美盛公司 (MOS) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the The Mosaic Company's fiscal second quarter 2005 earnings conference call. At this time, all participants have been placed in a listen-only mode. The floor will be open for questions following today's presentation. It is now my pleasure to introduce your host, Mr. Doug Hoadley, Head of Investor Relations. Sir, you may begin.

Thank you, Bernie. And, again, welcome to the The Mosaic Company's fiscal second quarter 2005 conference call. Representing the Company today are Fritz Corrigan, President and Chief Executive Officer; and Larry Stranghoener, the Company's Executive Vice President and Chief Financial Officer.

Before I turn the call to Fritz for opening remarks, I will read the Safe Harbor statement. Statements made during the conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about future financial and operating results, the predictability of fertilizer markets and raw materials, markets subject to competitive market pressures, changes in foreign currency and exchange rates, international trade risks, including but not limited to, changes in policy by foreign government and changes in environmental and other governmental regulations. Such statements are based upon the current beliefs and expectations of Mosaic's management and are subject to significant risks and uncertainties. Actual results may differ from those set forward in the forward-looking statements.

And lastly, I would like to point out the remarks made during the conference call are based on information and understandings that are believed to be accurate as of today's date, January 6, 2005. Because of the time sensitive nature of this information, it is Mosaic's policy to limit the archived replay of the conference call for a period of 30 days. This call is the property of Mosaic, any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of the Company is prohibited. With those announcements, I give you Fritz Corrigan.

Thank you, Doug. And good morning to everybody. We're pleased to have you join today's conference call. It marks the first time that we have an opportunity to communicate with a large audience since the completion of the business combination in October. And this communication marks our first earnings call as the Mosaic Company. We're excited about the prospects of Mosaic. With the merger complete, we are financially stronger and more diversified Company. We also have an opportunity to be a low cost producer and to realize substantial cost savings.

Before I review our results, I'd like to note that Mosaic embraces the concept of consistence and transparent shareholder communications. I'm confident that today's conference call and future communications will prove this out. But I'd also like to note that the results we present today are probably not very helpful for your understanding of Mosaic. Mosaic was launched as a new company on October 25, nearly 2/3 of the way through the quarter for which we are now reporting operating results. The numbers include a full quarter of results from the former Cargill Crop Nutrition, but only 39 days of results from the former IMC Global. They also include large merger-related charges and pre-merger hurricane costs. So that you can see -- as you can see, the results are not truly reflective of our ongoing business.

A brief review of our results is as follows: Net sales in the second quarter were $1.1 billion, compared to 700 million a year ago. The year-ago comparisons include only financial data for Cargill Crop Nutrition and are not meaningful for comparison purposes. Net loss for the quarter was $15.5 million. A result of purchase accounting adjustments and other business combination related costs, precombination hurricane costs and foreign currency exchange impacts. On a go- forward basis, reported results will obviously be an important way to monitor our progress.

Given the uniqueness of this quarter, though, I believe it's more important today to put the results in the larger context of where Mosaic is heading. I'd like to spend a few minutes talking about who we are and how we're structured. I'll then turn the call over to Larry for a detailed review of our financial results, and then I'll end the call by talking about our priorities.

Mosaic is a leading producer and marketer of concentrated phosphate and potash and nitrogen, all major crop nutrients. Our goal is to become the global leader in nourishing crops and to deliver distinctive value to world agriculture. By way of background, Mosaic was launched on October 25 and has revenues of nearly $5 billion. The merger resulted in a 66.5% ownership by Cargill, Incorporated, and a 33.5% ownership by the former shareholders of IMC Global. Our management team was selected from the best of both companies, as well as experienced outsiders. Our Board of Directors includes 11 members, 6 of whom are independent.

One of the major considerations in completing the business combination was that as a combined entity, we believed we could operate more efficiently and more effectively. As I said, the newly formed Mosaic that you now own is financially stronger than the predecessor public company. In particular, Cargill's contribution delivered assets generating revenues of more than $2.4 billion, with very little debt. Secondly, the Company is now more diversified than either company before the transaction and now includes the production of all 3 major nutrients, specialty products, plus a large international distribution business. And thirdly, the Company is a low-cost producer of potash and phosphates and nitrogen. And with the synergies from the combination, we'll continue to reduce costs particularly in our phosphates business.

