美盛公司 (MOS) 2015 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to The Mosaic Company's third-quarter 2015 earnings conference call. (Operator Instructions) Your host for today's call is Laura Gagnon, Vice President Investor Relations of the Mosaic Company. Ms. Gagnon, you may begin.

Thank you welcome to our third-quarter 2015 earnings call. Presenting today will be Joc O'Rourke, President and Chief Executive Officer and Rich Mack Executive Vice President and Chief Financial Officer. We also have other members of the senior leadership team available to answer your questions after our prepared remarks.

The presentation slides we're 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're based on management's beliefs and expectations as of today's date. And are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release, issued this morning. And in our reports filed with the Securities and Exchange Commission.

Now, I would like to turn it over to Joc.

Good morning, and thank you for joining our third-quarter earnings conversation.

This morning, I will discuss current market conditions. And then Rich Mack will review our financials and provide our guidance. Before we take your questions, I will provide closing remarks. Mosaic delivered solid results in our seasonally slow third quarter, despite a variety of market-based challenges.

There are three points I want you to know. First, demand for our products remains strong in most parts of the world. We understand investor concerns regarding future potash supply, and I will address the supply and demand picture for you shortly.

Second, Mosaic continues to execute at a very high level, and effectively allocate capital. We're focused on capturing the value of our investments. To put it simply, we believe Mosaic is in an excellent position with significant upside when market sentiments and conditions improve. And third, Mosaic has displayed market leadership and a thoughtful production philosophy for many years. We will continue to pursue a strategy to maximize value.

For the quarter, Mosaic earned $160 million on net sales of $2.1 billion, compared with earnings of $202 million on net sales of $2.3 billion in the third quarter of 2014. We reported earnings per share of $0.45 this quarter compared to $0.54 a year ago. Adjusted for notable items, primarily the non-cash impact of foreign exchange rates, Mosaic's earnings increased over 10% to $0.62 per share, compared to $0.56 per share last year. Our higher year-over-year adjusted earnings per share, despite tougher markets, reflect successful cost control efforts, the lower share count resulting from our active share repurchase activities, and a lower effective tax rate.

So let me turn to the markets, which are quite different from country to country and from product to product. The one constant around the world however, for both potash and phosphate is that demand remains strong. We expect total global phosphate shipments to set a new record and total global potash shipments to decline slightly this year, compared with last year's record. That is an important point. Demand for fertilizer is underpinned by demand for food. And we have no doubt that this demand will continue to grow along with world population. Even if supply out-paces demand for short period of time, demand will continue its steady upward trajectory.

We're seeing this now in the day-to-day operations of farmers all around the world. Going into each of the last several application seasons, market sentiment has been negative, with forecasters expecting significant lower fertilizer applications. And each season has exceeded expectations for several reasons. First, high nutrient removal rates from the recent record global harvest, have required growers to replenish their soils. Second, rain and oilseed prices have remained stable. And third, fertilizers remain necessary and affordable.

In addition, challenging macroeconomic factors are not having significant impacts on demand. For example, in Brazil, where the economic and political situation remains volatile, 2015 is expected to be the second-best year in history for fertilizer demand. Demand is also remains strong in other key countries, including China and India. Currency devaluation against the dollar have both positive and negative impacts on agribusiness. A strong dollar is a net positive for agricultural regions like Brazil that are large exporters.

Growers can pay for many imports in local currency, and sell their grains and oilseeds in dollars. In North America, the fall application season is meeting our expectations. Potash shipments to North America in 2015 are expected to be lower than last year, mostly because of built-up in retail inventories we saw at the end of 2014. Retailers are working through inventories now. And we're seeing evidence that inventories are reaching low levels.

Supply is a different story, and we realize the concerns about future oversupply are driving current equity valuations. We have maintained, and we continue to maintain our philosophy to match supply with expected demand, as our decision to curtail production at our Colonsay potash mines demonstrates. It is also worth noting, that most of the additional potash supply that is expected to come to market, is still years away. So demand will have some time to catch up.

Let's put this into context for Mosaic. We have two attractive businesses that are of similar size in markets expected to experience long-term secular growth. In potash, we have taken actions to right-size our operations and reduce cost. We're confident in our ability to manage through, if not take advantage of the current market dynamics. In phosphates, we have also taken out costs and made significant investments that solidify our leadership position. We believe these investments will continue to drive growth in the years to come. The phosphates business continues to generate attractive margins and demand is strong. We are ahead of schedule in our work to achieve $500 million in cost savings across the Company, and this work is visible on our bottom line. This slide tells the story.

