美盛公司 (MOS) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to The Mosaic Company's fourth-quarter 2013 earnings conference call. At this time all participants have been placed in a listen-only mode. After the Company completes their prepared remarks, the lines will be opened to take your questions.

Your host for today's call is Laura Gagnon, Vice President, Investor Relations of The Mosaic Company. Ms. Gagnon, you may begin.

Thank you, and welcome to our fourth-quarter 2013 earnings call. Presenting today will be Jim Prokopanko, President and Chief Executive Officer; and Larry Stranghoener, Executive Vice President and Chief Financial Officer.

We also members of the senior leadership team available to answer your questions after our prepared remarks. After my introductory comments, Jim will review Mosaic's accomplishments for the quarter and year and our views on current and future market conditions. Larry will provide an update on our capital management and share insights into our future expectations.

The presentation slides we are using during the call are available on our website at mosaicco.com. We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date, February 11, 2014, and are subject to significant risks and uncertainties.

Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued this morning and in our reports filed with the Securities and Exchange Commission.

Now I would like to turn it over to Jim.

Good morning, all. Thank you for joining our fourth-quarter 2013 earnings discussion. I will start by acknowledging the obvious: the external business environment impacted our results.

Potash and phosphate prices were low, although phosphate prices began to move upward in December. But our outlook is rosier. We are starting to see some rays of sunlight at the end of this tunnel, and Mosaic is extremely well positioned for the daylight to come.

We also were and are in excellent position to succeed through this trough of the cycle. Potash prices fell by approximately $130 per tonne during the calendar 2013 year, and phosphate prices fell by $150 per tonne. Because of those steep declines, we generated $179 million in operating earnings during the quarter on sales of $2.2 billion.

For the calendar year we earned $1.1 billion on $9 billion in revenue and generated $2 billion in operating cash flow. While these numbers fell short of our calendar 2012 results, our ability to generate meaningful earnings and operating cash flow in the trough of the cycle demonstrates the resilience we have built into our business model.

Strong volumes and reduced inventory drove operating cash flows in excess of $500 million for the quarter. In turn, we invested $370 million.

Clearly, we manage Mosaic for the long term. We want to deliver shareholder value across the cycle, and we are positioning the Company to do just that. We believe the business cycle is beginning to turn in our favor.

We have said this many times over the past year, and it is coming true. Volume comes before price. That is to say, we expect to see shipping volumes increase before prices turn upward.

As you can see in the presentation accompanying our discussion today, that exact scenario happened in phosphates. Prices hit bottom during the fourth quarter, and volumes accelerated to record levels, which in turn moved DAP prices upward. Coupled with lower year-over-year raw material costs, this all bodes well for margin improvement in phosphates in the coming quarters.

In potash, prices seem to have found a bottom following recent contracts with China and the beginnings of upward price momentum in Brazil. We need further demand increases to tighten the global supply and demand balance before we can expect significant price improvements.

Now, it's important for you to understand that we do not expect dramatic short-term potash price increases. The downward part of the cycle is prolonged, and we expect the upward swing to take time, as well. But we do expect better operating conditions in the second half of this year.

We've always known that our markets are cyclical; and we have prepared Mosaic to succeed in the peaks, troughs, and everywhere in between. Difficult markets often present excellent opportunities, and we have made rapid and important strategic progress over the past year. And the pace of progress accelerated during our seven-month stub period.

I would like to cover some of the highlights. We expect to close the CF Industries phosphate acquisition in the near future, pending additional regulatory approvals. The additional 1.8 million tonnes of phosphate capacity will bring our capacity to approximately 11.5 million tonnes, ensuring Mosaic's place as the largest finished phosphate producer in the world.

In potash, at our Esterhazy mine we recently completed an extremely successful Canpotex proving run. In fact, the run exceeded the expansion's design capacity by 20%.

Our potash expansions continued on budget and on schedule, despite a rising cost environment in Saskatchewan and challenging conditions in the global potash market. Our Esterhazy K3 mineshaft has reached a depth of more than 1,000 feet on its way to a 3,600-foot level.

Our long-term ammonia supply agreement with CF Industries will allow us to purchase up to 725,000 tonnes annually for 15 years, with pricing based on a formula tied to the prevailing price of US natural gas. The agreement will begin when CF completes its planned expansion in Louisiana.

Along with our joint venture partners Ma'aden and SABIC, we broke ground last week on the new integrated phosphate complex in Saudi Arabia. The project remains on schedule and on budget, and when complete we expect it to be among the lowest-cost phosphate facilities in the world.

Mosaic extended its product innovation lead. For the first year ever we invoiced more than 1 million tonnes of MicroEssentials to customers in North America. We are streamlining our supply chain logistics on Tampa Bay with the construction of a 110,000-tonne state-of-the-art warehouse facility and the purchase of ammonia handling assets. These were not large investments, but it demonstrates our commitment to continuous efficiency improvements and high standards of operational excellence.

