美盛公司 (MOS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to your conference call for today. I do apologize for the delay today. There was a technical difficulty on our side. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host for today's call, Mr. Doug Hoadley,. Please proceed, sir.

Thank you. And again we apologize for the delay. Welcome to Mosaic's fiscal 2007 second quarter conference call. Several members of our management team are here this morning, including Jim Prokopanko, our new President and Chief Executive Officer, Larry Stranghoener, Executive Vice President and Chief Financial Officer, Linda Thrasher, our Vice President, Public Affairs, and Rick McLellan, our Manager of North American Sales. Before I turn the call over to Larry for opening remarks, let me read our Safe Harbor Statement.

Statements made during this 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. These statements are based upon the current beliefs and expectations of The Mosaic Company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. I would like to point out the remarks made during the conference call are made based on information and understandings that are believed to be accurate as of today's date, January 29th, 2007. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is included in our press release issued earlier this morning and in our reports filed with the Securities and Exchange Commission.

Because of the time sensitive nature of this information, it is The Mosaic Company's policy to limit the archive replay of the conference call for a period of seven days. This call is the property of Mosaic. Any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of Mosaic is prohibited.

With that as important and quick background, I'll turn it over first to Larry Stranghoener, who will review our 2nd quarter results.

Thank you, Doug and good morning to everyone.

Before turning to our second quarter results, I want to address our delayed filing. As most of you are aware, we implemented a new Enterprise Resource Planning system in October, 2006. This was a final and critical step in our merger integration process. In accomplishing this, we have changed organizational structures, outsourced key activities, and dramatically reconfigured and streamlined key financial and commercial processes. In addition, we continue training literally hundreds of employees to use entirely new systems and processes, while still continuing to make and ship our products and serve our customers.

Our new ERP system is working well on many fronts, especially with respect to customer facing activities, including regular sales transactions. However, our first financial consolidation under the new system was challenging. We still have additional steps to take to ensure we reach steady state, including some system modifications, additional training and improved processes. We expect that it will get easier to complete the financial consolidation each quarter going forward. I'd like to take a moment to publicly acknowledge and thank the many talented and dedicated Mosaic people who have worked through evenings, weekends and holidays to implement these new systems and processes, and allow us to report our numbers today and file our 10Q with confidence either later today or tomorrow.

I will shift now to address some highlights from our Fiscal 2007 second quarter financial results as well as update certain elements of our financial guidance. Note first that because of our delayed filing this data pertains to a quarter that began five months ago, at a time when supply/demand fundamentals in our industry were very different than they are today.

In Phosphates especially, sales volumes were weak as the quarter began, and we curtailed production accordingly. We accelerated plant turnaround plans, and kept Faustina production off line following the explosion at our ammonia plant there. Along with substantially higher natural gas costs compared to the prior year and other factors, this led to higher production costs.

And in Potash, we slowed production at our Esterhazy mine during the quarter as we finalized our expansion project there, negatively impacting production costs in that segment, as well. With our plants and mines now generally running full out, we expect improved cost performance in the second half of the year.

With that as backdrop, let me turn to some details from the quarter. Our net earnings for the second quarter ended November 30, 2006 were $65.9 million, or $0.15 per share. This compares to reported net earnings of $55.0 million, or $0.13 per share, for last year's second quarter.

Our net sales increased 2% in the second quarter to $1.5 million in the second quarter of fiscal 2007 and operating earnings declined from $139.3 million to $90.7 million.

We had non-cash foreign currency transaction gains of $19.8 million for the second quarter compared with a loss of $13.7 million for the same period a year ago. This was mainly the result of the effect of a weaker Canadian dollar on U.S. dollar-denominated intercompany receivables held by Mosaic's Canadian affiliates compared to a stronger Canadian dollar in the same quarter a year ago.

The Potash business had operating earnings of $78.2 million in the second quarter compared with $111.3 million a year ago as a result of lower selling prices and higher production costs. As I mentioned, these higher costs are related primarily to preparations for our expansion at Esterhazy. We also had a turnaround at Belle Plaine during the quarter.

In addition, Potash incurred a $6.4 million unrealized mark to market loss on derivative contracts for the quarter compared to a slight gain during the prior year period. .

The Phosphates business had operating earnings of $5.1 million in the second quarter, which is lower compared to $41.1 million a year ago, resulting from lower selling prices and higher costs. As I noted earlier, cost drivers included production curtailments, accelerated turnarounds, repair costs associated with the Faustina explosion, higher natural gas costs, and idle plant costs associated with our May, 2006 restructuring actions. We are optimistic that these costs will decline in the second half of fiscal 2007, and understand full well the imperative of improving our phosphate cost structure.