As we began operations following the transaction, we started with a plan to reduce costs through operational excellence and by capturing cost synergies from the combination. In total, we expect to realize annual pretax cost synergies of at least $145 million by Mosaic's third anniversary in May -- end of May, 2007. With an estimated $22.5 million in the year that will end May 31, '05, $90 million in the second year. The full $145 million by May 31, '07. The synergies will come from savings in SG&A, plus the optimization of staffing in our phosphate operations where there was considerable overlap. About 70% of the synergy savings are over $100 million and will occur in our phosphate operations.

Operating margins will be a primary focus. Clearly prices are important, but our focus will be on the margins from each ton of fertilizer that we sell. This is why we're focused on becoming the lowest cost producer in our industry, reducing costs of mining and processing at every turn and why we'll operate our phosphate business to meet demand rather than flood the market with unwanted production. Mosaic is already one of the industry leaders in potash and is producing at near capacity rates and very attractive profit margins to fill growing global demand.

Before we get into the specifics of our business, I'd like to touch upon the overall market and discuss for a moment why we believe that the crop nutrient industry is poised for growth. Now after disappointing results in 2001 and 2002, worldwide demand recovered in 2003 and '04 and is expected to grow by 2% to 4% per year over the next couple of years. This increase in demand has resulted in improving industry fundamentals, higher prices and higher margins. Concurrent with the decrease in demand in 2001 and '02, the U.S. phosphate industry made appropriate adjustments, including plant closures. Currently the industry operates at above 90% of capacity and inventories remain in line with demand resulting in positive margins these last couple of years.

Similarly, the potash market awakened over the last 2 years due to growth and demand and resulted in substantially higher prices. The potash story is very exciting right now and Mosaic is capitalizing on it, operating at near capacity today. With that said, we believe our timing for completing this compelling combination is just right.

I'll now turn the call over to Larry for a more detailed review of our financial results and the outlook for our key drivers. Larry?

Thank you, Fritz. I will review our overall financial results for the second quarter, as well as by segment. As noted by Fritz, these results are not very helpful in looking at Mosaic on a go-forward basis, so I will provide some additional context that will help you with your models. Again, I'd like to remind everyone that while today's conference call includes full-quarter results from the former Cargill Crop Nutrition, it only includes 39 days of operations from the former IMC Global.

As Fritz already noted, our net sales were $1.1 billion, and we had a net loss of $15.5 million for the period. There were several significant events that led to this loss, including; 1, purchase accounting adjustments and other merger-related costs of about $30 million in pretax operating costs. 2, pre-merger hurricane related costs of approximately $30 million pretax. And 3, non-cash foreign currency losses of approximately $22 million pretax, mainly due to the strengthening of the Canadian dollar.

SG&A expenses were $45.4 million for the second quarter, an increase of $20.6 million compared with the prior year. This is due to the inclusion of the former IMC entities, as well as the inclusion of various merger-related expenses of $11.3 million. On a run-rate basis, SG&A costs are expected to be in the mid $50 million range per quarter in the second half of the year, including expected synergy savings and associated costs. Below the SG&A, line you will note an other operating expense item of $3.5 million in the P&L. This relates primarily to another pre-merger item, a $5 million charge associated with the closure of a Tampa GTSP plant last year.

Interest charges for this quarter were $25 million. Going forward, we expect interest expense of just over $35 million per quarter, including an amortization credit of about $16 million per quarter, due to the revaluation of IMC's debt at the time of the combination. On the foreign exchange front we had a non-cash pre-tax loss of $22 million, mainly due to the unfavorable impact of the strengthening Canadian dollar on the U.S. dollar denominated receivables of Mosaic's potash business. The Company fully hedges Canadian dollar cash transactions and hedged gains and losses are recorded in Mosaic potash's gross margins, but Mosaic does not hedge against non-cash U.S. dollar denominated receivables translation risk.

Mosaic's effective tax rate year-to-date was an unusually high 76%. This high tax rate is related to the strong contribution from Mosaic's potash business unit, which is taxed at high Canadian rates, and the inability to take full advantage of certain tax credits and allowances due to the historic low profitability in the phosphate business. Going forward, we expect the tax rate in the low to mid 40s, with significant improvement possible as phosphate profitability improves. Note that cash taxes in fiscal 2005 should be significantly less than the effective tax rate.

