美盛公司 (MOS) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mosaic Company's third-quarter 2016 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 and welcome to our third-quarter 2016 earnings call. Presenting today will be Jacques O'Rourke, President and Chief Executive Officer; Rich Mack, Executive Vice President and Chief Financial Officer; and Dr. Mike Rahm, Vice President, Strategy and Market Analysis. We also have other members of the senior leadership team available to answer your questions after our prepared remarks. The presentation slides we 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 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.

In addition, during this call, we will present both GAAP and non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures are in our quarterly performance data also available on our website. Now, I would like to turn the call over to Jacques.

Good morning. Thank you for joining our third-quarter earnings call. This morning, I will give you an overview of our results. Then Mike Rahm will discuss market conditions before Rich Mack takes you through some details on our performance for the quarter. I will have some final thoughts before we take your questions.

The key concepts that we want you to understand from this call are first, we anticipated improvements in the business in the second half of the year and those improvement have begun to materialize. We continue to maintain a constructive outlook for the industry.

Second, the actions we've taken to lower costs and optimize assets, combined with our scale and secure market access, positioned us to maximize the benefits of improving market dynamics. And third, our Brazil-centered growth strategy is clearly paying off. Our investment in MicroEssentials capacity expansion and the acquisition of ADM's distribution business came together to allow our international distribution business to meaningfully exceed expectations this quarter. Now let's discuss the markets. Mike?

Thanks, Jacque, and good morning, everyone. Markets during the third quarter played out close to our expectations. Let's start with potash. Three positive developments are taking place in the global potash market.

One, the on-farm demand remains solid worldwide. Two, large channel inventories are getting worked down. And three, producers are optimizing operations in order to meet demand and compete profitably in this new market environment.

On the demand side, statistics continued to point to a bunching of demand during the second half, exactly what we had highlighted on the last earnings call. Capotex has announced that it is sold out for the rest of the year. It's second half shipments are expected to top the 2014 record.

We also project that second-half North American shipments will rank as the second highest during the last five years. As you can see on the slide, North American producer inventories are shrinking rapidly as a result of not only this demand surge but also production cutbacks during the first half, normal summer turnarounds, and the temporary closure of our Colonsay facility.

Current momentum is expected to carry over into next year. We project that global MOP shipments will climb to 61 million to 63 million tons in 2017, with a current point estimate of around 62 million tons. That computes to a 4% or 2.5 million ton jump in shipments from our 2016 estimate of just less than 60 million tons. The projected increase is driven by continued solid on-farm demand and leaner channel inventories worldwide. Thus, shipments are expected to more closely approximate use next year. All of the big six consuming regions are forecast to post gains in 2017.

In the case of phosphates, the DAP margin turned up during the third quarter as a result of improved fundamentals. The benchmark increased but the sharp drop in raw material costs resulted in stable or only moderately higher prices in most regions and that is helping to fuel broad-based demand growth. We estimate that global shipments will increase by 800,000 tons to 65 million to 66 million tons this year.

China and India remain drags on growth, but gains from all corners of the globe are projected to more than make up the shortfall in the two largest phosphate consuming countries. In addition to increases in the United States, Brazil, Argentina, Australia, Pakistan, the former Soviet Union and Africa are expected to post solid gains this year.

Just like potash, several supply side changes are taking place. China year-to-date exports through September are down 29%, or 2.4 million tons, from last year. We project that exports will drop from a record 11.6 million tons in 2015 to about 8.6 million tons this year.

A restructuring of the Chinese industry is widely expected, with publicly announced plans to close outdated plants with capacity of 3 million tons of phosphate capacity by the end of this decade. That is the equivalent to 12% of industry capacity or 6.5 million tons of DAP, roughly the amount of new capacity expected to start up in Morocco and Saudi Arabia during the next year or two.

Looking ahead to 2017, we forecast that global shipments will increased by approximately 2.5% to 66 million to 68 million tons. China and India are expected to register modest gains next year and continued growth is projected for most other regions, especially the Americas.

Finally, we do expect a typical seasonal slowdown late fourth quarter and early first quarter and two key factors we are continuing to watch closely are Chinese exports and the pace of new capacity ramp-up. Now I will turn the call over to Rich Mack.

Thank you, Mike, and good morning to you all. As Mike's assessment indicates, we expect the recent potash price and phosphate margin to remain fairly stable, seasonality aside. We also expect demand to remain strong in limited additional price appreciation in the near term.

Mosaic's performance for the quarter reflects the incrementally improved market environment, but it also reflects the resilience we've built into our business. We are maintaining our focus on the long-term and controlling the things we can control, most notably our execution, our operational costs, and our capital.

For the quarter we reported earnings per diluted share of $0.11, which included a negative $0.30 impact from notable items that brought adjusted earnings per share to $0.41. Earnings also included a benefit of $0.08 per share from adjusting the full-year effective tax rate accrual.

Our cost reduction efforts are evident in the bottom line across our segments. You can see that we are achieving meaningful cost savings and keep in mind that we made two acquisitions over this period.