Also in phosphates we made good progress in our central Florida mine permitting process. As you are all well aware, we made several important strategic financial moves. Today we announce that our Board of Directors has authorized a $1 billion share repurchase program in addition to the 43.3 million class A shares we have already agreed to purchase. This reflects our commitment to optimizing our balance sheet and returning capital to our shareholders.

In December we effectively put our split-off transaction behind us by reaching an agreement to repurchase 43.3 million shares of class A stock from the Margaret A. Cargill Trusts. We have completed more than half of those repurchases, which will continue through the middle of this year.

Also, in November we issued $2 billion of long-term debt at a very low average interest rate of approximately 5%, putting us in sight of our stated leverage targets. And we reached agreement with our banks to significantly increase our revolving credit facility, allowing us to meet our stated liquidity targets. We are committed to reaching the balance sheet targets we established last May, maintaining an investment-grade rating and are confident we can generate cash flow to fund our investment agenda.

In still more developments, we announced our intention to invest in additional distribution assets in Brazil, which is among the world's most promising agricultural markets. We are making good progress towards exiting our distribution business in Argentina and Chile and decommissioning our small potash mine in Hersey, Michigan. Those elements of our business simply were not generating appropriate returns for our shareholders.

We've also taken steps to ensure Mosaic will remain a low-cost operator. As we outlined at our analyst day in October, we are working to reduce costs across the Company in both business units and in our support functions.

On another note, we held a successful grand opening for the Lodge at Streamsong last month, and the resort is now fully up and operating. I must tell you, it's a spectacular place.

Finally, and in my mind most important, we set yet another new record for safety performance in our seven-month stub period. We achieved a 13% improvement in our key safety measures on the heels of two consecutive record periods.

That's quite a list of accomplishments for seven months, and all of it represents meaningful progress. We are growing our business, securing our supply of raw materials, rationalizing our asset portfolio, creating a more efficient balance sheet, and operating with excellence.

We have a lot to do in 2014 to bring these accomplishments to their full potential. But while we are engaged in the critical work of integration, expansion, and cost reduction, we are not taking our eye away from additional opportunities. We will continue to push our innovation lead' we will look for additional growth opportunities; and we will continue to work to optimize our balance sheet.

Now I would like to ask Larry to address our financial results and our guidance, and then I will offer some concluding thoughts before we take your questions.

Thank you, Jim, and good morning. I would like to begin by discussing our balance sheet strength, and then I will move on to our results and outlook. Even after executing all the strategic actions Jim described, we continue to believe we have substantial capital to return to our shareholders.

To date in 2014 we have repurchased 24.7 million shares for $1.1 billion. We have agreed to repurchase an additional 18.5 million shares between now and the end of July. And as you saw by our announcement this morning, our Board of Directors has authorized an additional $1 billion of share repurchases, which could be accomplished through either direct or open-market repurchases.

We are planning to issue short-duration debt to finance the CF acquisition and expect to do so at attractive borrowing rates. While we intend to repay that debt relatively quickly with cash from operations, it will add to the current $37 million per quarter debt-related interest expense.

It's important for you to understand that we will remain appropriately conservative in our approach to capital redeployment, paying close attention to our financial priorities as well as to changing external conditions.

Now I will move on to our results for the quarter. First, until we complete the current class A share repurchase process, we will report our earnings per share using a two-class method. So even though the full 43.3 million class A shares have already been taken out of our official outstanding share count, for modeling purposes the simplest approach is to assume those shares are outstanding until we actually close on the shares repurchased.

Second, we also had a significant discrete tax item that factored into our reported earnings for the quarter. As a result of a tax settlement between governments, we changed our intention to repatriate earnings from our Canadian operations, resulting in an approximately $100 million non-cash P&L charge. The decision will also modestly increase our 2014 tax rate, but it is not expected to impact our tax rate beyond 2014.

In Phosphates we sold a record 3.4 million tons of product, clearly reflecting the volume-before-price pattern we expected. The heavy sales volume reduced our year-end inventories.

Our gross margin rate in the segment was 12%, lower than in prior quarters, primarily due to the decline in average realized prices and lower realized margins on crop nutrient blends sold through our international distribution business. Raw material costs have declined, and we expect that trend to carry into the first quarter. More on that in a minute.

Our operating rate in Phosphates for the quarter was down slightly to 81%, due to scheduled annual maintenance turnarounds. In potash net sales increased compared with both the sequential and year-ago quarter, as a result of both the late fall application season and the pent-up demand Jim mentioned.

Prices declined further to an average MLP selling price of $303 per tonne. As a result our gross margin rate for the segment decreased to 21%. Our operating rate declined to 65% as ongoing production curtailments at Colonsay were partially offset by the highly successful Estherhazy proving run.