Equity income totaled $15.8 million after tax, compared to $11 million after tax in the prior-year period. The main contributors to this P&L line are our joint ventures in Brazil and with Saskferco in Canada. The numbers reflect an accounting change instituted as a result of the merger, which causes us to report results from one of our Brazilian joint ventures on a 2-month leg basis instead of on a current basis as was the case in the prior year.

Turning to our business segments, the potash business segment continues to be a star performer. The average sales price was $100 per short ton and volume was 1 million short tons, with a 39 day period for which IMC results were included in Mosaic's results from operations. Operating earnings were $23.4 million, including the adverse effect of $23.6 million in purchase accounting adjustments, primarily in inventory revaluation adjustments due to the combination. In 2003 this same business had an average sales price of $73 per ton, indicating the favorable trends in the industry right now.

The outlook for the potash business is excellent. For the second half of our fiscal year we expect potash production to be 4.5 million to 5 million short tons, which means our MOP operations will be producing at or near capacity. Potash inventories are likely to remain near or at record lows due to continued strong demand. The average sales price is expected to continue to rise. Mosaic has already announced a $20 domestic price increase beginning in mid-February and there have been price increases in several key export markets, such as China. We expect the average sales price to rise by $7 to $12 per ton in the second half, with the third quarter showing a more modest increase.

Mosaic's phosphate business recorded an operating loss of $24.8 million. As with potash, the earnings were reduced due to merger related expenses, such as $7 million due to purchase accounting adjustments, including the revaluing of IMC's inventory at the time of the combination, and also due to about $30 million in charges from 3 hurricanes that struck Mosaic's Florida operations in September and October, prior to the closing of this transaction. The good news for phosphates was the average DAP price was $202 per short ton, an increase of $56 compared to a year ago. However, raw material costs were also higher than the prior year, especially for ammonia prices, which were $55 million higher than a year ago. Margins, the spread between product revenue per ton and sulphur, ammonia and rock costs was slightly improved reflecting increased demand.

Despite this difficult quarter, we are optimistic about the phosphates business. Generally short-term, operational and cost issues in our phosphate business are greater than our precombination expectations. But so are the long-term profit opportunities. Including about $100 million in cost synergies savings over the next 3 years, leading to significantly better than earnings. Phosphate volumes will be lower than expected in January, due to the temporary shut down of our Greenbay, Florida plant in response to slow demand during the holidays, and a partial shut down at our new Wales plant for maintenance work. We believe there will be a strong domestic and international market this spring season, and our fourth quarter should show strong volumes.

According to Ferticon, an industry consultant, the Tampa DAP price for our third quarter is forecast to decline by $3 to $6 per metric ton, and to decline by an additional $10 per metric ton for our fourth quarter. For raw materials in our phosphates business, ammonia costs are headed dramatically lower. Mosaic recently settled its first half of January Tampa ammonia purchase price at $240 per metric ton, down $100 from the first half of December. To put this in context, a $100 per ton price decline in ammonia translates to approximately a $20 per ton reduction in DAP costs. Meanwhile, sulfur costs have become less volatile. We expect ammonia prices to remain lower for the rest of the fiscal year, while sulfur prices are expected to be about unchanged. So phosphate raw material costs are headed lower, and even with slightly lower DAP prices, as forecasted by Ferticon, gross margins may improve.

The offshore business is one of our business units that can be compared with year-ago results. Net sales here were $450.4 million, an increase of 26%, compared with a year ago. However, operating earnings decreased by $3.9 million, to $16.6 million. This business had lower volumes compared with a year ago at 2.5 million tons, but this was more than offset by higher prices. SG&A costs rose 49% due to combination-related costs and were the major reason for lower earnings.

This is a seasonal business and the second half will show lower volumes and margins than the first half. A key driver for this business is volume in Latin America and particularly Brazil. Fertilizer applications in the southern hemisphere countries are opposite those of North America and China. Our presence in these countries helps provide balance and reduce the seasonality in Mosaic's business results. Mosaic's nitrogen business showed a revenue decline of 27% to $51.1 million. This was due to lower volumes following a wet fall season in North America. However, operating earnings improved by 27% to $3.8 million due to higher prices.