On a brighter note, we are achieving one of our primary goals in fiscal 2007 - cash generation. For the second quarter, cash flow improved considerably. Free cash flow, which is cash flow from operations less capital expenditures, was $178.2 million in the first half of fiscal 2007, up from negative $20 million in the same period last year. (Note that the weak prior-year results included a $94 million payment to settle our rock sales contract with USAC.) Because of our strong cash flow, we are no longer borrowing under our primary short term credit facility - in stark contrast to last year at this time - and net debt defined as total debt less cash, has declined from $2.4 billion at the start of our fiscal year to $2.2 billion at the end of the quarter.

Our total debt stands at $2.5 billion as of the end of the quarter, resulting in a debt-to-capital ratio of 41.0%. Note that cash flow continues to be strong thus far into the second half, and we should be positioned to pay down a meaningful amount of debt by year end. As many of you are aware, we also completed our refinancing on December 1st, 2006, another significant milestone for the company. This refinancing will reduce our cash interest costs by approximately $25 to $30 million per year, although for accounting purposes the quarterly interest cost on the income statement will remain around $40 million per quarter. This refinancing also provides us with a better debt structure, a lengthened debt maturity schedule, and more operating flexibility.

Mosaic's selling, general and administrative costs were $70.4 million in the second quarter, compared to $68.0 million for the same period a year ago. The increase was primarily due to higher share-based compensation expenses as well as implementation expenses associated with our new ERP system.

We are disappointed having to raising our guidance on SG&A costs for fiscal 2007 to a range of $260 to $265 million, - an acknowledgement that it is costing more money and taking more time for us to achieve steady-state business processes and a robust internal control environment.

For the second quarter, our effective tax rate declined sharply to 31.9% compared with 48.9% a year ago. This change is primarily the result of a reduction of the Canadian corporate tax rate, and less impact from certain losses without a tax benefit. For Fiscal 2007, we have lowered our guidance on the tax rate to the 35% to 40% range, based on our expected operating results and business mix, but excluding the one-time benefit reported in our first fiscal quarter. As I have mentioned in the past, we have a large amount of net operating loss carryforwards, which will effectively eliminate nearly all U.S. cash taxes for several years. This will not be evident in our effective tax rates, but certainly will be apparent in our cash flows.

Our equity earnings in non-consolidated subsidiaries were $15.4 million for the 2nd quarter, an increase of $2.5 million compared with last year. We are raising our guidance on equity earnings to a range of $30 to $35 million, as Saskferco results have been stronger than expected. Saskferco continues to be an excellent business partner, and is producing outstanding financial results this year.

Finally, second quarter capital expenditures totaled $29.4 compared with $91.0 million a year ago. We still expect to spend about $250 to $290 million on capital for fiscal 2007, which is down significantly from $390 million last year. With that as a recap of our second quarter results, I'd like to now turn to Jim Prokopanko to discuss our business outlook.

Thanks Larry. I would like to begin my comments with an update about our Esterhazy mines. I visited the mines last Thursday - touring both our above ground infrastructure and the underground workings. I visited the above-ground grout injection wells and brine disposal wells currently being drilled, I went to the shore of the underground reservoir area where the brine inflow is collecting and I toured some of the workings that have been dewatered in the last few weeks. I came away impressed with the team working to stem the inflow and dewater the mine, and very encouraged that we can handle this new brine inflow. We have a dedicated team working very hard on this comprised of experienced Mosaic employees from a multitude of disciplines, as well as, a number of world renowned mining experts. I visited with the outside contractor who recently completed 3D seismic imaging of the mine site along with individuals interpreting the seismic maps -- they believe that they have pinpointed the inflow area. We are already drilling wells and will be injecting calcium chloride to grout the inflows soon. We've also commenced drilling new wells for the injection and disposal of the brine that is being pumped from the underground workings. All of these actions are going to lead to additional estimated costs of $20 to $40 million in the second half of fiscal 2007, a portion of which will be capitalized. We'll update you as soon as more details are available. It important that I point out that Esterhazy potash production has not been impacted by these inflows and that production is currently at record levels following our recently completed expansion.

Now let me turn to the outlook. What a difference one quarter makes. In our last earnings call, we noted the softness in the domestic sales demand, especially for Phosphates. However, this situation changed dramatically for the positive in November and has continued over the last two months. U.S. farmers had a late fall, due to wet weather in the Eastern Corn Belt. When farmers got their crops off the fields and into the bins they began focusing on the 2007 spring season. It was then they saw corn prices at 10-year highs of above $3.60 per bushel, or $1.30 higher compared with year ago levels. This quickly translated into increased demand for fertilizers, at a time when dealer inventory levels were low. Corn prices have climbed to around $4 per bushel over the last two weeks, further improving on-farm economics.

The agricultural sector fundamentals are very strong and we are forecasting corn plantings to reach 85 to 88 million acres this spring. Current corn prices suggest plantings at the high end of this range. The challenge is whether farmers can find this many acres for corn even though market signals call for them. As $4 corn attracts acreage away from other crops, like soybeans, prices for these crops will also rise.