Ammonia on sulfur prices declined during the quarter. Ammonia costs were $422 per tonne and sulfur prices were $123 per tonne, down from $486 and $167 per tonne, respectively, in the prior quarter.

On a year-over-year comparison basis, while ammonia costs were lower, an extended maintenance turnaround at Faustina had a roughly $9 million negative impact on gross margin within the segment. Also, keep in mind that market prices for raw materials take some time to be reflected in our cost of goods sold. Despite the recently increasing raw material market prices, we expect to realize lower sulfur and ammonia costs in the first quarter of 2014.

Now I will turn to guidance. In Phosphates sales volumes are expected to range from 2.3 million tonnes to 2.6 million tonnes for the first quarter compared with 2.7 million tonnes in the same period of 2013. We believe some of the record sales in the fourth quarter pulled volume from our first quarter, and our inventories for new sales in the first quarter are mostly committed.

We expect our realized prices for DAP to range from $390 to$420 per tonne. The gross margin rate for the Phosphates segment is expected to increase to the upper teens as we see the benefits of higher prices and lower raw material costs. Mosaic's phosphate operating rate is expected to be in the low 80% range during the first quarter.

We expect potash sales volumes to be in the range of 2.3 million tonnes to 2.7 million tonnes, much of which has already been committed. We expect average realized potash prices to be in the range of $245 to $275 per tonne. Keep in mind, our recent proving run at Esterhazy increased our Canpotex allocation to 42.5%, and that is factored into the price and volume guidance.

Our gross margin rate for the potash segment is expected to improve to around 30%. Our operating rate in Potash during the first quarter is expected to be in the mid-80% range as we prepare for an expected strong spring season.

For the full year 2014 brine management expenses are expected to be approximately $200 million, and Canadian resource taxes and royalties are expected to be in the range of $120 million to $180 million. In addition, we expect full-year SG&A expenses to range from $350 million to $400 million and an effective tax rate in the mid to high 20% range, which includes the additional tax expense, as I mentioned earlier. We expect capital expenditures for the year in the range of $1.0 billion to $1.3 billion.

Before I turn it back to Jim, I'd like to address our expense management initiatives, which began years ago in phosphates through a program we call ROIC Works! and in Potash through a program called Momentum. We have consistently worked to lower costs and offset inflation. Our goal has always been to maintain or improve our low-cost position and maximize free cash flows.

At our analyst day last fall we showed you our plans to continue to maximize cash flows by cutting sustaining capital by $250 million per year and taking $200 million in annual costs out of each of our operating segments. Now we have expanded our focus, also actively engaged in reducing our corporate support function costs. We are committed to being a low-cost producer of both nutrients across the business cycle.

With that, I will turn the call back to Jim for his concluding remarks.

Thank you, Larry. These are not the best of times in the crop nutrition industry, but conditions are improving. During our last earnings call I said that economics will win in the end, and by that I meant that economic forces would outweigh temporary interventions in the market. That is proving to be true now, as excess supply has been absorbed by strong demand, leaving producers with limited phosphate inventories and lower potash inventories.

We believe once again that economics will win, and that prices will rise over time in response to more balanced supply and demand dynamics. That said, plenty of factors always influence the markets, not the least of which is grain and oilseed prices.

The record 2013 crop has sent the 2014 December US corn futures to about $4.50 per bushel, and it remains to be seen how that and the South American harvest will affect spring planting in North America. Farmers still can make money at these grain prices, especially given the affordability of crop nutrients.

Of course, broader economic issues, including the apparent slowing growth in emerging nations, could impact global farmer behavior. But longer-term forces are undeniably in our favor. I've talked frequently about population growth over the 21st century and the compounding challenge it imposes on global agriculture.

But we can't ignore that the compounding has already begun. The challenge is upon us now. The United Nations estimates that to meet demand, global food production must increase by 50% by 2030. That's just 16 years from now. Consider that for a moment. By the time my newborn granddaughter can drive legally in the US, we will have to be producing 3 bushels for every 2 today and 6 hogs for every 4. Perhaps more arable land will come into production, but either way existing farmland simply must produce more -- a lot more. And it must do so sustainably.

And crop nutrition is absolutely essential to farmers' ability to meet this staggering challenge. At Mosaic we have built a resilient business capable of prospering through cycles, and we have seized many opportunities during this challenging time to strengthen our franchise for the decades ahead. There is light at the end of this tunnel, and there is tremendous promise beyond.

Now we will be happy to take your questions.

(Operator Instructions) Joel Jackson from BMO Capital Markets.

We have seen yourself and some of your Canpotex partners announce $20 a tonne potash price increases in various markets, including the US, Brazil, Southeast Asia. Maybe you could talk about when you see those price increases, first time they are going to get tested, and if you have had any progress on those? Thanks.