Our SG&A today is lower than it was before those acquisitions, and in fact, third-quarter SG&A is the lowest in the last nine years. We continue to be on track to meet our combined expense reduction goals of $575 million by 2018.

We are demonstrating similar discipline with respect to our capital. We're continuing key, strategic projects and we're investing to ensure the safety of our employees, as well as the mechanical integrity of our assets.

As part of our strategic planning process, we took a very critical look at our CapEx requirements over the next five years. We are considering every capital decision very carefully, and as a result, we expect CapEx to come down meaningfully after 2017 to a level of approximately $800 million per year, down from earlier expectations of approximately $1.2 billion.

With meaningful changes to our five-year capital program and significantly reduced operating costs, as well as expectations of an improving environment, we have maintained our dividend, which we will continue to review as market conditions evolve. We have also changed our target leverage range, now at 2.0 to 2.5 times net debt to adjusted EBITDA.

We are also in the process of upsizing our revolving line of credit from $1.5 billion to $2 billion, maintaining our targeted liquidity at $2.5 billion. Going forward, we will continue to assess our cash generation and cash uses in light of our firm commitment to maintaining an investment grade credit rating.

Now, I'd like to provide a brief review of our results and our expectations for each segment. In potash, our sales volumes for the third quarter came in slightly above the top end of our guidance range at 2.2 million tons. The volumes reflect the pent-up demand that came to fruition during the quarter which in turn drew down producer and channel inventories. Prices responded accordingly, though they remained low compared with a year ago and earlier periods.

In the fourth quarter, we continue to expect positive pricing trends and our guidance is $160 to $175 per ton. With our volume expectations in the fourth quarter of 1.9 million to 2.1 million tons, we believe the second half reflects the strong bunching of demand we talked about earlier this year. The narrower than normal ranges reflect Mosaic's essentially sold out position for the fourth quarter.

Our potash gross margin rate for the quarter was 9% above our guidance despite an operating rate in the low 60% range and prices at the low end of our guidance range. The improvement reflects the benefits of our ongoing and aggressive work to reduce costs and optimize our operations. We expect fourth-quarter margins to improve further with tailwinds from higher prices, higher operating rates to meet demand, and continued cost reduction efforts.

We also will be expensing some turnaround work during the quarter and expect our gross margin rate to be in the mid-teens. Our margin rate guidance also incorporates further weakness in K-Mag prices reflective of the softer SOP market dynamics.

Moving on to phosphates, our business performed as expected. The phosphate gross margin rate continued to expand as raw material cost reductions benefited our cost of goods sold and with rock costs returning to more normal levels. Blended costs of rock declined to $60 per ton during the quarter.

Going forward, we expect slightly more variability in quarterly rock costs than in years past. However, our teams have done an outstanding job of mitigating some of the issues we encountered in the second quarter and our goal is to maintain rock costs at or near current levels.

Our average phosphates realized price in shipment volumes were in the middle of our guidance range, with strong global demand persisting and with prices stabilizing despite falling raw material costs. As Mike said, the fourth quarter is seasonally slower, but we expect volumes to remain fairly robust at 2.1 million to 2.4 million tons and DAP prices to seasonally weaken to a range of $300 to $330 per ton. We expect relatively stable margins, with a gross margin rate in the upper single-digits as lower input costs largely offset expected weakness in realized prices. We plan to run our phosphates facilities at approximately 85% of capacity.

Before I leave phosphates, I'd like to briefly discuss our ammonia contract with CF Industries. As you know, the contract which begins in 2017, allowed us to forgo the construction of a $1.2 billion ammonia manufacturing plant.

We've worked with CF to align on the logistics and we expect our barge to be completed in mid-2017. Given the long-term nature of the contract, the impact to our P&L will fluctuate based on nitrogen production economics. We fully expect there will be times we will be benefiting from it and times that we will not.

Moving on now to international distribution, which was a bright spot during the quarter. Excellent farm economics in Brazil drove strong demand in improving prices. In addition, our unique position allowed us to capitalize on improving pricing trends with a meaningful improvement in international distribution segment operating earnings. Gross margin per ton came in well ahead of expectations as the result of higher volumes and higher per ton margins of MicroEssentials as well as better fixed cost absorption.

As a reference point, sales of MicroEssentials in Brazil are up over 70% year to date. With a more stable operating environment in Brazil, we expect gross margins to be around $20 per ton and volumes to be in the range of 1.7 million to 1.9 million tons during the fourth quarter. As in potash, the narrower than normal volume range reflects Mosaic's sold out position for the fourth quarter.

Finally, the effective tax rate in the quarter was negative. The provision for income taxes in the third quarter included a $28 million benefit related to the expected reduction of the full-year effective tax rate. The low effective tax rate is a function of tax deductions that remain fairly constant, primarily depletion combined with a currently low taxable income.

In the near term and in 2017, we expect more variability in our effective tax rate. Our other full-year guidance numbers can be seen on the slide.