Third-quarter adjusted earnings per share were higher this year than in 2014, despite lower product prices and overall revenue. Our strategic initiatives, including acquisitions, capacity enhancements, decisions to exit or curtail underperforming assets, and substantial capital return to shareholders are delivering the benefits we anticipated. While micro economic and agricultural market conditions remain challenging, Mosaic remains in an excellent position to continue to reap the benefits of these initiatives and has significant leverage to the upside when this market turns more positive.

Now I will ask Rich to provide more insights into our results, and our guidance for the fourth quarter.

Thank you, Joc.

I will begin today with an overview of our three operating segments. The phosphates segment continued to generate good results and strong margins. Mosaic's phosphates shipment for the quarter fell slightly below our expectations. With delayed Brazilian demand and cautious buying behavior in North America being a big part of the story. As Joc noted, the global phosphate market remains balanced. And the relatively stable margins support that statement. Cost control, including low cash rock mining costs continues to be a margin driver.

In the potash segment, our results reflect lower production levels during a seasonally slow demand period, when we traditionally take maintenance shutdowns. Having said that, our 20% gross margin rate in the segment reflects excellent cost control. Despite an operating rate of 67%, we produced MLP at a cash cost per ton of just $105, including $20 per ton in brine management costs, down 21% from year ago.

In the international distribution segment, results were better than expected. Especially in light of the difficult political and economic situation in Brazil. Gross margin per ton was $30, which is $4 per ton above the high end of our guidance range. This quarter we sold more tons of product than last year at higher-than-expected margins, capturing time-place utility and leveraging our fixed costs.

Now, I would like to address our capital management. We have repurchased roughly $700 million of Mosaic stock, or 15 million shares since the beginning of the year. We repurchased $75 million of our shares during the third quarter in the open market, have over $900 million remaining under our share repurchase authorization, and will continue to be prudent about our share repurchases in the future. We will continue to manage capital carefully, and embrace a balanced approach and our allocation across growth initiatives. Both organic and inorganic, as well as shareholder distributions. This is a cyclical business, and the most compelling opportunities present themselves at the bottom of the cycle. With that said, our share price in the mid-$30 range creates a high bar for investments, other than our own stock.

Now let's move on to our guidance for the fourth quarter. You can clearly see the guidance on the current slides. So, unlike prior quarters, I won't go through the details, and instead, focus on assumptions, risks and opportunities. In phosphates, we anticipate that both the upside and the downside on sales volumes will come from North America, which will represent a higher proportion of expected sales in the fourth quarter, compared to the third quarter. If you recall, earlier in the year, we diverted tons that were destined for North America to the export market, which Mosaic, and our size, has the ability to do.

As the fall season progresses, our guidance assumes more tonnes will be needed here domestically. We expect relatively stable margins in the fourth quarter, as lower realized prices are largely offset by lower raw material costs. In our international distribution business, Brazilian credit availability is the swing factor in our volume assumptions for the fourth quarter. Because of the relatively high proportion of fixed costs, higher volumes positively impact margins per tonne. As does a higher proportion of micro essentials in our sales.

Finally, swings in the Brazilian real have an impact on local currency costs. Our forecasted margins do not anticipate any appreciable strengthening in the real. In potash our volume guidance is below last year's levels because, unlike last year, we do not expect dealers in North America to build inventories late in the year. Similar to phosphates, albeit to a lesser extent, we expect higher sales volumes domestically compared to the quarter we just finished. These assumptions are incorporated into our pricing guidance.

Margins are expected to be in the mid-20% range, reflecting both lower-realized prices and our decision to hold back production to match market demand. The mechanical failure at our Esterhazy K1 shaft is expected to take 3 to 4 weeks to repair. And we have accelerated other work that was originally planned to occur during a maintenance shutdown in December.

As a result, we don't expect this event to impact our sales in the fourth quarter, or impact our ability to meet expected demand in early 2016. For the remainder of 2015, our annual guidance ranges are as follows. Canadian resource taxes and royalties are expected to be in the range of $265 million to $295 million. Down from $310 million to $350 million. Brine management costs have also been revised down to the range of $170 million to $180 million, from $180 million to $200 million. Capital expenditures and investments are now expected to range from $1.1 billion to $1.2 billion, down from $1.1 billion to $1.3 billion.

Our SG&A expense range is now estimated to be $350 million to $370 million, down from $360 million to $380 million. And our effective tax rate expectations were lowered, to be in the mid to high teens range. Our outlook for 2016 includes the expectation of stability in our markets based on growing demand. Demand for our products is not predicated upon construction of bridges and roads in China but on the need to eat. We expect demand for our products to grow. The rate of growth will vary from year to year, but over time, we are confident in a 2% to 3% average annual growth rate. Our first look at 2016 producer shipments is yet another example of this trend.