As a result, our customers are showing increased confidence in long term agricultural fundamentals.

The need for increased yields is expected to result in a recovery in crop nutrient application rates. Historically, whenever corn prices have increased above $3 per bushel, nutrient application rates have also increased - which should have a far greater impact on fertilizer consumption than increased acreage alone. We are currently forecasting a recovery in total U.S. phosphates and potash demand by 10% to 11% for the fertilizer year ending June 2007 with stronger growth expected in the second half.

North America is not the only region experiencing a robust outlook. Steady increases in population and solid economic growth worldwide are boosting the demand for food. In addition, nearly every energy-deficit or grain-surplus country is developing a biofuels industry in response to persistently high energy prices. Just back from a trip to Asia, Jim Thompson, our head of Commercial Operations had one comment: "India is on fire." Demand is very strong in India due to excellent on-farm economics.

The Brazilian outlook is also improving. With the recent rise in soybean prices, optimism is returning to the Brazilian market. We're forecasting that total Brazilian fertilizer consumption will be 22.6 million metric tonnes, an increase of 12 percent and almost the same as the 2004 record. The total planted area is expected to be 61.8 million hectares, up from 3.5 million hectares at the peak in 2004. We expect about 3 million hectares of this increase will come from converting pastures, and the remainder will be lands that were opened, but not yet planted. In fact, Latin America as a whole looks to be a strong market in 2007. This improved outlook in key offshore markets bodes well for summer fertilizer demand.

Turning to the Phosphates outlook, inventories in the U.S. were at 20-year lows at the end of December. Mosaic's inventories are lower than optimal levels, causing some logistical challenges. We expect MAP and DAP inventories to remain at or near these low levels through calendar year 2007. Currently, we have a large percentage of our forward sales for the North American market booked through early spring. We still expect our fiscal 2007 Phosphates sales volume to be 8.5 to 9.3 million tonnes with stronger second half North American sales.

Clearly, it is a bullish market in phosphates right now and DAP prices have increased by about $20 to $40 per metric tonne over the last two months. This has helped offset the escalation in ammonia prices, which are up by about $50 to $60 per tonne over the last two months or an effective DAP cost increase of about $14 per tonne. Our margins are expected to improve in the second half of our 2007 fiscal year, based on higher phosphates prices, lower sulfur costs, and reduced production costs.

For potash, we continue to forecast sales volumes that will range from 7.7 to 8.1 million tonnes in fiscal 2007, which is unchanged from prior guidance. This compares with 6.5 million tonnes in fiscal 2006, an unusually slow year due to protracted negotiations between Canpotex and buyers in China and India. Canpotex has not yet entered into a new contract with the Chinese for calendar 2007. But we are not expecting a much of a delay as last year.

We are forecasting total North American potash consumption to recover by about 11% for the current fertilizer year. However, inventories were extremely low at the beginning of January and industry shipments will need to recover by 25% to meet the demand growth expected to the end of the fertilizer year.

Mosaic raised its North American potash prices by $5 to $8 per tonne in October and has raised them an additional $10 per short ton in early January. In addition, we expect to have higher production rates in the second half of fiscal 2007 which should also help improve our margins. Though I will note again the higher costs we expect to incur in mitigating the brine inflow at Esterhazy.

It's hard not to get excited by what's ahead in the agriculture markets and the impact on the fertilizer industry. In order to fully capitalize on the strong industry fundamentals, here is what we will be focusing on for the remainder of the fiscal year. First, we are working to improve our focus on the customer. I'll be with over 160 of our top customers later this week when they join us for Mosaic's annual AgCollege, which is a major customer event. I'll get a chance to talk with our distributors and dealers about how Mosaic can best meet their needs. Second, we'll continue to make progress on generating cash and improving our balance sheet. So far this year, I'm pleased with our results and this remains a key priority. Third, we clearly need to make progress on our cost structure and underlying operating discipline. I see much opportunity to improve business processes throughout the enterprise and impact our cost structure and relationships with customers and vendors. Finally, I have initiated a project that will have us sharpen our strategic focus and develop a compelling vision for how Mosaic will create value long term.

In concluding - I am excited and feel fortunate to be leading The Mosaic Company at this important and promising time. Industry fundamentals - on the farm, in the crop nutrition industry and the ag sector in general are benefiting from strong and growing global demand for food, feed, fiber and fuel. These improved fundamentals provide a strong foundation upon which The Mosaic Company can thrive.

As employees and shareholders of The Mosaic Company - we should feel proud about this enterprise serving a noble and necessary purpose - namely - providing the means and methods to feed the world's escalating demands for human nutrition, in addition to meeting the explosion of demand of corn and other crops for biofuels as an alternative energy source. I have a strong team of highly engaged employees leading Mosaic that are driven to improve and grow the business and deliver increased value to our shareholders.

