our continuous improvement system and culture. Six Sigma and Workout are exceeding target savings of over $12m in 2003, up from $8m of savings realized in 2002, helping offset inevitable inflationary cost pressures. We feel there are even more costs reduction opportunities beyond, and the IMC and team is aggressively pursuing these and others.

Reid spoke about the positive balance sheet impacts from our recent refinancing which had significantly strengthened our balance sheet by pushing our debt maturity dates, boosted our cash reserves and restored full burning capacity from our bank revolver. As a result of these financing initiatives IMC has no significant scheduled public debt maturing until almost four years from now. We believe we have a firmer financial footing now in place for IMC and are fully focused on ensuring that we maintain leadership in phosphates and potash. Our Potash business is growing and improving, and we remain very optimistic about its prospects. We are working hard to position IMC with the upside leverage we will enjoy in the recovering phosphate market by aggressively pursuing ways to moderate our raw material cost, lower our operating cost structure and help to structurally improve market dynamics.

With those comments I'll now like to now turn it back to Dave for questions, thank you.

Thanks Doug and Reid and with that we will begin the Q&A session and I again ask you to try and limit yourself to one question in one part only, so we have everyone with the chance to ask questions in the time we have remaining to the top of the hour. Operator, with that you may now begin the Q&A session please.

Thank you Mr. Prichard. At this time, we'd like to begin the formal question and answer session of the conference. If you would like to ask a question, please press "*", "1". You will be announced prior to asking your question. To withdraw your question you may press "*", "2". Once again, if you would like to ask a question please press "*","1". The first question comes from Mr. Duffy Fischer with Goldman Sachs. Sir, you may ask your question.

Yes good morning. As I look at the guidance that you gave in Q4 being you know some what equal to Q3, I have a hard time triangulating that because when I look at Q4 versus Q3, the shutdown charge from Q3 goes away, the $10 per ton price increase in potash is there, and I would guess that a lot of volume you probably sold before that July 15 date. The shutdown weeks in potash were largely in the third quarter. Those go away and you get a huge increase in the tonnage of your DAP that you are shipping to China, so with those positives what are the big negatives quarter-over-quarter that is bringing back to even?

Well, Duffy, I think you have actually outlined the situation fairly well, and generally the third quarter is not our strongest potash quarter, and in fact the fourth quarter historically has been, and we anticipate it will be stronger and that should be helped by the price increases that we anticipate we will see the benefit of in the fourth quarter. So, you are correct there. What you are seeing and what we are trying to assure that we hedge some of the bets on are really the increased raw material cost on the phosphate side, seeing higher ammonia cost where it is today, and I think the way that we worded this is based on where we see raw material prices today, which is higher than third quarter average, as well as where DAP pricing is today, down from the average that it was in the third quarter. That’s where we'd anticipate to see the major reduction versus the third quarter. Now, you saw, and I think this is pretty important, we saw that impact that only a minor change in raw material cost made sequentially from the second quarter to the third quarter going from the loss of about $13m on a gross margin basis, I think it was, to just below a breakeven in the third quarter with approximately flat DAP pricing. And so what we’re trying to project and I can tell you one thing for sure that ammonia pricing will not be at the end of the quarter what it is today, just as it wasn't a year ago and just as it wasn't at the beginning of the third quarter. So, nobody knows exactly what it will be, and I don’t even think the industry analysts know, but I think that the suggestions, and that's no – believe me, that's no cut to industry analysts, please. But I think that the point is that we we're trying to lay it out based on lower ammonia pricing -- excuse me, higher ammonia pricing and lower DAP pricing that's currently in the marketplace today, that could significantly and will significantly change from where it is today.

So, in your assumption for that flat Q3 to Q4 are you using today's prices, or you using your assumptions where you get some, you know, the ammonia price to back off and the sulphur price to rise a little bit?

We’re using today's assumptions, -- today's pricing.

Today's pricing?

Not necessarily what we would project, but we’re just trying to do it on the basis of lower DAP pricing today that -- we have also suggested that there maybe a case in which DAP pricing should improve in the quarter, certainly longer term, it should improve fairly dramatically as analysts will suggest.

Right.

But over the short terms, we think it will improve as well, but we’re using current DAP pricing, which is down from the third quarter, as well as, ammonia pricing that is up from the third quarter.

And if you look at today's pricing, you know higher transportation, you know higher ammonia, lower prices, are you guys you know for the tonnage getting shipped to China, are you guys EBITDA positive on those tons?