The issues we face are not demand driven, as demand in 2016 is expected to be the second highest on record. The concern we hear about, the new supply many investors worry about, is fairly limited until 2017. During the next two years, we expect demand to continue to grow. And over a longer period of time, we expect demand to consume much of the excess supply. In the meantime, Mosaic will continue to embrace our operating philosophy of producing only what is needed by customers. So, I would like to summarize my comments by reiterating Joc's main point earlier. There's no doubt that markets are challenging on several fronts, but Mosaic has made and will continue to make notable progress.

We have a realistic market outlook, and are taking actions to position the company to excel. With that, I'll return the call back to Joc for his closing comments. Joc?

Thank you Rich.

Over the past several years, we have experienced a wide array of challenges from the external environments. Agriculture specifically, and commodities in general are currently facing headwinds from several sources. Mosaic's growth story is driven by the execution of our strategy, and reaping the benefits of investments we have made and continue to make. We believe it is a compelling growth story.

At Mosaic, we have worked to optimize our business portfolio, reduced our costs, invested in additional capacity the market will demand and return significant capital to shareholders. We have also maintained a strong balance sheet that gives us the ability to take advantage of compelling opportunities that arise at the low part of the cycle.

We understand that success in this business requires an operating foundation that will not crack when times are tough. But Mosaic is not just resilient. The moves we have made over the past decade, and increasingly during the last two years, have also constructed a powerful engine for growth. Mosaic is in a great position.

We believe we have the strongest combination of talent, assets, financial strength, and global reach in our industry. We intend to use that strength to our advantage now, and as business and economic conditions improve. We intend to maintain our discipline, build on our leadership, and continue to execute at the highest level possible. In my three months as Mosaic's CEO, I've traveled to meet with a wide range of our stakeholders. Customers, shareholders, employees, and others in our industry. I have heard a lot of concern about the current markets and the short-term.

But I will say this, I have also seen and heard a lot of reasons to be optimistic. For the industry, and especially for Mosaic. The short-term situation is not nearly as dire as market sentiment seems to expect, and the long-term remains extremely compelling. Demand for our product will continue to grow, and we're managing this company to meet that demand efficiently. And don't forget, Mosaic has many advantages, from our industry-leading premium products portfolio, to the earnings leverage of recent strategic moves will provide in better markets. The CF, and [80M] acquisitions, the Ma'aden joint venture, the decisions we made to exit higher cost businesses, and the capital we have returned to shareholders all provide real opportunities to grow our bottom line. From my perspective, we are executing very well. And our future looks great. Now, we would be happy to take your questions.

(Operator instructions)

Andrew Wong, RBC Capital Markets.

On your production curtailments, could this have an impact on your market share in other phosphates or potash markets? Or do you expect similar productions curtailments from other producers globally? And then, longer-term how do you think about the economics of curtailment having lower volumes versus better pricing? Compared to a volume over pricing strategy?

I'm going to start by making a couple of comments, then I'm going to hand it over to Rick McLellan to talk. Let me first talk about market share. I would not say that Mosaic gets too focused on market share. What we focus on is serving our customers well, and optimizing the value from the tons that we sell.

So, I don't like to be characterized as either pushing for market share or pushing for price. I think they are interchangeable in many respects. And you're really pushing for value.

What we have done, as you have seen, is we look at what market needs from our perspective, and we've aligned our production to that level. In the short-term, that's things like the shutdown of Colonsay for a temporary shutdown.

In the long-term, it's the permanent moves we have made. Such as curtailing production of MLP at Carlsbad, and selling our Hersey operations. So, we have really positioned from a perspective of developing a long term view of where the market is going to go. And serving that market well. In terms of where we sit next year, I'm just going to leave that to Rick for a second.

As we look at our planning, we don't just look at the quarters. We look forward at least 18 months, and Joc has done a good job of describing what we do with our customer base, both globally and in North America. We plan our production to meet their needs. We do several things to make sure that -- there's a lot of times where people try to shoot ducks when there's none flying or sell into a vacuum.

We take the point of we would rather much up when people are buying to when we're producing. And we've done that so far this year. And as we look forward for 2016, everything we're doing today is on the look of being sure that we can provide our customers the products when they need it. And produce it to optimize our returns.

Ben Isaacson, Scotiabank.