Shifting away from our business units, I want to say a few words about the bond consent solicitation process which we just completed. At a cost to us of about $17 million, our bondholders agreed to eliminate or significantly modify certain restrictive covenants in our bond indentures. This will allow us to replace separate revolving credit facilitates for the former Cargill Crop Nutrition businesses and former IMC businesses with a new Mosaic revolving credit facility, and also give us the flexibility to more easily extract the synergies from the combination of the 2 companies.

Before I turn this back to Fritz for closing comments, note that we will file complete financial results, including our balance sheet and our cash flow statement in our 10-Q at the end of next week. For now, I can tell you that our debt to capitalization ratio at the end of the quarter was approximately 44%. Going forward, we will focus on cash flow generation and have designed an incentive compensation plan accordingly.

Finally, while we have given some guidance on many of Mosaic's the key drivers, we do not intend to provide guidance for earnings per share. We do plan to begin to discuss the 2006 fiscal-year outlook at our third quarter earnings call. We are also planning to have Analyst Day in Florida on April 7, that will include a visit to our phosphate plants and mines. And we suggest anyone who is interested put this date on your calendar. Again, that's April 7. Thank you. Fritz, back to you.

Thanks a lot, Larry. One thing before I conclude. In your remarks, Larry, you said the ammonia prices, which were up $55 million higher than a year ago, I think you meant were up $55 per ton over last year. Just wanted to clarify that for everybody.

Thank you.

Again, the combination between IMC Global and Cargill Crop Nutrition forming Mosaic was the clear highlight of this quarter, and we're very excited about our growth prospects. We are financially stronger and much more diverse. Our priorities for the rest of the year are quite clear to us.

First, we will dedicate and commit ourselves to completing the merger integration process and build the Mosaic team. Second, we will work to achieve our targeted levels for operating earnings, operating working capital reduction and synergy savings. Third, we will implement numerous action plans to reduce phosphate mining and processing costs. As we've stated already, this business segment will provide the bulk of our synergy savings. Fourth, we'll take the steps necessary to run our potash operations at full capacity, even as we seek incremental capacity growth opportunities. And finally, we will emphasize cash flow and use cash judiciously with the primary focus on strengthening our balance sheet to attain investment-grade debt ratings.

This business combination is clearly on track, providing -- proceeding according to the plan which we laid out over the past year. It's a difficult but rewarding task, and one that has this management team committed to accomplishing. Thanks very much. Now I'll turn it back over to Doug Hoadley, our Investor Relations Manager.

Thank you very much, Fritz and Larry. Operator, we will now open the floor to questions.

(Operator Instructions). Your first question comes from Don Carson of Merrill Lynch.

Thank you. Two questions. One on the financial front, will you be releasing any pro forma historical quarterlies before the third fiscal quarter release? I'm just trying to see if we can get some more useful financial comparisons. And then more fundamental business question. Fritz, the U.S. DAP exports on a calendar year basis in '04 were, I guess, down around 1.7 million metric tons to China down from about 2.4. Where do you see U.S. exports to China going and do you think that Mosaic will have to permanently idle additional capacity to bring supply in line with export demand?

Don, it's Larry. On the first question, yes, we will be releasing pro forma results as part of the 10-Q filing next week.

And with respect to the DAP exports to China, actually the last couple of months of '04, Mosaic was shipping a very heavy program to China to the NAMPGC organization, the co-op there. And we've renewed that contract, Phoscam [ph] has renewed that contract for the coming year. We see exports continuing to China continuing to be about the same level in calendar 2005 as 2004. As to idling capacity, I've indicated in my prepared remarks that as an industry leader, we will be producing to meet demand and not flooding the market with unneeded tons.

Just as a follow-up on that, you've got Greenbay down to manage inventories. How long would you anticipate that that plant is down? And was that more just a reaction to a somewhat softer than expected domestic fall season?

It was partly a reaction to the fall season and to the normal seasonal slowdown during the holidays. People don't buy during the holidays. They enjoy the holidays with their families. How long it should be down, we think that it will be down for the month of January and maybe a week or 2 of February. We're getting a lot of maintenance work done at the plant while we're down, readying it to resume operations. We think that, by the way, reduced command from that plant might have contributed a little bit to the dramatic reduction in the price of ammonia.