Again it's going to depend on what the pricing is at the time of shipment.

I mean just based on today's prices.

It's pretty close.

Okay. Fair enough. Thank you, Doug.

It's pretty close. And again it varies from week from week based on what the pricing is and what the raw material cost input -- you know, an interesting point is that right now we are producing ammonia on the river at substantially below what we're buying it for in Tampa, which is suggesting that part of the market correction is probably is going to be out there on the ammonia market place because margins are much higher than they have historically been, if we could product it at substantially lower prices.

Alright, thanks folks.

The next question comes from Mr. Donald Carson with Merrill Lynch. Sir, you may ask your question.

Yes. Douglas, I do that math it would seem today at specially these new low prices that were set in India and net back to Tampa that you are at best cash cost breakeven and in Florida today so as to clarify that guidance is sort of your 12 cents guidance, the loss that is for Q4, based on the assumption of flat to negative cash margins in Central Florida?

Yes, and I think that’s relatively accurate.

For export volumes.

Yeah.

Right and --

This is for export volumes and again as I said just a minute ago what we have seen as a result of that that in fact our Louisiana production costs have, the differential between that and Florida have dramatically narrowed because of we can produce ammonia in Louisiana first -- essentially as we could buy for today in Tampa.

Now if cash margins on export business are negative why won't you shut down?

Well number one we have a contract in which we are going to supply the product.

Are you obligated to supply even if you are losing money on that?

Yes, and on top of that there were additional costs of shutting down.

Okay. Longer term question is --

I think that the important piece on -- that's why players in this industry don't shut down when they probably should be.

Right. So you are not forecasting any immediate shutdowns by others then?

No, I think we are suggesting that it is probably the appropriate time in the industry for that to happen.

Now looking longer-term I mean you've been, you know, running Louisiana at about half your ready capacity for sometime. You know, given the likelihood that China will never get back to its ‘98 peak, why not just shut in a portion of that the Louisiana capacity and not incur the ongoing idle plant cost? Is it a question of the cost of shutting down or why would you keep that you know, excess capacity idle but not permanently closed?

Well Don, there is a couple of pieces on that. First of all, we have about two-thirds of Louisiana operating today. In other words, when we operate Uncle Sam and Faustina granulation with that, we still have additional capacity of Faustina granulation as well as Taft granulation that is the additional 1.1 or 1.2m tons, should we bring up Faustina asset. But we are operating in about two-thirds capacity today, obviously when we shutdown it makes a significant change on that. But what we have shutdown is probably the lowest and most logical cost for shutdown, if you recall our costs of shutting down the Taft and the Faustina asset is around $10m a year. And therefore that's the most logical way to balance and manage that. And I think we've consistently said we will continue to have that shut down until the marketplace suggests we bring that up. On the other hand as we -- we just said a minute ago the cost of shutdown or the cost of managing idle plant is substantially greater than we saw in one month in the third quarter than just the EBITDA or the cash breakeven level, and I think that's a key piece to it. I think the biggest issue and probably what needs to be understood is we are not the high cost producer. And what needs to really be happening in the marketplace today is that marginal high path producer or producers really need to be the ones that come out of the marketplace.

Then final part - phosphate question, your variable costs were down, it was -- were rock costs down in Q3 versus Q2, is that why you had the better cost performance?

Yes. Our rock cost was down as well as concentrate cost was down as well.

And how significant was that on a per ton basis.

Well it's insignificant versus raw material cost, but its still down.

All right. Thank you.

Your next question comes from Mr. Jacob Bout with CIBC World Markets. Sir, you may ask your question.

Just turning over to the potash markets, can you comment on the increase in freight rates in the potash market and your ability to pass these costs on the customers going forward. I understand that this market you know, there is lot of negotiated contracts there and I assume that you know, as these come up you are going to at that point be able to see if you are going to be able to pass on the cost.

Clearly, that’s the case and as they come up we have been doing that already this year. We have already seen in 2003 to date significant pass on and increases in pricing through Canpotex in the $5-10 range. Brazil is a good example of that, but Malaysia and other places are good examples of that as well. But we continue to see the cost of freight go up as well. In the potash business and through Canpotex there is more sold on a C&F basis than there is on FOB basis and that's why we are seeing more of the impact in that market. So I guess the answer is we have already done and we continue to do that and I think the market is in a position luckily where we can see more of the ability to pass on price increases as we go into our next year at contracts are renewed and spot book pricing is done on close return basis.