Thank you very much. Just a couple questions on your North American potash strategy. Joc, can you remind us of the advantages of the consignment strategy that you employ? And do others follow a similar strategy or is there a potential competitive risk there?

My second question is, is there a possibility to start securing long-term MOU's with US customers? And if not why not? Thank you.

So first of all, we do not use a consignment. Sorry. Thanks Ben. Good to hear you. We do not use a consignment process. What we use is what we call an SPD, which is, future price deferred. So what we're doing to allow for the efficient logistics, we use customer space for our best customers. We ship to them, and then decide on price when the product is actually getting used.

Others may use other strategies, and I really wouldn't talk to their strategies. I believe our strategy is a good balance between making the product available in the market, to give us the time-place utility that we need to be efficient while still giving us good economic results. I'll ask Rick to go further.

Part of the question you asked was on MOU's with customers. And I'll spend a couple of minutes there, and then I'll go back and add a couple points to Joc's points. Right now, we have a three-year planning agreements with our top customers. Those aren't contracts, but they are agreements. And we build in incentives against those agreements, we build in the portfolio of products we offer. So, rather than have formalized MOU's, we have three year planning agreements with most of our main customers. We think that better reflects a way for us to go to market.

The second piece is, and Joc talked about, you asked whether it put us at a competitive disadvantage versus other programs like price protection that are being offered out there. And, frankly, with the customers we work with, what we recognize in a quarter, is what we have revenue recognized. Not what we have shipped and billed at provisional prices. And we think that's a much better way for us to operate in business. And our customers to make sure they take advantage of the use of their space.

Joel Jackson, BMO Capital Markets.

Good morning guys. I want to stay in North America. Looking at your guidance for 2016 and your numbers for 2015, the potash demand will be three million tons this year. And you have lost about a million tons of share, all in North America. Your [camp protects partner potach corp] is about flat. So my question is, who else lost market share in 2015? You guys took a big hit of it. Why was that the right strategy?

Looking to 2016, you see gaining three million tons back in the global market. Do you think you will be able to gain back that one million tons? And where will those three million tons come from?

This is another one I'm going to put over to -- Sorry hi Joe. Good to hear you. I'll put this back to Rick as well. I think there is a couple things I want to point out before give it to Rick. The first is, we saw this in the first half of the year where in the slower part first quarter, it appeared that our market share was behind. And I think that has something to do with how we revenue [rack] as opposed to our competitors.

And then, in the second quarter, what we've found is that was basically made up. We expect we will see similar things in this year. So, in the second half of the year. So, ultimately I don't think it's quite legitimate to look at quarter by quarter market shares. I think they vary, and again we have got long-term plans with our customers. And as long as we're meeting those long-term plans up with our customers, we expect that we will do fine.

I guess the other aspects is, where are those imports would be the other aspect of market that we have to look at. And, frankly the imports are playing a bit of a disruptive role and we will have to look at how to manage that next year.

And Joel, I think Joc has done a good job of it. You need to separate revenue recognized sales from shipments. And that's where things will get corrected in the fourth quarter.

Can I ask Mike Rahm to give us a review on where the 2016 market is going for potash? I think that's also important here.

We're projecting [a point estimate] of about 62 million tons. And that's up about roughly three million tons from our 59.1 million point estimate. I would characterize the growth as not getting a grand slam from anyone. But very consistent singles from all of the major buyers. I think we have laid out, in terms of the big five importers, China, India, Indonesia, Malaysia and Brazil, We expect moderate increases in all of those. I think that really is tied into our view of ag commodity prices. And we see a very balanced global agricultural outlook. We think acreage, and the technology applied to crops will need to continue to increase and underpin decent demand prospects.

Jacob Bout, CIBC.

A question here on Esterhazy, and maybe talk a bit about some of the operational issues you have there. It sounds like you had some problems with the skip there. Maybe you can talk also as well a bit of [what you have left to spend] and does it make sense at this point either speed up the development of that, or to slow down?

Thank you Jacob. I will hand over the details of the Esterhazy skip to Walt Precourt who's on the call here today. But before I do, again I'll say, as Rich said in his comments, we had a failure of skip, a mechanical failure of the skip at Esterhazy's K1. We have accelerated some maintenance work, and we were looking at lower production rates to make sure inventories were in line anyway. So, we don't see any impact to speak of either in this quarter, or in the first quarter of next year. So that's the first point.

In terms of K-3 spend, I just want to say, today we're pushing K-3 at the reasonable safe rate we can. You have to realize we're sinking shaft and you only have approximately 20 feet of working area, 20 feet of diameter. And we're sinking that shaft. So there's very little opportunity to accelerate at this stage beyond that. Once we get into K-3, we'll certainly be accelerating the development. So with that, I'm going to ask Walt to talk a little bit more about the skip mechanical failure.