Those prices just went in. We are starting to see some of the uptake on that starting in the international markets. And we are getting some good interest at this point in the domestic market in North America. I'm going to ask Rick McLellan to give you some color on just that. Rick?

You are right. I will start in North America, where we announced our price increase effective Friday. And as normally happens with price increases, the North American buyers have come in and committed for that increase. And so we won't see those price realizations until the second quarter.

We will see the current price until then, because our shipments are going to be at that price level. So that -- when buyers came in this quarter, they bought about two-thirds of what they are going to need for spring. And so we feel that's in a good position, and prices are going to move into the second quarter.

And then to look at the international markets, I think you just need to use Brazil as a proxy. We've seen prices increase in Brazil since the start of the year above $40 a tonne. And part of that is that it's driven by market conditions in Brazil, where carryout inventories were lower year on year; and, frankly, the economics of soybean productions are very good.

Vincent Andrews from Morgan Stanley.

Just sort of a follow-up on pricing and customer dynamics. What I'm wondering is: do you think, as we move out of the first half of the year, out of the spring season to the second half of the year, do you think you're going to continue with the upward price momentum? Or do you think we're going to have more of a seasonal pattern, where there will have to be summer fill prices, and then prices may be -- you will expect to drift higher as we get into the fall season? Or are you thinking that there's going to be the traditional potash stairstep higher, only in one direction through the year?

I'm going to ask Rick McLellan, our commercial manager, and perhaps Mike Rahm could weigh in on that as well. Rick?

Frankly, what we do know is that we're in a position where volume has begun to move quite substantially on the potash side. So first will come volume, then will become the price momentum.

And we see that momentum carrying through the second quarter. And frankly, if -- and Mike can talk about it -- but we do expect demand increase around the globe. And we think that probably bodes very well for price momentum into the second half of the year.

Vincent, I would just add that when you look at potash fundamentals, if our global shipment forecast of 57 million tonnes to 59 million tonnes is on target, we see fundamentals coming into a very good balance in the second half of the year. So I think that bodes well for sustaining the price increases that have been announced recently.

And in the case of phosphate, I would just comment that we have seen this 40% run in prices since the end of November without any impact from India. And we believe that India has an appetite for phosphate imports that's 2 million tonnes greater this year than it was last year. So fundamentally, I think there's an argument to be made that there certainly is forces that will elevate prices.

Vincent, along with the -- I will just add -- it's Jim here. I will just add that along with that point about the international markets, in particular India, that card is yet to be played.

Couple of other things we're watching is: what happens to grain and oilseed prices as we approach the spring planting season? That will have some impact. And how the Brazilian oilseed crop develops from here on is going to have an impact. And much is yet to be played out.

The other thing that we are watching is the transportation. I've been in this business over 30 years. We have never not gotten our customers all the product they need.

However, this year has really been a real test, with serious ice on the river in the US; with serious snows -- really, really serious snows -- in Western Canada. We are facing transportation issues and backlogs unlike we ever have before. The frigid, frigid temperatures have reduced the railways' shipping. Instead of shipping 100-car, 120-car trains, they are limited to 50-car trains. Trains are getting stuck in the snow.

And dealers and buyers are starting to get tuned into that story. If we have an early spring, snow goes away, no flooding, we will get the product there in time. But right now we are struggling to keep up on the logistics side with the demand we've had.

So a couple of big question marks hanging over the market going into the spring season. If there's transportation problems, you can be sure that we are going to see considerable more upside price pressure on the potash that is available in-country.

Jeff Zekauskas from JPMorgan.

Two questions: the first is with the new $1 billion share repurchase that you've announced, when do you expect to complete that? Secondly, in your slide deck you show 58 million tonnes of potash demand in 2014. I think global potash demand was 53 million tonnes in 2013. So where do the 5 million extra tonnes come from?

I'm going to have our CFO, Larry Stranghoener, talk to you about the share repurchase and our thoughts on timing. And then, Mike Rahm, you can address the question about the outlook for potash demand this coming year. Larry?

Good morning, Jeff. That additional $1 billion share repurchase authorization should be seen in context of what we announced early last summer. We clearly stated our balance sheet priorities, and this authorization is intended to get us to those balance sheet targets by the middle of this year. Our Board has given us full authorization and a lot of flexibility with respect to just how we fulfill this remaining $1 billion authorization.

It should be clear -- we like the price of the stock right now, and so we could be active relatively soon. And we will give updates as appropriate.

Just a couple things. First, our estimate for 2013 shipments is closer to 54 million tonnes. I think our point estimate right now is 53.9 million tonnes. So we see a 4 million tonne increase in global potash shipments in 2014.

And that is made up of the following. We think China -- we'll see an 800,000 tonne increase in shipments there. That is made up of about a 500,000 tonne increase in net imports coupled with about a 300,000 tonne increase in their domestic production.