What are your thoughts on the actual freight rates itself on forward look say for 2004, and 2005?

Well I'm not sure that I'm the one to project that. You know what we are seeing now is on both carriers that the supply has been outstripped so dramatically with the large increase in demand for -- heavily for China as the key market for shipping of ore -- iron ore, coal, wheat, other grains, that was kind of supply that had outstripped as much as it has. So, we are going have to see that's come back in the balance and that could be the longer term with additional supply of vessels what could be shorter term is the economies are forced to tamper down a bit.

Okay thank you.

Clearly we are seeing this is a result of economic growth and this may seem tempering that economic growth. Qualls, you want to comment?

Well just, you know, recall -- we shipped about two thirds of our potash domestically as well, so those freight rates we are talking about does affect one third of our business that goes to Canpotex.

And again on the phosphate side, most of it is done on a FOB basis, however the freight rate still impact the final landed price.

[inaudible] smallest, is that two thirds or?

Much more than that. I would say two or three quarters in that.

All right, thank you

The next question comes from Mr. David Silver with J.P. Morgan. Sir, you may ask your question

Okay, thanks. I have a couple of questions I guess on your potash business. First, I was wondering in the third quarter, I believe there was a kind of a year-to-date catch up to reflect the lower PPT or potash production tax-rate and I was wondering if you might be able to quantify that for yourselves? And then secondly on potash, I guess Doug and Reid both cited active customer pre-buying ahead of those big announced price hikes. I was wondering if you could may be quantify or give some indications on what you think first quarter potash volumes might look like and how much poaching from the fourth quarter did we see in the third quarter numbers? I’ll stop there. Thanks.

I’ll answer David, the resource tax question. Simply put our resource taxes third quarter ’03 to third quarter ’02 were about $2.5m better. And obviously the resource taxes will be ongoing and we did not book a huge one time adjustment in that regard.

So the $2.5m, is that a year-to-date kind of adjustment or is that strictly 3Q versus 3Q based on?

Largely and primarily 3Q versus 3Q.

Okay. Thank you.

Dave to your other question. While we did see volumes in the third quarter higher than our forecasted volume and higher than historical volumes, obviously, that’s why we are concerned that we’ve might have seen some pulling ahead. How much of that, we don’t really know and it may be up to 100,000 tons. However, on the other side, we are seeing strong orders that are at or above our forecast levels already fourth quarter days, and we would have anticipated that should we have seen that pull ahead then we would have seen it start falling off fairly dramatically in the first part of the fourth quarter. So you know I guess the point is that we’re very pleased and I think I put this in the comments. Though we’re not seeing that yet but we want to make sure that people understand that, number one a lot of the invoice sales in the third quarter were at prior pricing levels in order to beat that and now they are at the higher levels and we would have anticipated that some if might have been pulled, but today we've not seen the impact of that.

Okay thank you.

Once again, if you would like to ask a question please press "*" then "1". One moment please, our next question comes from Mr. Bill Hoffman with UBS. Sir, you may ask your question.

Yeah good morning, just looking forward, if we get in to a situation where 2004 doesn’t look too much better than 2003, what do you -- what are sort of your contingency plans about either cutting capital spending or other ways to conserve cash, and maybe if you can just sort of outline for us what other cash obligation do you expect to make it into next year?

Bill let me talk about CAPEX, first of all and then I’ll past it over Reid to make any other comments on that. As you can probably see year-to-date our CAPEX is down versus last year and we think it will continue to be down this year to below a $120m on a gross basis and right now we're looking at next year to be at that level or potentially even below and I think that's a fair amount left and many analyst would have suggested it will be 2004 and beyond and that’s probably something that make a significant difference in the cash flows. I think what you will also find is very aggressive working capital management going forward, and hopefully that will be evident at the end of this year as well. I think those are fairly significant factors that maybe weren’t put into most models in the past. Reid.

You know obviously we've been relatively cash neutral this year as you can see from our nine month cash flow statement, and frankly some cash outflow from the phosphate business has been offset by asset sales. We still have the ability to identify modest asset sales and pursue them, but we are focused on continued cost reduction and turning of the phosphate cycle. We have over $200m roughly in liquidity to help us get through the downturn in the cycle, but, you know we would expect structural changes and improved supply and demand over the course of the next two years to start generating cash flow for the business.

And as I said Bill in my comments and we will continue to escalate cost improvement programs that are already in place and should we not see a more favorable turnaround, I think you will see us even more aggressively take cost reduction actions, and we are not moving -- we can and we will continue to do that we have proven that in the past.