As you pointed out, we did have a mechanical issue with one of the Esterhazy K-1 skips last week. And although the skip itself is damaged, there was minimal infrastructure damage. So we're very confident that we will resume full K-1 production later this month. And we do expect that the repair costs will really be diminimus.

In terms of your question with respect to K-3, we have about $1.7 billion US left to spend on that entire project.

Adam Samuelson, Goldman Sachs.

Hello, good morning. My question on phosphates, hoping to get a little bit of color on some of the uncertainty about the North American market in the fourth quarter. Is generally, as you think about 2016, provide some high-level comments on different demand outlooks. India in particular, an area that seems to be a bit of a wild card today. Thank you.

I am going to just hand that straight to Mike Rahm to talk about the markets and then Rick to add color.

In terms of fourth-quarter shipments in North America, I think we have had pleasantly surprised and pleased with the anecdotal reports that we're getting in from the field. That the fall application season has met or exceeded expectations. Obviously, that is not a shocker in the sense that we have had a great crop come off. So lots of nutrients have been removed. And we have had a fairly long open application window to get fertilizer down.

So, we think a fair number of tons of PMK are going down this fall. [And important thing] when you talk about phosphate, I think what's really important on the potash side of things, we think we're working down the increase in channel inventories that we saw last year. Shifting to 2016, you've seen our projections for phosphate. We expect that shipments will increase from about 65.5 million tons this year, to a range of 66 million tons to 68 millions tons. And our point estimate is right smack in the middle of that with 66.9 million tons.

And in terms of some of the markets, we do expect a decent rebound, particularly in those markets that saw little bit of a channel build last year, Brazil, we see continued growth in India, we think over the past several years.

Their channel has been pulled down to very low levels. We are talking about the channel primarily at the small retail shop. The tens of thousands of shops across India that have 30 or 40 bags in the back storage room. We think that has been -- that has been drawn down, and they're going to buy the amount that they actually use, as opposed to rely on inventory.

And I guess, similar to the comment we made earlier, I think we see lots of singles in 2016 as opposed to a grand slam or strikeouts in some of these markets. As a consequence, the growth that we're projecting is made up of moderate increases in most of the main markets.

Sandy Klugman, Vertical Research Partners.

Good morning. Question on industry supply discipline. We have definitely been seeing signs of the potash industry. But what are your expectations for how competitors in the phosphate industry will manage production? In particular, I'm thinking about levels out of China. And how you expect [OCP] to manage supply given the increases to their granulation capacity?

So I will start off, and thank you Sandy. I will start off a couple of comments and then again hand it to Mike to give a bit of a world S&D discussion. But what I would say on phosphates, though, certainly China has continued to increase their exports, probably beyond what either we, or some of the major analysis firms like CRU would have expected. But having said that, the demand has required it. I believe China has increased their exports by about 1.6 million tons, and India has taken up all of that as excess from there. So that's the first step of it.

If we look forward going [NP] we don't see huge amount of new production coming on for the next year or two. And yet the market continues to grow at 1.5 million tons or so per year. We continue to see that market as very constructive and a very good market to be in. Mike can you give more color?

Sure. Let me start by talking about China. Joc mentioned those numbers, and I think those are from July or August. I took a look at numbers this morning. When you look at year-to-date exports from China there are up 3.3 million tons. And we think for the year, China will probably export somewhere in that 9.5 million ton to 10 million ton mark. And while that's a big increase, as Joc mentioned, the market really is requiring that. And, in particular if you look at India, and their increase in DAP imports, those have increased 3.1 million tons during the same period. And particularly if you look at China's phosphate exports, and look at just the DAP component. DAP exports have increased 2.7 million tons, Indian DAP imports have increased 3.1 million tons. There is a draw coming from India, that China is meeting.

The other thing that I think we said before is that, on the demand side, we see a very steady growth in phosphate demand. And on the supply side, there's really some very interesting dynamics taking place. While China has increased their exports, if you look at other major producers, there have been some real significant declines in supply. So, in North America, we have had two facilities close down. And so we've had the full impact of the closure of Mississippi Phosphates this year. So, another 700,000 tons lost there.

We've had the full year impact of the White Springs plant closing. And then, if you look around the world, there have been outages or hiccups in many different countries. Whether its Tunisia with some of the political unrest that has disrupted production. Whether it's in the -- some hiccups in places like Jordan, South Africa, Senegal, Mexico and you name it. There have been supply disruptions.