Thank you.

Yep.

Your next question comes from Mr. David Silver of J.P. Morgan. Please proceed, sir.

Yeah, I'd like to ask maybe a financial question then a business question as well. Larry, I was wondering if you could provide a little guidance on a couple of areas. Number 1, depreciation. And in particular, depreciation kind of on a run-rate basis going forward. I was also hoping that you might be able provide some balance sheet data, maybe the gross debt total at the end of the quarter, as well as maybe the net debt. I'll stop there and ask the next question after your response.

DD&A. On a run-rate base will be roughly $65 million to $70 million per quarter. In terms of the balance sheet question, on debt -- bear with me for just a moment, please. Total debt long and short term was just under $2.5 billion at the end of the quarter.

That would be the gross total?

That's correct.

And then net debt, is that available?

Net of cash, it would be $2.4 billion. Slightly under $2.4 billion.

Very good. I was hoping to get maybe your comments about phosphate demand out of India. So Cargill has a distribution business there, you have some assets on the ground and I guess there's a number of issues that are -- it's always complicated there. What might your expectations be for the Indian market for let's say calendar 2005, and in particular their appetite to import DAP as opposed to maybe continuing on the way they are currently importing the intermediates and the feed stock? Thanks.

Dave, this is Fritz. First of all, demand by farmers in India is very, very strong. We had a shipment, a trainload go from our port in Jamnagar up into the Punjab a month ago. It was greeted by 5,000 farmers who fought over the bagged DAP and the police were called. Demand is great, in other words. The policies of the Indian government are improving with respect to whether the country should import DAP or intermediate products. As you know in the past they have favored the import of raw materials or intermediate products by their differentials in the subsidies provided greater subsidies to their indigenous producers. Most recently they've made that subsidy the same for both imported DAP and imported raw materials and intermediate products. So now U.S. imports are competing on a level playing field with the local producers, which is good news for our industry. The bad news, if there is any, is that the levels of subsidy result in prices for imports that are below world market levels, and make it a less attractive place for exporters, such as the U.S. to ship to versus other markets. If they increase the amount of the subsidy a little bit or if ammonia prices in the rest of the world drop enough, the world market will -- world producers will be able to supply DAP into India at acceptable margins. So the outlook is cautiously optimistic based on really strong fundamentals within the country.

Okay. Thanks. If I could ask one other question. I guess you kind of have a tail of 2 segments here right now. You mentioned on the phosphate side you're going to be monitoring demand and producing accordingly. But in potash you mentioned you were sold out and the demand outlook remains good. So do you plan on some growth capital or some incremental capital projects to kind of give you a little bit of extra capacity there to meet further demand? And secondly, do you have some growth capital projects on tap in certain other areas? Thanks.

We do have -- we are looking at the growth opportunities at the margin in our potash business. We're look at all sorts of ways to debottleneck our existing plants, existing lines. We've got a few things that we think we will be able do. We haven't got any to the stage of announcing them, but we're working on them hard, and you might hear something from us in the recently near future. In addition, the capital focus will be -- outside of the potash business, will be on the capital needed to put in place permanent cost reductions in the phosphate business. And then a third priority will be some modest additions to our distribution businesses where we're already strong. For example, in Argentina where we're looking at a growth in our distribution business there. But those will be relatively smaller commitments of capital.

Okay. That's great. Thanks very much.

You're welcome, Dave.

Your next question comes from Bob Boyle of Green Markets. Please proceed, sir.

Actually, you've already answered my questions, so I'll withdraw that. Thank you.

Your next question comes from Edward O'Kine of Basso Capital. Please proceed.

I was wondering if you could comment on what your common stock dividend policies are going to be going forward?

We have no intention of paying a common stock dividend any time in the near future. As we've outlined, our priorities for cash flow will be to invest in some of the capital projects that Fritz mentioned and to manage our debt portfolio down so that we can attain an investment grade rating. Once we get to that point, then we can begin entertaining how to best return cash to shareholders if and when appropriate.

All right, so no common stock dividend until investment grade rating. Thank you.

Your next question comes from Jack Franky of Ducane Capital.