With the merger integration of IMC Global and Cargill Crop Nutrition largely behind us - we are well positioned to move on to our next phase - that is - to apply our energies to focusing on our customers, pursuing operational excellence, reducing our cost structure and creating value for our shareholders with one of the leading crop nutrition companies in the world. As fortunate as I feel to lead a company as well positioned as The Mosaic Company - I fully understand the challenges before me and the expectations our shareholders have for their investment in Mosaic. I have every intention of making good on these challenges and meeting our shareholders' expectations. Thank you.

Thank you Jim. Now the operator would you please open up the phones for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Don Carson of Merrill Lynch. Please proceed, sir.

Thank you. Jim, a couple questions. One, you mentioned you're sold out in phosphate or you've sold forward quite extensively. What impact does that have on your pricing leverage? Or asked another way, we saw transaction last week at $2.79 FOB Tampa, when will you realize that price? Is that something that's three to four weeks out in the future? Wondering when we can expect these improved prices to hit the bottom line and make a similar comment on Potash. And then just one question on Brazil. What's the earnings potential for your offshore business if we get back to 2004-type conditions in Brazil? Which you indicated we should see at least based on your acreage planted outlook.

Okay, yeah, two questions. First, the potash phosphate pricing. You're right, Don. We are sold through into early spring. And that's been at ever increasing prices over the last as we've seen the last six to eight weeks. So, no, most of the prices -- most of what we have sold is not at the new current prices, but we will start seeing increased margins as a result of higher prices trickling in on the third quarter and the fourth quarter as more is sold at the higher current prices. So we are not sold out. We have product to move and sell, but we are well positioned with forward sales and getting those logistics into place now. And I would say that is a fair comment for both the phosphate and potash. We have more of the phosphate sold into spring than we do have of the potash.

Second, if that answered your question ...on Brazil, we are looking for a considerably improved farm market fundamentals in Brazil. Higher acreage planted. And higher phosphate prices and potash prices going into that marketplace. We haven't -- I haven't seen those numbers pencilled in for forecast for the next year.

And is Brazil recovery more of a fiscal '08 event for you since most of that will start over the summer months?

We are going to see some of it coming now. Fertilizer sales will start as the harvest is now getting into full pace in the -- in Brazil February, March, we really get into the midst of it. Then the sales will be taking place in March. We will see some of it this year and we will have a strong summer as a result.

And just a clarification on the forward pricing, so basically what you have sold forward you locked in the price on that?

Much of it has been priced as we have made the sales and committed to the sales, yes.

Thank you.

Your next question comes from the line of Mike Judd of Greenwich Consultants. Please proceed, sir.

Good morning. A question about MAP and whether there is a more of a preference for MAP this season in your opinion versus DAP given the increase in prices of ammonia whether you seen a pickup in volumes there? And just a follow-up of the Canpotex -- when do you expect we will see notice in terms of the contracts there?

I will answer the Canpotex question. Then I'm going to turn it over to my colleague Rick McLellan, North American sales leader to address the MAP question. We don't know when we will see it. You just can't tell when we were negotiating -- when negotiations are going on with the Chinese. What we do know is that the Chinese market is carrying a considerably less potash going into this coming year. We think the best we can judge, they have one-half of potash carry-over at this time that they did last time. The inventories are that much lower.

And we also received feedback from our customers that they do not want to go through what they went through last year until June or July before we had a contract and shipping taking place in August. That is problematic with logistics, getting product through that large country and into the warehouses. They tell us they motivated to do something earlier and we believe the supply and demand situation is such that they do have to do something. So I don't see this happening carrying on anywhere near as long and we would like to believe we will see it happen in the next couple week. But we just can't tell. Sorry.

Rick, will you address the question on demand that we are seeing for MAP?

Yes. Good morning. We clearly are seeing more demand for map. Part of this is the impact of some sales programs we put in place approximately 16 months ago that focused on us selling more MAP into the North American market. Those have been successful and now we were working on the execution of making sure we get the product that people are wanting into the right place for this spring.

Thanks for the help.

Operator?

Yes, sir. Your next question comes from the line of Edlain Rodriguez of Goldman Sachs. Please proceed, sir.

Good morning, guys. One follow-up on the MAP and DAP prices. As you've noted, no deal on the upswing. If ammonia prices start to decline, do you think you can keep the upslide pricing momentum and how high do you see those prices going?

The first I am not going to be able to comment about where we see the prices going. We have expectations that there is upward capacity in the pricing. And I think we are now at a point where with phosphates supply and demand that we have somewhat decoupled on the downside with ammonia, that there is only so much demand -- only so much supply of phosphates and I think we are going to have an extraordinarily strong season in North America that higher or lower ammonia prices will not impact what can be produced in North America. North American markets producing as much as they can going into the season. And we are working very hard to meet the demand that's ahead of us. No, I don't see much downside of phosphate prices on account of reduced ammonia prices.