Alright, thank you. Just a point of clarification. You mentioned the 400,000 tons order for the -- basically the rest of the share but you also said it was -- and I guess September, through the last four months of the year, was any of that shipped in the third quarter or should we just assume that part of that comes in, most of that comes into the fourth?

I think there was one vessel for PhosChem that shipped in the third quarter, I don't know if that was ours or not. But the balance of it then is in the fourth quarter I think that the bottom line though is that the PhosChem is sold out for the fourth quarter including these times obviously, but all of others as well and we are actually more than booked in our export sales already. So, you are not to see us in the market, and it means that we are fully booked to the year.

Okay, thank you.

The next question comes from Mr. Chuck Peterson (ph.) with Lehman Brothers. Sir, you may ask your question.

Good morning. Could you tell us what the actual calculations for leverage and interest coverage were for the banks as of the end of the third quarter?

I don’t think we disclosed that information. I can tell you we make a number of adjustments to our leverage calculation and interest coverage calculation for the banks and I can tell you we are in full compliance.

Okay.

You know the bank agreements have certain treatments such as how we treat idle facilities and things like that, which are obviously reflected in cost of sales that, Chuck, you may have a hard time coming up with an exact EBITA or leverage ratio.

Okay. But to be clear the applicable covenant levels were I think for leverage 7 in three quarters, something down to 7 in a quarter -- in the fourth quarter?

I believe that’s the case I don’t have numbers in front of me but they sound right.

We will get back I think it is -- yeah we can handle that offline. It's in the February bank amendments that are on EDGAR, but we will work with you on that later.

Okay, I just wanted to make sure that those were the same ones that we have already -- still the same ones that numbers were --

Yes, from the February of this year, that’s right.

Okay, terrific. And just one another quick question, could you help to walk me through a little bit kind of some of the puts and takes that are going into the change in working capital in the fourth quarter?

Generally, we expect phosphate inventories to go down, and the rest of the working capital be relatively flat.

Yeah.

The next question comes from Mr. Scott Zemky (ph.) with Black Diamond Capital. Sir, you may ask your question.

Hi Reid. I was wondering if you could give me the breakout for the quarterly raw material costs on ammonia, sulphur, and natural gas? And is there any balance on that potash AR (ph.) facility?

The second question first, I think we typically maintain a balance on the potash working capital facility of 55 -- the facility is $55m, we are typically drawing about $20m on the facility. In answer to your other question, are you looking for gross numbers, but I quoted in my talk percentage changes year-over-year, is that what you are interested in?

Yes, just the dollar amount like ammonia was X dollars for the quarter, sulphur 60 whatever?

And I also quoted in my numbers that the change year-over-year was $32m and that the 3 raw material impact in the phosphate business.

I understand that. I was wondering if you had a more detailed breakdown?

No, why don't you call Dave, or Dave will call you?

Okay.

He will get you the market number for the quarter, we can sure we can look at the market numbers for quarter, receivables and use that as a basis. Is that right?

No problem.

Alright. Okay. Thank you.

Operator, I think we have time for one more call. It's top of the hour, so they can all have to do the next call, so if there is another question we will take that and then close it down.

Thank you sir. The last question comes from Phillip Bearbara (ph.) with Goldman Sachs. Sir, you may ask your question.

My question has been answered already, thanks.

We will try one more of then, if there is.

The next question comes from Thomas Mackay with [Finland] Partners. Sir, you may ask your question.

Good morning, my question was whether the Mississippi Chemical bankruptcy has had any impact on your business or the market in general in last few months?

Tom, that's a good question and probably it is even a better question of what type of impact it will have on us going forward. I guess I would suggest over the last several months it has had limited impact in the marketplace and probably it really hasn't changed much. They have continued to produce both phosphate and potash, those that are specific to our marketplaces, and they have announced the startup again of their nitrogen, most of their nitrogen operations anyway in North America. But as you may have recently seen they are also in the process to selling key assets under their Chapter 11 proceedings and they have stocking horse debt on their primary assets, that being their joint venture ownership in the Trinidad ammonia assets. And you want to answer that Reid?

No. I -- you know I think it has obviously it's had limited to no impact in the past -- it could have an impact going forward.

Okay with that I'll close down the call again thanks to all of you who are still on the call for taking part. We will be available all day and the days ahead. Thanks again. Operator, thank you also. Have a good day.

That concludes today's conference. Thank you for your participation. You may now disconnect at this time.