And in terms of the bigger players, like Ma'aden. Ma'aden [one] continues to ramp up. It still hasn't reached full capacity. So it's leveled off at two thirds of capacity if you will. And the Moroccans are bringing on capacity, but at a much slower rate than expected. Whether that's planned or unplanned, who knows. The bottom line is, their first hub just started up a few months ago. And, as we understand that the granulation plant is not running there yet.

And secondly, if you look at some of their other hubs, they're not scheduled to come on for several months or even years. And I think, all of that is evident when we look at margins. In this business, we're focused on what we call the stripping margin. And the difference between the price of DAP and the price of sulfur and ammonia. In a ton of DAP. If you look at the margins in the fourth quarter, if you calculate them based on current spot prices, that are published, they're up above $40 from a year ago.

And if you look at margins through calendar year 2015, they have been incredibly constant at between about $265 and $275 per ton. So, I think the best proof in terms of the positive or constructive phosphate fundamentals is in what stripping margins have done. And they've reflected stronger fundamentals in phosphate.

Steven Byrne, BofA Merrill Lynch.

Thank you. When you look at heterogeneity of [PMK] nutrient levels within North America cultivated fields, how do you look at the potential impact of variable rate fertilizer applications of PMK on demand? Do you think that there could be a net increase in demand? Or a net reduction in demand as growers focus more on that heterogeneity?

I'm going to hand that over to Mike right away. But I'm going to first say that we see the technical advances like variable rate application and precision agriculture as ultimately a very good thing. We believe the demand for our fertilizer in the plant is all about if you get too technical about the [stocio] metric needs of the plant and the fertility of the soil. If we can have that fertility of the soil be more exact, then we believe, overall it will neither hurt nor help our overall consumption but it will ensure the best productivity for the farmer.

That's the only comment I would have, is if you look at the numbers. Shipments in North America both with the main phosphate and potash products have really been pretty consistent over time. In big round numbers, about 9 million metric tons of MOP, and about 9 million metric tons of the main solid phosphate fertilizers get shipped every year. And there might be some swings from year-to-year in the pipeline, and so forth, but on average that's more or less what goes down.

So, I think that the widespread use of variable rate technologies, which have been around now for 10 or 15 years, I think have been to optimize that on farm fields. I think more of it is spread, on the better land that has upside in terms of yield potential. Less probably gets spread on the sandy hillsides. But the bottom line is net net. Shipments have remained about the same. Rick do you have any comments?

The only thing I would add is that this technology, the variable rate technology has been around for a while. And frankly, it has been helpful to getting the right nutrients in the right place for the growing crop. And we see as the adoption rates get higher going forward, that being very positive for both PMK application rates overall across North America.

Don Carson, Susquehanna.

I want to go to your slide 12 where you talk about your potash shipments outlook. You've got an increase in 2016 to 61 million to 63 million tons from 59 this year. What is your price assumption there? And are we finally seeing some price elasticity benefit from lower potash prices? You're down about $100 domestically, and presumably you're forecasting lower offshore pricing next year as well. Just wondering if you can comment on that price elasticity dynamic and the impact on demand?

I will hand it to Mike in a second. But on the price elasticity, I think we have probably been a bit surprised that there is more elasticity than we might have expected. In terms of price, I think it's a little early to come up with an exact price for next year. But I would say, first of all, the potash over-supply concerns I believe are a bit overblown.

This year we started with high inventory. As the shipments go up next year and we start with a little lower inventory. I believe that market's going to be a lot better balanced, and I don't believe the downward pressure people are talking about will really be there.

I will let Mike give a little more detail of that and how we came up with our forecasts. I think it is a good story.

In terms of the underlying price assumptions there, Don, I think that we are beginning to see some stabilization in potash prices. They have come down a great deal. And our expectation is that they will stabilize and how they play out in 2016 will depend on a lot of factors. I think the most important, which is, agricultural commodity prices.

And the reason why we see prices stabilizing here is that, we're working through those large channel inventories from last year. As you see, in the numbers, we had we had a 9 million ton increase in shipments. I think you're probably familiar with all the reasons for that. But, when you go back and take a look at what was happening in 2014, we ended 2013 with virtually an empty pipeline, given the announcement on July 30, 2013. Everyone was waiting for prices to move or advertised. And eventually people stopped buying and the pipeline was pulled down.

Then we got into 2014, with all the weather and shipment concerns in North America. Prices began to increase, and everyone jumped back into the market. Net result, big increase in channel inventories. Especially in North America, Brazil and even Indonesia and Malaysia. We're working through those right now.