Okay, good. And also last week you talked about logistic issue such as transportation that could potentially impact the spring season. Can you elaborate on that? What are you fearing?

Sure. I will give you a response and then if Rick wants to add anything he can. We had this delayed first quarter, Mosaic first quarter, June, all the way through September. It just was very weak demand in addition to what we believe was low inventories in the dealer and distribution network with the high prices on corn that emerged in September and not really reacted to by farmers until October, November, we are having to move more than we normally would in the last six months -- eight months of the year than is typical. We see it will be challenging with rail, with barge -- and given what was until November low in-country inventories. There will be real challenges to getting everything that's moved that we believe will be required to grow the kind of crop that the market is demanding. Railways are attuned to this. The barge companies are attuned to this. We are encouraging distributers distributors and dealers and we are aware they don't want to get stuck for lack of freight, so we are seeing good movement in fertilizers right now. Rick, you want to add something to that?

I think the question relates to part of a presentation we made last week. What we experienced in the first six months of the fertilizer year was the lowest volume of shipments of dry fertilizers that we have seen in the last five years. If you equate to the big crop that we had facing us, it means in the last half of that year the half heading up to the spring, we will have to see extremely large shipments. In fact, 15% higher in the products we looked at than anything we've seen in the past five years.

Okay. Thank you.

Your next question comes from the line of Marshall Reid from Banc of America.

Morning. On the phosphate guidance I think your outlook suggests 13 to 20% decline in volumes the fiscal year. But you were down just 6% in the second quarter and higher domestically in the second half. Can you break apart your guidance a bit? Is it lower exports that are dragging down the volumes?

I will repeat, Marshall, that we are facing very strong demand for phosphates. We expect to see a strong summer export season. However that may not translate into higher shipments in the second half of our fiscal year. We are going to be selling everything we can produce in the domestic North American market.

Okay. And, Jim, you said you were very encouraged you can handle the inflows at Esterhazy. Have you made some progress since the announcement? And with the measures you're taking, can you talk about your inflow target there and what amount of water do you think will be manageable over a long period of time?

Our inflow target is zero. [laughter] And that's wishful thinking. We are approaching this with two measures. One is to increase the water we pump from the brine inflow that we pump from the mine. We have a capacity to produce, pump 6000 gallons per minute. This number, the amount of inflow has ranged. We have had a very high range of anywhere from 2000 gallons per minute to 12,000 gallons per minute over the recent prior to this inflow. So it changes with the geology and the water pressure. So we have a system that we do keep ahead of the inflows. We pump 6000 gallons a minute is our capacity. Right now we are working first to increase that pumping capacity in a variety of methods, and it's a bit of a long chain from pumping it underground to pumping it to the surface, getting it across surface to a disposal well. And that is happening right now. We've acquired more pumping drill rigs. We are drilling more disposal wells. And that is moving along quite promptly and we think we could get the pumping capacity improved considerably soon.

As far as the more sustainable piece that we want done is to clamp off the current inflow which our recent press release came out that we expected was between 20 and 25,000 gallons per minute. That is -- again historically we've seen inflows as high as 15,000 gallons per minute at the traditional inflow site. So this is a good bit higher, but we are confident we are going to get the inflows back down to confident we are going to get the inflows back down to what I would call the historic ranges and we would be real comfortable with none, but we don't believe in the near term that's practical. We were looking at a variety of alternatives that may be able to take it down, conceivably the far less than is what historic, but that will take a little while. Our goal and our practical target is to get it down to the traditional levels and that we should have a sense of being able to do that. But that's weeks if not months.

And one last question on phosphates, with prices at record highs, can you talk a little bit about price elasticity and demand. There is a concern there that farmers will cut back on application rates if prices get too high or corn values in such that it's not a real concern right now?

I would say simple answer at $4 corn and $7.50 beans, this is not show up -- it's a blip on the radar for the farmers' net returns. We are not concerned about the elasticity at these kind of levels.

Great. Thank you.

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

Hi, good morning. I was hoping to maybe you could provide some additional commentary on India. You mentioned quote-unquote, it's on fire. I consider it kind of the key swing market for phosphates the last few years. I was wondering apart from the strong demand from the farmers, do you see or did Jim see a willingness on the part of the government to kind of support the ag sector to increase their fertilizer purchases. And I'm wondering if you're signaling that DAP imports might be greater than in the past couple years. And if there is any early read of the PhosChem negotiations. Thanks.