If you add to China about a 200,000 tonne increase in Malaysia and Indonesia, that gives you the first 1 million tonnes. We expect India will import 1 million tonnes more potash this year than a year ago. And then we also have about a 1 million tonne increase in the former Soviet Union, Western Europe, and Eastern Europe. And there we see greater use for NPK compound production that is going to be sold to domestic and offshore customers, as well as greater demand for direct application use, particularly in the Eastern European countries in the former Soviet Union.

And then we have about a 500,000 tonne increase expected in Brazil in terms of their overall shipments. And then the other 0.5 million tonnes comes from the rest of the world, including North America, other Central American countries, and so forth. So that's the breakdown of the 4 million tonne increase that we see.

Jacob Bout from CIBC.

A couple questions here on Esterhazy. So you said that the shaft is down 1,000 feet. How deep is it -- or how far down are you going to K3? And when do you go through the aquifer?

And then just on the brine inflow costs, you gave some guidance here for the full year of 2014. It looks like it's dropping off. And what is this a function of?

I'm going to just turn it over to Joc in one minute. But I've got to tell you, this sinking a shaft 3,600 feet to the ore body is no small task. Many have tried; many have failed.

We are proceeding well. We have great safety performance on this shaft sinking. We are on our budget on it, and we are on our timeline, and that's not something everybody could say. So with that, I'm going to turn it over to Joc to tell you a little bit more of the details of the shaft sinking. And he will address the brine inflow cost estimates.

Joc O'Rourke here. Yes, we are at about 1,000 feet on the one shaft, slightly behind that on the second shaft. But we will be hitting the aquifer -- your first question -- we will be hitting the aquifer at about 1,200 feet to 1,300 feet. We will actually start lining for that aquifer starting at more like 1,100 feet. So within the next month we will actually be lining for that aquifer, and through it by probably mid-March or -- sorry, mid-April or early May.

In terms of the total depth of the K3 shaft, Jim mentioned that. That goes to approximately 3,600 feet. So that was your first question.

Your second question, on Esterhazy brine inflow -- as you are very aware, we have been managing this for a long time. Certainly nature plays a big piece of the cost. But we believe some of the initiatives we took and talked about about a year ago have really helped us control our costs and manage that in a much more day-to-day operational as opposed to emergency base. We have done some good technology work that has really helped stabilize those costs.

Ben Isaacson from Scotiabank.

Can you just talk about the dynamics of what's going on in India right now? It seems like that they have become the swing buyer of both potash and phosphate. So where are we with the subsidy?

Obviously, the fiscal year is a couple months away, and the elections, as well. How do you think about how India could kind of swing back and forth on both potash and phosphate?

I'm going to turn it over to Rick McLellan, our commercial manager -- leader, to address that. The other piece that he will address is the India inventories and how badly they have been drawn down, depleted. That's a story that goes a bit unnoticed. But, Rick, why don't you add some descriptions around that?

Yes. There was a lot in your question, Ben, and I'll try and cover it all. The first of the question is: where are we at with subsidies? The expectation that we get from our Indian customers is that we will hear something about subsidies earlier than we have in the past, that it will get itself dealt with probably within the next 60 days, which would be earlier than what we've seen. So that's the one thing. We think that will be behind us within the next 60 days.

Then when you talk about Phosphates on the swing, last year India imported about 3.5 million tonnes of phosphates. And when you take a look at it, that probably is the low point. Because, as Jim said, what gets missed is there is 1.5 million to 2 million tonnes of pipeline inventory in place close to the farmer that, frankly, hadn't been counted.

So to have the same deliveries to farm as they've had last year, their demand is going to be in the 5 million to 5.5 million tonne range, we believe. And frankly, that could be higher, depending on what happens in the marketplace. We are really at a point right now with phosphates where farmers are seeing what is happening in global markets, and the returns are very good.

Potash is a bit of a similar situation. We saw their imports drop to just around 3 million tonnes. We believe there's 1 million tonnes more could be imported this year, as pipeline inventories have been drawn down. So frankly, we see the back half of the year the opportunity for India to come in and probably move more volumes than they have in the past. The price will be at a level that they haven't seen in several years, and there is a need at the farm level for these products.

Chris Parkinson from Credit Suisse.

Can you just comment a little bit on the margins in the phosphate business due to the significant variation in ammonia and sulfur prices over the last two quarters? When I looked at your slide deck, it looks like you benefited from ammonia, but not as much as sulfur, despite lower prices in 4Q. Could you just give a little guidance on your expectations for the first half of 2014, including the lags and the realization in COGS, please?

I'm going to have Joc O'Rourke, our COO, address the raw material costs.