So, I think we will start 2016 with the pipeline in much better shape than certainly a year ago. And then, in addition to that, I think we have been saying what has really pressured potash prices this year are two factors. One being the channel inventories, the second being the collapse of key potash currencies. Hopefully in 2016 will see a little bit greater stability on the macroeconomic front. And we think that will be constructive.

And then if these forecasts are on target, we should see about a 3 million ton rebound, we think in shipments. Put that all together, and I think it points to a situation where prices began to stabilize a bit. And we see a very balanced situation between what is required to ship, and the actual demand out there.

Jeff Zekauskas, JPMorgan.

Good morning, I have a question for Rich Mack. The operating cash flow through the nine months has been $1.5 billion this year, versus $1.8 billion last year. The cash flow from operating activities this quarter was only $184 [million]. Even though DNA plus net income was about $340 [million].

What is going on with the working capital that is leading to such a large cash train? And how do see your operating cash flow for the year versus last year? Or your free cash flow for the year versus last year, this year?

Hi Jeff. For the year, we don't expect any difference really between our performance and operating cash flow this year compared to last. For the quarter, we had some movement in working capital, when you compare it to last year. We had some strong trends in working capital movements, when you compare it to this year.

But in the end, our operating cash flow performance for the nine months is very strong for Mosaic. And we continue to be a cash generator in both of our businesses. I think that will be part of our story going forward, in terms of continuing strong operating cash flow. And a reduction in our capital expenditure profile over time, and an increasing free cash flow story.

Yonah Weisz, HSBC.

In your comments at the start of this call, you talked about Mosaic's balance sheet and ability to use the balance sheet taking advantage of opportunities at the low point in the cycle. Earlier on this year, at Mosaic's investor day your predecessor Jim was asked I think a similar question about use of balance sheet and perhaps M&A. He implied that there would be no transfer of M&A in potash, and maybe here there a few bolt-on acquisitions in phosphates.

On the other hand, if you're talking about use of balance sheet, I'm wondering is there's a change in philosophy at Mosaic with regards to M&A? And if so, could you talk a bit about what you would be interested in? Thank you very much.

Sure. Our capital philosophy, Yonah has not changed in the last year. We certainly looking first at making sure we maintain a reasonable liquidity buffer, that we keep our credit rating in really good shape, that we meet our debt ratios that we have set, the 1.5 to 2 times EBITDA to debt. But none of that has changed.

And as we have probably said, at the bottom of cycles that really opens up let's say, more opportunities. There's more things out there that look like they might be well-priced for the people who have the balance sheet to take advantage of it. But as Rich said in his comments, I would emphasize that when our stock is trading low like this, our bar becomes even higher. Because we have to measure any expenditure against the benefit of buying back our own shares. So, we've been very disciplined about that we will continue to be very disciplined about it. But if there is a great opportunity for our shareholders, we will explore it carefully. And if it makes sense and adds value long-term, we will certainly be looking at that.

In terms of specifics, we don't like to talk about specifics. But be known that the general philosophy has not changed, the discipline has not changed. But our opportunities may be higher.

PJ Juvekar, Citigroup.

If you look at realized prices for potash over time, it seems like the premium in the North American market maybe has come [bit a bit] compared to the rest of the world. I'm just wondering if, structurally, the North American market is going to get more competitive from here? If I could sneak a second one in. Maybe Mike can you comment about the longer-term ability of Chinese phosphate exports to be maintained at this high level? Thanks.

Okay Dan I'm going to hand this over to Mike pretty quick. But I'll say, we live in a competitive market. And from time to time, if the competition is higher, those -- if you call it a premium, they're all about, again time-place utility, cost to serve that market. So from time to time that premium as you call it will change based on free-market dynamics.

I think the structural reasons for a higher price in North America being into granular market, being that there is some logistics challenges to get into the mid-US, justify the difference in price. But that won't always be there day to day. So that I'll hand it to Mike to give some.

Sure. We have said in the past, the fair comparison is looking at the blend-grade price delivered to the US Gulf as well as Brazil. And if you look at current spot prices you are exactly right, that differential has more or less dissipated. In particular, if you look at an Anola barge price of $270 per short ton, versus a Brazil C&F price of roughly $290, for the Russian or Belarusian supplier Brazil actually gives them a little bit better net-back.

So, I would say that yes we have seen some adjustments in prices to turn off the beacon in terms of attracting tons to North America. And I think that's evident in terms of our import forecasts. If you look at the 2014 and 2015 fertilizer year, the US imported about 1.7 million metric tons of MOP from offshore sources. And not only Russians, but every potash producer around the globe seemed to place a few tons in the US.