First the farmer demand and just the in-country demand for food products following the drought crop, wheat crop == drought affected wheat crop in Australia, we have seen an increasing demand of food in India. We have seen the Indian wheat stock carryovers and this is a few weeks old down at about 5% on -- 5% of carry-over. Demand carry-over. So they are low in terms of food stocks and this is what is driving the strong farmer economics. The tightening world supply in phosphates is having its effect and demand increasing. So this coming year although we don't see appreciable increase in phosphate demand, we have been seeing strong underpinnings in pricing of phosphates in India. The government is facing -- it's a considerable part of the government's expenditures and I think we are now at a point where the Indian government has to look at the practicality of really continuing subsidies in light of farmers doing particularly well and the fertilizer companies doing well. Is it really necessary to support those industries?

Dave, for a little added color, it's Larry, we saw very strong import demand in India just in calendar 2006, up substantially from the prior year and our comments are to suggest that we could continue to see imports at something of those high levels of calendar '06 again in calendar '07.

Okay, thanks. Could I just ask, one thing that's kind of curious to me has to do with your mark to market derivative results. I'm assuming most of your mark to market derivative results relate to natural gas. And I noticed that between your phosphate and your Potash segments one had a meaningful loss from the mark to market. The other had a meaningful gain. Could you just kind of clarify why that's the case?

David. In fact, we have significant derivative contracts on foreign exchange as well. So I'm just digging for some notes here. The big part of the difference would be the effective derivative mark to market on foreign exchange contracts more prevalent in Potash than in Phosphate.

Okay, thanks. That makes sense. Great.

Your next question comes from the line of Chris Summers of Greenlight Capital. Please proceed, sir.

Hi guys. I wanted to better understand what your potash philosophy is given, one, the Saskatchewan tax breaks incentives to increase capacity there. And then secondly I guess Potash Corporation talks about this long-term supply and demand disruption in potash over the next three to five years, they are the only ones out there with incremental capacity. Wanted to hear how you plan to respond to this and what your three to five year game plan is in this segment. Thanks.

We do have capacity to expand. First, we have at our Esterhazy mine we have a project that was just completed. $35 million project to expand the facility 450,000-tons per year and that's gone extraordinarily well for us and we are going to be posting numbers better than that. We are also currently in the process of expanding capacity at our Belle Plaine and Colonsay mines. The Colonsay expansion is expected to be approximately 200,000 tons per year and is currently targeted for completion in 2010.

The Belle Plaine expansion will -- we have a two stage expansion project. The first phase is expected to take capacity up by approximately 120,000 tons by 2010. Also have some energy savings that that will result from that. And the second phase is currently planned for 2012 with an additional capacity of about 360,000-tons I think it is. So we do have room both at Belle Plaine and Colonsay. 200,000-tons at Colonsay, and so net by 2012 another nearly 500,000-tons at Belle Plaine. So there is capacity to expand and we can be right alongside PCS in expansion efforts of potash capacity in Canada.

So where does that put your targeted production capacity in 2009 and 2012 respectively?

Until we sort of test out the Esterhazy I'm reluctant to say what that number is. We will -- we will get that -- and it will be a lot of production capacity but it's also going to be market driven and we will bring on capacity as the market requires the capacity. But we do have -- we do have room to add a good percentage more production as the market requires.

Did you say you could do 9 million-tons in 2009?

We are doing that now. And we can do more than that.

Okay, great. Thank you very much.

Your next question comes from the line of Brian Yu of Citigroup. Please proceed, sir.

Hi, Jim, could you talk a little bit about the international volumes for your Phosphate business? I know you touched on North America. But it seems like international is a bigger part of your business, maybe 60 to three-quarters of phosphate sales.

Yeah, the 60%, that's about right. I think 59% I think is our export numbers. And that's a -- we have been looking and quite intentionally building our North American share and we were quite successful in that. International still remains an important part of our business. And just as -- my observation is -- that just as it took a couple of months for the North American market consumers to realize what's happened with grain pricing and the consequent impact it will have on fertilizer demand. We are seeing the light go on in international markets that just a minute here grain prices are up, North American demand is increasing. And that is going to, frankly I think, take some phosphate fertilizer that was traditionally shipped abroad will be consumed in North America. That goes for Brazil. Will be consuming more phosphates. India we think will be, with time, consuming more phosphates. What is the counterbalance is some of the countries that are producing more in-country. But with these current grain, oil seed demand forecasts that we are seeing, I think we will have to all work hard at finding the capacity to meet the increasing demand. So right now I think we could see -- no doubt will expect to see a shift in where that demand will occur. But have I little doubt that -- and where we will ship to. But have I little doubt that we have a couple years ahead of us of solidly increasing both domestic and international demand.

How far --

Just to be clear, this is the second question on this topic. We will ship a greater proportion of product in the second half of our fiscal year to the North American market than historically is the case. So, strong North American shipments, less strong export shipments in the second half of this fiscal year. Then as Jim has said, we look for a strong summer season as we head into fiscal 2008 with respect to export volumes.

Okay. Have you booked the international shipments as far ahead as you have with the North American?

No. Nothing like what has been experienced in North America and I would say its only been the last three weeks, two weeks that the international market has become active and people preparing for their coming growing season.