Thanks for taking my call. I just had a question regarding the nitrogen market and the recent pullback in nitrogen prices, and your view on it going forward.

If I understand your question correctly, Jack, you'd like our expectations on what we think nitrogen prices are going to do going forward.

And the reason for the recent pullback.

The recent reduction in price really begins with the fact -- or the view that we had, anyway, that ammonia prices were way too high and in response to those high prices, a lot of supply was coming to the U.S. And at the same time, we had had a very, very moderate, poor fall ammonia application season. Wet weather prevented farmers from getting their crops out of the field and supplying fall application ammonia. So supplies were building up, and in response to high prices at a time when demand was not very great, and it didn't taper off, prices didn't taper off, they dropped very, very precipitously over the holidays. Partly, I think we were one of the catalysts that helped that happen. The outlook going forward, I believe should be reasonably good for spring season in North America, in that we didn't get ammonia -- farmers didn't get ammonia put down this fall, didn't get nitrogen applied and they're going to need to do so before planting this coming spring. Given good weather for this spring, I think we should have a pretty good nitrogen season in North America and that should help drive price.

The other thing that drives price is natural gas. I'm cautiously optimistic as a buyer of natural gas for this winter, because we started off with a relatively mild winter and we still at this point in the winter have fairly good reserves in underground storage as a country, North America really, of natural gas, so if there is a real cold snap, like we're having in Minnesota right now, it shouldn't produce a huge spike in prices because the market thinks there's plenty of gas available to supply the needs of a cold snap. So we believe that we should see relatively moderate prices for gas, the feed stock to make nitrogen products.

Right. So you believe nitrogen markets still should remain fairly strong?

Relative to historic levels, relative to immediately past levels, no. These price drops that we've seen should continue at these levels. I don't anticipate a spike back up to the prices of December.

I got you. Thank you very much.

You're welcome.

You have a follow-up question from Mr. David Silver of J.P. Morgan. Please proceed, sir.

Hi. I'll preface my remarks, my phone was cutting in and out just a little bit. I was going to go back to maybe Fritz's comments about the pace at which you expected to realize cost savings from the merger. And I was hoping you could maybe repeat the first year target and the second year target. Then secondly, I was wondering if you might be able to comment on -- from my perspective I was wondering why some of the costs savings, some of the initial cost savings weren't going to be maybe a little bit greater than what you were indicating. In other words, my sense is once you do the combination, a lot of the overhead or SG&A savings come kind of earlier, rather than later. And I was just wondering, you know, why we couldn't expect maybe some front loading, I guess, in realizing the overall savings, you know, that you're targeting. Thanks.

Dave, I've been coached a little bit on -- in preparation for this call to always try to underpromise and overdeliver. We said at the very outset that our annual run-rate savings in the first full year would be $45 million, followed by $90 million, followed by $145 million in full years. We're in a stub year situation, because of the timing of the closing of the merger, so we've said $22 million for the first half a year. About half of the 45. And then moving on to 90 and 145, accelerating the timing of the overall synergy captured by about a half a year. And I think you can chalk it up to being conservative on this call. I will tell you for certain that the incentive plan in place for the Mosaic management requires a lot more aggressive capture of synergies and my team is here working on it right now.

Okay. So the first half number that you mentioned earlier was 22 million; is that right?

That's correct.

That was something that I might have missed.

That's correct. And it's basically having for the half of year the 45 million we said earlier.

And this might be an accounting question. But there's certainly going to be some cash outlays required, I imagine, to realize some of these savings, lease payments and things like that. Are those going to be run through the financials as they're incurred or will they be part of a one-time charge? How do you account for those or how do you anticipate accounting for those?

David, as you know, we have much less flexibility these days in how we account for those costs, so they will be run through the financials. We will try to provide you guidance on what to expect on what's actually occurred. Suffice it to say here, that the amount of savings expected in this stub year will be roughly matched by the amount that we'll be spending to help attain those savings. Of course, the savings we achieve are ongoing and annual in that the expenses will be one time in nature.

Okay. Thanks very much.

You have no further questions at this time. I'd now like to turn the presentation back over to Doug Hoadley.

Thank you very much. And glad you could all join us for our first earnings conference call and we look forward to further communications with you going forward. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes your conference call. You may now disconnect.