We think that will drop about 600,000 tons to 1.1 million to 1.0 million tons this year. One of the main reasons for that is the dissipation of that differential. If you look at the numbers for the first three months of our fertilizer year, namely the third calendar quarter, imports are down about 150,000 tons from last year. So, we are on pace to reduce imports from offshore sources by the amount that we have. And then again, if global shipments increased 3 million tons, there will be a natural pull of some of these tons that have come into North America into other markets that are better markets for them.

Then your second question in terms of long-term Chinese exports. Obviously, we have seen a big surge this year driven largely by the rebound in Indian demand as well as the supply problems that we talked about earlier. I think longer-term, we expect that those are not going to be in that 10 million ton range, but probably something closer to 6 million or 7 million tons.

We think there will be structural adjustments that take place in the Chinese phosphate industry. Chinese producers are very heterogeneous in the sense that there are some very efficient low-cost players. There are some medium cost payers and there are some high cost players. We think that they will see some restructuring, and that longer-term, 10 million tons is not the number.

Vincent Andrews, Morgan Stanley.

Hello this is Neil Kumar calling in for Vincent. I just wanted to talk a little bit about what is going in India and China with potash. We have been reading about Indian buyers looking for a contract discount. Do see that as a possibility? In regards to China, how is the re implementation of that affected domestic consumption?

Sorry Neil, I missed the second part of your question. It broke up a little bit. Oh the [VAT] okay. I think I got it. It sounds like somebody's got that. I'm going to hand that straight over to Rick to answer. I think that's probably right up his alley. Rick why don't' you just take that?

Yes good morning, Neil. If you're asking about the Indian and Chinese contracts, frankly it's a bit too early to talk about those. But we do see a good demand. If you look overall, we have seen increased demand or solid demand, 14 million tons in China for products. So, the product that is being shipped is going to the ground.

And indications on the impact of VAT have been, frankly de minimis from what we have been able to pick up. They have to work through inventory, there was a transitional VAT cost for inventory. And so overall we think it will take a little bit of time to work through. But where potash is priced versus other nutrients, there's high inclusion rates on the in NPK's for potash.

Rick can I just add one thing? If you look at grain prices in China, the government supports them at extraordinarily high levels. There have been a lot of focus on their September 18 announcement that they were going to reduce the corn support price by 10%. The reduced it to 2000 RMB per metric ton. That's the equivalent of about $8.70 per bushel. So, their support price is still more than double what current prices are. In terms of a 13% VAT, while it certainly increases the pain for the Chinese farmers to buy phosphate and other fertilizers, farm economics are very good and we really don't see that dent in demand all that much.

Jonas Oxgaard, Bernstein.

Congratulations on starting out on such a nice note. Good first quarter.

Thank you, Jonas.

The question I think has been asked, but I would phrase it a little differently. When you are thinking about Colonsay, what would the world look like for you to restart it? When would you restart it?

Okay. Thank you Jonas, and again, thanks for the comment. Before I do this I think this will probably be either last or our second to last question as we get to the end of the hour. So, Colonsay, what we will be looking at, is I have to take a step back. We have a very comprehensive process for doing what we call integrated business planning. That integrated business planning looks at our production capabilities, it looks at where we make the product, what products we're making. So it's done a site by site basis for productions. It's done on a product per product basis for production.

We also look at the markets that we're serving and how those look on the quarter, all the way out multi years. So with both of those, you also have the logistics and between. But that very comprehensive process, we take a look at how we're going to add the most value over the next period of time.

Clearly, if the market requires it, and we see it is adding real value to our shareholders, we will add production. But as Rick said earlier today, on one of the earlier questions, there's very little value in selling into a market when there's no demand. In the third quarter, it's just refilling, it's just getting ready for the fall application season. So what we find in general, is that if you try and stuff product into that market all the you do is destroy price and value. So, we would rather wait until there really is demand up there.

So, I think it's probably as we are at the hour, it's time for a wrap up. And all I am going to say in the wrap up is that we see the future long-term is extremely bright. We do believe in the food story. We believe in the secular long-term trend of higher population, greater wealth around the world leading to higher demand for food, which leads to higher demand for our products.

And with that, I think that Mosaic is extremely well positioned to take advantage of that. And we will continue to focus on operational excellence, on delivering to our customers, and making sure that we execute against our strategy. Thank you very much for listening, and we will hear from you again in a quarter. Thanks.

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