Thank you.

Your next question comes from the line of Christine [McDuffy] of Goldman Sachs. Please proceed, Ma'am.

Yes, hello. I was wondering why your natural gas costs were higher versus last year. Was it related to hedging?

Yes, it was. Last year we had the benefit of having locked in attractive natural gas prices with our forward contracts at that time.

And this year you weren't as hedged going forward?

That's correct.

Okay. And second, what were the repair costs associated with your ammonia plant in Faustina that hurt your operating earnings?

The repair costs were in the mid- single digits. Millions of dollars.

And lastly, I noticed that in your operating earnings segment your corporate line item was zero when in the past we've seen it range from negative $12 to $17 million. Is this a change in your accounting?

There was no change in accounting, Kristen. I am hard pressed to give you an answer on the spot and I will have to give back to you on that and I don't know what the answer to that is.

Okay, thanks. That's all I have.

Thank you.

Your next question comes from the line of Robert Reitzes of Bear Stearns. Please proceed, sir.

Hi. I've got different types of questions. One, regarding, do you have any excess in phosphate rock? Do you guys use all your phosphate rock internally or are you still exporting that. If so, how much? What's going on there?

It's all internal use. We have our proven reserves and we have limited any sales externally and using all of that with internal production.

Okay. And you don't have any designs to ship phos rock around the world or any place?

Not our plan to do that.

Okay. Second question is, obviously one of the things that makes your industry more let's say optimistic is not only this year but the following year, what's your guess? Again, what's your best estimate assuming this year comes in as you said -- I'm not asking for earnings. But what do you see demand? Do you see demand stronger next year? As strong? This is a multi-year deal with corn and all the other types of grains? Or do you see this is a blip and then we go back? How do you describe it?

Very unique. Very different circumstance here. We have first time in my quarter of a century in the ag business to see multi-year forward prices on corn in excess of $3 and approaching $4 -- let alone $3, now it's almost $4. And we see soy beans in that $7 range for multi-years. And that what is unusual is that where we had spikes of these and higher prices in the past they have been supply driven spikes where there has been a crop failure and drought has reduced production someplace. This is demand driven. Highly unusual. I don't know if I could go as far as saying a historic change in the supply and demand fundamentals of grains and oil seeds. So we see this going on. Now, add to that as we have sold some fertilizer before the peak of the markets. Some phosphates. Farmers as well, they started selling their crop all the way from $2.50 all the way up. I would say that the lion share of the crops that the farmers sold, the corn in particular, was not sold above $3.50 or even $3. Farmers see that and they are locking in with futures contracts. For the coming year this is going to be the first year that the farmers fully get the advantage of these high prices on a full years crop. So I think it's next year demand-wise could be better than this year for everybody in the ag economy.

Okay. So you think next year could be better than this year?

[inaudible] If creeks don't rise, yeah, I think we are going to be fine and do better because again farm cash flow will even be better this year or next year, I should say, than the one year we were just ending.

All right, thanks for your help.

[OPERATOR INSTRUCTIONS] Your next question comes from Seth Harvey of UBS. Please proceed.

Hi, good morning. It's Bill Hoffman actually from UBS. Just a couple other questions on the Esterhazy inflow situation of brine. I want to get a sense of -- you know, you talked about the flow rate of 20-25,000 gallons a minute. Wanted to know if that's a relatively consistent range and I know it varies. But is it growing and increasing the flow rate in? And how do you judge that?

It's a good question. And I'm glad you did ask that. 20, 25,000GPM, it could be lower where we had some evidence that may say it's lower than that. We've had geologists and this is a very uncertain area, we had geologists that say the Dawson bay deposit that is delivering the inflow only has a capacity to deliver 15,000GPM. We just don't know for certain. We take some measurements on -- at the beach area and forecast how much of the mine is being filled with the brine. And we come up with an approximation that we don't believe it's increasing, first of all, because of water pressures in the monitoring wells. So we think we are getting either getting to or have been at a steady state. But is it 20? Is it 25,000? Or 15,000? We think it's toward the lower end but can't say for certain. We don't see the -- we don't think it's increasing but this is all conjecture at this point.

And just quickly just to follow that, if you are successful at plugging this entry point, can you from a geological standpoint, can you? Is there other points of weakness or where the pressure start to build back up again you have issues in other parts of the mine?

Sure We have a series of monitoring wells around our property in the mining areas and that gives us a signal that there has been a -- when the water pressure in the monitoring wells drops we know that water is flowing into the mine someplace and that's how we detected there was an issue here in the first place. What has been very helpful in this case is the 3-D seismic imaging that we have been doing. There is seismic imaging for a number of decades, but the information you get now from the current imaging is really quite remarkable. And we believe with the very extensive imaging that we undertook in December we have some better ideas where the risk areas are and where they are not. That is what helped us identify this being in an area that we didn't anticipate and we identified a possible fracture in the geology. So going forward it's a large area. We -- 3,000, 3500 feet underground and it's tough to find out where that is but technology continues to improve. We have better information. I feel we are far better equipped to both anticipate and to mitigate where those -- where that may happen. But we could get it and it's possible we could get an inflow in another area that we weren't anticipating just as it happened this year. But I think we were getting ahead of it now.