Just quickly, certainly ammonia prices have been trending down. And we expect them to trend down next quarter, as well as -- because of slightly higher operating rates at Faustina, our realized price for ammonia will go down. Sulfur has also been trending down, although there's a lot of pressure in the international markets, with large rises in prices in the international. But we expect our sulfur price to also trend down in the quarter.

And a lot of that is due to lag. We held reasonably high inventories of those two products, so it takes a while for those to move through our system and then into our actual cost of goods sold.

Don Carson from Susquehanna Financial.

Question on the potash outlook -- maybe this is for Mike Rahm. Mike, in that rebound in shipments from 54 million to 57 million to 59 million, how much of this is inventory rebuilding? Are we just looking at kind of a pipeline rebuild this year, or what is actually happening to underlying consumption?

And then I noticed, longer term, your Slide 24 shows operating rates for potash globally peaking this year; and while shipments are going up with higher capacity, operating rates come down. So I'm wondering what impact these lower operating rates have on your price outlook going forward.

Just in terms of how much of the increase in shipments is the result of a pipeline drawdown, that's a tough number. But I would say that there probably is a good 2 million to 2.5 million tonnes when you take a look at the potential pipeline drawdown that we've seen in the past.

In terms of the other components of your question, we are projecting around 58 million tonnes of shipments this year relative to a capacity estimate that is in that probably 65 million to 66 million tonne range in terms of effective capacity.

I think what is important there is -- you know, the brownfield capacity that has come on is in the hands of major producers. So we don't see that operating rate as something that raises a bunch of yellow or red flags in terms of price impact.

And as I said earlier, when we look at our projected supply and demand balance getting into the second half of the year, we see the market coming into a much better balance the second half than what we've seen for the past couple of years. As you know, by following North American inventories, we have chugged about 3 million tonnes of inventories for quite a while. And we see that getting pulled down to normal or average levels in the second half of the year.

P.J. Juvekar from Citi.

I think in the past, you have talked about, or Mike Rahm has talked about, how global DAP inventories have come down globally. Wondering if you can talk about where you see this DAP and maybe potash inventories currently. Secondly, as DAP prices have run up 40% from the bottom, are you seeing a supply response either from Morocco or Middle East?

I will let Mike talk about those inventories. That's a tough question, given the state of reporting of inventories. On your question, has there been a demand response or supply response from competition: the North African producers are struggling with some serious, serious North Atlantic storms. There has been some delays in shipping. There's about 20 vessels waiting. And it probably is going to be until the end of April before -- or till sometime in April before the backlog is going to clear.

Some of the shippers are just having a hard time with the swells at their port facility. So we have seen supplies unnaturally pinched in the last couple weeks. People are producing at a high level of production. I've seen some Eastern European producers report 100% production levels.

So I'd say the worldwide industry is already producing at very near practical capacity. And it's going to be hard to accelerate that production rate. And maybe with one of the North African producers coming back into the market, that's about the best of it. But we have a tight S&D balance right now as it is.

So the response is: people are shipping and producing as much as they possibly can, and I'd say the world is coming up a bit short. Mike, can you touch on the worldwide PNK inventories?

Sure. I think we highlighted this in the last issue of Market Mosaic, which we titled Picking Up the Knife. These markets have been in a bear run for two years. And if you -- during that period of time you would expect that all distributors are going to minimize the amount of inventory that they carry. And we think that certainly has happened.

And I think the poster child for that is India. And we provided our analysis at an outlook presentation we made at the TFI conference in November, as well as at the Ag College presentation that we made in January. I think both of those presentations are available, where we go through and highlight the drawdown that we think has occurred in India.

And in that case we think wholesale and retail inventories in India have been drawn down to the tune of about 2.5 million tonnes over the past year. And while the drawdown hasn't been as dramatic in other parts of the world, I think that the trend is correct -- that everyone is trying to maintain very lean inventories.

And once you get a trigger where people then believe that the bottom is in, what's happened is that we have had a rush to the market. And we have had several other factors that have exacerbated it. And you typically don't see a 40% run in prices, like we've seen in phosphate, due to one factor.

I think it's been a combination of things. On the one hand, end-user demand remains very good. While ag commodity prices are off from their highs last year, they still generate some very good on-farm returns. So end-user demand is good. The pipeline, we think, is very lean.

We've talked about some of the increases in raw material costs, the logistical challenges. And then, I think, sprinkled on top of that, just the cumulative impact of several planned or unplanned production outages; and you have the ingredients for a very, very strong run.

I guess I would just reiterate what Jim said, is that fundamentals in the phosphate market are extremely tight, due to the combination of all those factors.

I would just add one thing, P.J. Since 2008, where a global financial crisis occurred, people had a real lesson in risk management. And Mike said it: dealers and pipelines have gotten accustomed to dealing or demanding that they have thinner pipelines all the time and less inventory with price risk.