Thank you. That was helpful. And just one other question. You mentioned the Faustina costs in the second quarter being mid single digits for repair costs. You help us with what the lack of absorption/idle times were in the second quarter and how much we expect to see here in the third. Want to help us quantify.

Just to be sure the repair costs referred to the Faustina plant and not to the Esterhazy situation. I want to make sure everybody understands that. We'll be incurring costs with Esterhazy with respect to this inflow that Jim described earlier. The assorted different cost drivers that affected the Phosphate business in the second quarter collectively added up to a very significant number individually ranged anywhere from a couple million to as high as say $10 million.

Okay. And in the third quarter?

In the third quarter we would expect to see substantially improved cost performance recognizing that a number of the costs incurred in the second quarter related to events in the second quarter. Turnarounds, the Faustina plant shut down, lower production rates, the Faustina cost of repairs and so on. So we expect with the absence of many of those costs in the third quarter and fourth quarter, gross margins should improve significantly in the Phosphate business.

Thank you.

By the way, a follow-up on Kristen McDuffy's question if she is still here. I think the biggest factor explaining that corporate segment improvement relates to profit in inventory. We need to eliminate profit in inventory that is sold from one Mosaic unit to another before it gets to the end customer with inventories down so significantly we had much less profit in inventory to eliminate compared to last year.

Operator. We are going to have time for one more call. -- or question. Sorry.

Thank you, sir. Your next question comes from the line of Bill Young. Please proceed, sir.

Good morning. Couple quick ones here. Jim, I think you mentioned as the price goes up for the commodities, the grains, the intensity of fertilizer use can move up as well. Speaking for potash and phosphate, a shift from soybeans to corn, if you forget the intensity issue, shift from soy beans to corn, what is that going to do for the demand for phosphate and potash? I can understand definitely not increase the demand for nitrogen.

That's good. You know something about your agronomics. Soy beans and corn uses more potash and -- a little bit more potash and phosphate. We expect that, our estimates are that another million acres of corn that will come from soy beans, and that's where we expect a bunch of the new corn acres to come. Rather than a corn bean rotation, farmers will do a corn, corn, bean rotation. Look at it over a couple years. So we expect a million acres of corn will gain another 29, call it 30,000 approximately tons of P2O5. Requiring another 30,000 tons of P2O5. And another million acres of corn will require about 30,000-tons of KCL. So, this is to the point that, yes, we appreciate the extra and we welcome the extra corn acres that another five or six or 7 million acres of corn will help. What will really make the difference is farmers getting to replacement rates of nutrients, potash and phosphate, on the first 80 million acres.

Intensity.

Nitrogen will be just about fully incremental, but again, remember, farmers aren't -- I think it will be tough for farmers to go to much more than a corn, corn, bean rotation. Maybe some areas will go corn, corn, corn, beans. But we have got some agronomic work to figure out how that's going to work. Does that help?

Yes, sure. Lastly, what's your nitrogen strategy long-term? Obviously you are subject to natural gas and ammonia cost fluctuations. Do you expect to temper that over the longer term?

Well Nitrogen has been -- and we have this investment, equity investment in the Saskferco urea plant and ammonia plant we have in Saskatchewan that's doing extremely well for us. And you know I think there is a change in the North American economics of nitrogen production with the escalating cost of building a plant from what it used to be, I think that's tempered what the benefit is of those countries that have locked in gas. It's an area that we will look in. I mentioned that were going to sharpen our strategic focus and we got to ask the question, where do we want to be in nitrogen production with Mosaic company. And I'm sorry, I'm not being withholding here but I don't know what our answer is. Do we want to be bigger in the nitrogen business or smaller or the same? And we have to come up with the answer on that in the next while. I'm sure pleased to have as part of our portfolio nitrogen plant in Saskatchewan this year. It's outstanding.

You are looking at a coal gasification project, right, to take to Singas?

That's right. We were looking at that. We have had a few other proposals. A Petco project and a coal gasification project that have come us. We are pursuing that and I think we will be excited about either of those projects going on, and I'm encouraging them and participating with the developers to see how to make them happen. That would be a nice boost to our ammonia needs and it would also go a long ways to temper the enthusiasm in the -- temper the enthusiasm of some current ammonia suppliers.

Great Thank you.

Thank you very much. I know there are still some questions out there. I will be happy to take your calls to try to answer them personally. That ends the call for the Mosaic earnings.

This concludes today's presentation. You may now disconnect.