Result is we got this greater volatility that we've had. When people aren't buying, it's a flat to a declining market, and maybe rapidly so. And we test new bottoms. Yet when demand comes, and we are convinced that demand will be choppy but steadily growing over time, you are going to see these spikes. And they are going to be somewhat unanticipated.

That storm in North Africa -- all of a sudden one of the major producers is having trouble shipping to Latin America and North America. It happens overnight. So get used to it. I can't tell you we have calm waters ahead for the next -- anytime soon.

Kevin McCarthy from Bank of America Merrill Lynch.

Two questions on phosphates, if I may. First, I think your Saudi joint venture broke ground. Perhaps you could update us on the coming mileposts there, and whether or not you are running on time and on budget?

And then, second, I think you said MicroEssentials just above 1 million tonnes now. How high can that number go? And perhaps you could comment on the margin differential between MicroEssentials and the balance of phosphates.

Thanks for the question on the Saudi joint venture. We just did have the groundbreaking this past week. I'm going to just turn it over to Rich Mack, our GC, who is the lead on the joint venture on the Board of Directors of the Ma'aden business.

But before that, I just want to highlight what's coming up. And I'm enjoying it -- more questions about our phosphate business. This is what has distinguished us. We've said that. It has been an underappreciated nutrient, and I think it's finally getting some respect. It's the Rodney Dangerfield of nutrients, and its time is here.

And this is, we believe, the beauty of a Mosaic, is having the balance between potash and phosphate. Not -- both cylinders don't always fire, but usually one is going when the other is dormant. So we are seeing that now, and we are just so confident about our phosphate business, the expansions we are doing in Saudi in CF.

So with that prelude, and gave Rich Mack a chance to think about his answer, he can tell you about the mileposts and how we are doing relative to budget. Rich?

Sure. Thanks, Jim. Kevin, with respect to the Ma'aden joint venture, we have awarded about 75% of the bid packages on the joint venture, and we have been pleasantly surprised with the numbers that we have been seeing through that process. They generally have been below the budgeted levels and below the prefeasibility studies, so that has been good news.

We have about 3 or 4 left to award, and we are in the process of reviewing those. We are also making great progress on the project financing component for Ma'aden. That will be a milestone that we will be looking at over the course of the next several months, as well.

You may recall that this project was basically broken into two parts. One is at Ras Al Khair, and basically the DAP processing and the port facilities. And then there is the mining operations, and the beneficiation, and the asset process up in the northern part of Saudi Arabia.

So, basically, everything is moving forward as planned and as scheduled. We are on budget. Things are looking good. And the infrastructural work and the progress now starting to put the assets in place -- first in the northern part of Saudi Arabia is ongoing right now. So stay tuned, and we will have more developments as time proceeds.

Okay. Rick, our commercial leader: take the question about MES margins, and perhaps say something about the volumes and some of the mileposts we've hit.

On MicroEssentials we pointed out that we had reached 1 million tonnes in North America, which was a significant milepost. When we think about it, we have almost got a similar amount that we ship internationally, into key markets in Brazil, Central America, and Australia.

And so we see really good demand. Our current productive capacity is a little over 2.25 million tonnes. And we are looking at opportunities to increase that, because we are going to bump up against our productive capacity. It has been a really good story on developing ways to increase yields around the world as well as differentiating Mosaic as a supplier of phosphates.

As far as a margin delta, we shared some data when we were together at our analyst day. And frankly, we see $40 to $45 differential in gross margins for the MicroEssentials product mix. We continue to see opportunities where that can grow, and we are looking at ways that we can both understand better value capture as well as understand how we could further improve our production capacity.

Matthew Korn from Barclays.

On potash, a major competitor of yours highlighted a strategy to recalibrate their portfolio towards lower-cost operations during a period when demand is somewhat suboptimal. Reading through the release today, your op capacity is 10.7 million tonnes. You are looking at mid 80%s percentage-wise operating rates over the first quarter.

So first, what kind of operating rate for you for the full year would be consistent with the 57 million, 59 million tonne market you are projecting? And second, is there any space today, given your mines' current operating rates, to further redistribute production and give you an assist on the cost side?

That was a big question. The first is about the low-cost production. That is an objective we stand by. It's core to this business, which is basically a commodity business. We have been working on the Momentum project -- Larry mentioned that in his comments -- where we are driving costs down. It's not one-of event that we decide to do once and then business as usual; it's something you have to pursue every day.

We have been pursuing it, have taken some good costs out of our system. And we have some ambitious goals ahead. So we are not going to do a special announcement about a project. We talked about it at the New York investor call. I think we called out about $200 million or $250 million of costs that we are going to take out of our potash production over the next couple of years. And it's just regular tasks that we do every day: get our costs down to where we are now, in that bottom quartile. And we are going to stay there.

How we are going to run our operations: what we find is costs go up when you have highly variable production rates. If you are -- one day you are running at a 10 million tonne rate or a couple months; the next quarter you are running at 8 million tonne; then you run at 9 million. That drives our operations people crazy. So we are trying to calibrate that for a steady and stable operating rate.

I'm going to turn it over to Joc, and he will share with you some of his ideas about the rates we think we need to operate at.

I think Jim has pretty much covered what you are looking for. Clearly, next quarter we will be running in that 80% to 85% range. We expect to be running in that range.

Clearly, at that kind of level we would not be able to redistribute a portfolio, as you have suggested. But certainly we have our higher-cost operations, as we outlined in our investors meeting. And we have some lower-cost ones. And, particularly, Esterhazy now, with its proving run completed and new capacity, is going to be a very competitive low-cost mine. We will maximize the usage of that operation to make sure our best-cost product gets to market.

I'm going to add, Matthew, I think you have read it's a small mine, but our Hersey operation -- we are decommissioning that, so we are taking that out of production.

And about a year and a half ago we announced that we are not going to continue with expansions that we previously announced. We had an expansion at Belle Plaine that we were ready to go on as well as one at Esterhazy, and we have deferred those until we see some change in the cost of production as well as the cost of bringing those capital projects into fruition and the demand scenario.

So we have been taking these actions. And we started a year and a half ago, when we deferred two major expansion projects. So we have been actively balancing our portfolio.

Mark Gulley from BGC Financial.

I had a question with respect to the potash cost side. At the investor day you talked a little about the various cost positions at your plants and indicated that Carlsbad was off of your average cost curve. Can you comment on -- is that part of shutting that facility down as part of your cost reduction plans? Secondly, can you comment on the accretion from the CF acquisition, given the strong prospects in phosphates?

I'm going to have Joc, our COO, speak to the potash cost at Carlsbad and his operating plan for that.

So Carlsbad -- Mark, let's first of all understand: K-Mag is a higher-margin, great premium product for us that exclusively comes from our Carlsbad operation. The MLP costs at Carlsbad are higher than our other operations, but it's not a significant volume. And with advantage of K-Mag, it's still an important site for us -- as well as Carlsbad goes to a different market in general, and a more localized market or export to Brazil. So either way Carlsbad still makes sense to us.

However, we are definitely always looking at how we can reduce those costs, how we can take costs out of that MLP at Carlsbad in particular.

And Larry Stranghoener, why don't you take the question on the CF accretion?

Mark, as Jim mentioned, we may be closing on this soon. And we are really excited about the timing of this, given what has been happening in the phosphate industry. We are pleased that we are going to be getting more tonnes at this time in the marketplace.

We are busy working on integration planning. That's going very, very well. We see a lot of opportunities on the synergy front. And of course, the irony is the more successful we are at integrating this business, the more difficult it is going to be to track exactly what the accretion number is.

But the numbers that we put out at the time we announced the deal, of roughly $0.30 per share in 2015, certainly look good to us. We think this is going to prove to be a very successful deal for our shareholders.

Yonah Weisz from HSBC.

A question to ask you about financials or financial strength. Since you presented your 2013 capital markets day, you have added the CF deal. And unless this buyback replaces maybe future buybacks from the MAC Trusts, you are also adding, I think, $1 billion extra share buyback.

And our question is: where do you see the source of funds for all these transactions? Is it really just generated internally, or would you be significantly increasing your debt-to-target ratios?

Yonah, it's Larry. Everything that we are talking about doing on the strategic initiative front, on the shareholder capital return front, is very much in line with what we laid out last year with respect to our capital management philosophy. At that time we talked about a debt-to-EBITDA target of 1.5 times, with the willingness to go to 2 times for a strategic deal such as the CF acquisition.

We talked about maintaining a very strong liquidity buffer. And we talked about our commitment to investment-grade credit ratings.

And given the large cash balance we have accumulated, given the prospects for the business, we believe that we are able to accomplish all of what we have outlined today within the bounds of those balance sheet targets.

So with that, Jim, I'll turn it over to you for concluding comments.

Well, I apologize; we have run out of time here. And we have about 5 or 6 more questions in the queue. I would ask those folks to please call Laura and Anton directly, and they will promptly follow up with you.

And with that, I will conclude our call by reiterating our key messages. First, market dynamics are unfolding just as we expected they would, with sales volumes preceding price improvements. We've seen a big increase in phosphate prices in response to tightening supply, and we expect strong demand for potash to lead to improving prices later in the year.

Second, Mosaic has made remarkable strategic progress. We are growing, securing our supply of raw materials, optimizing our business portfolio, and creating a much more efficient balance sheet. As a result, Mosaic is in excellent position to thrive as we emerge from this low point in the cycle.

Thank you all for joining us today and please have a safe day.

This concludes today's conference call. You may now disconnect.