To summarize, we are seeing incremental improvements in the business climate but we are continuing to plan for whatever the markets may bring. Mosaic has the financial strength and management discipline to adapt and take advantage of opportunities as conditions change. With that, I'm going to turn the call back over to Jacque for his closing thoughts and to moderate our Q&A session. Jacque?

Thanks, Rich. Before we move on, I would like to address the situation at our New Wales phosphate facility in Florida. As you probably know, a sinkhole developed in one cell of a gypstack on the site resulting in a the loss of processed water that was a top that portion of the stack. This is an unfortunate situation, but I would like to commend the excellent around-the-clock work our teams in Florida are performing to resolve it.

The key points for investors to understand are first and foremost, we have performed over 1,000 well tests and we have not identified any offset impact from the water loss. Collection walls are retaining the water and we're pumping that water back up to another area of the gypstack. We have done and will continue to do extensive water testing around the site and we do not expect that there will be any off-site impact.

Second, phosphate production at New Wales has not been impacted and we do not anticipate any impacts. And third, based on the work we completed so far and the consent order reach with the Florida Department of Environmental Protection, we're comfortable that the cost to repair the sinkhole will be manageable.

Now, to summarize our thoughts on the quarter and the business environment, agricultural commodity fundamentals, including fertilizer fundamentals are improving, albeit slowly, and Mosaic is benefiting from those improvements. Just as important, our work to reduce costs is driving better results now, and we're going to maintain this focus as conditions improved so that we can outperform across the cycle.

And we are maintaining our solid financial foundation by managing our liquidity and capital spending carefully. Mosaic is performing well and we remain in an excellent position to thrive as conditions continue to improve. Now, we would be happy to take your questions.

(Operator Instructions)

Andrew Wong, RBC Capital Markets.

Thanks and good morning. So my first question would be on the leverage ratio. How does your current leverage ratio compare to your new target range?

And then, second, in your prepared remarks, you've been pretty strong defending the balance sheet. But with a lower cash balance and some CapEx spend still remaining, how does that tie together with the overall dividend strategy? Thanks.

Thank you, Andrew. So I'm going to hand most of this over to Rich, but let me just reemphasize. We do take a conservative view with respect to our balance sheet. But also, we don't take a one-quarter view with respect to any of this. I want to highlight that while the operating cash flow was relatively low this quarter at $96 million. If you take it over two quarters, we were $679 million over two quarters, which was down only 14% from last year.

So while we do have capital still required, we are generating good cash flows. Of course, we will continue to assess how those two fit together.

Rich, do you want to talk a little more about our CapEx?

Sure, thanks, Jacque.

Good morning, Andrew. First, on the leverage ratio, the way that we currently look at it is we're adapting our balance sheet philosophy, our capital management philosophy, to the current market environment. If you go back and you look at history, this is really a vestige of the years after the Cargill split off transaction. We first rolled out our capital management philosophy in 2013, and it hasn't meaningfully changed since that point in time.

Where we're at right now, we're not changing our overall liquidity buffer. We're keeping that at $2.5 billion. We're simply changing the mix of that by up-sizing our revolver from $1.5 billion to $2 billion. As you noted, we are moving our target leverage ratio from 2 to 2.5 times. I think it's important to note that we take a look at that on a through cycle basis.

We're a cyclical industry, and there are going to be times where we are going to be over it' and there are times where we're going to be under it. I think it's all guided by the guidepost of a strong investment-grade credit rating. We believe that the ratios and the liquidity buffer that we have articulated will meet just that.

Then moving on to your second question on the dividend, obviously a topical issue in the environment that we are in right now. Obviously, it's something that we continue to monitor very closely. As you've seen in our results, we've aggressively and proactively reduced our spend, both in capital and in operating costs.

Earlier this year, we indicated that the second half was going to be better than the first half. We're starting to see that, particularly in the potash business and also with the good result in our ID business this quarter. With the $2.5 billion, we certainly have ample liquidity, and we can use this for a short period of time; but it's not something that you would use for a long period to cover your dividend.

So what I would simply say in summary is that this is something that we are going to continue to watch. It will be dependent on where the market goes, and it's going to be dependent on the trade-offs between capital, operating expenses, and cash available for dividends.

Okay. I appreciate that. Thank you very much.

Jonas Oxgaard, Bernstein.

Good morning and congrats on a pretty nice quarter in, well, in this terrible, terrible market. Question on the MicroEssentials in Lat Am. You said your ID went up quite a bit because of the higher volumes in MicroEssentials. I believe last year you were sold out of MicroEssentials. So have you shifted volumes from North America to South America and, if so, why?

Thanks, Jonas. I'm going to start here and I'll hand it over to Rich. A great lead in for what I think is a great story, which is our MicroEssentials story.

First of all, yes, we did increase capacity. If you'll remember, we spent $250 million to increase the capacity of MicroEssentials at our New Wales plant. That largely got completed at the end of the second quarter, so it's only been a very short period of time we've had new capacity available.

In North America, our shipments of MicroEssentials will be up, although the growth rate of MicroEssentials in North America are still fairly low or are now slowing down. However, in Brazil, where we have what we believe to be a great market opportunity with our own distribution business and the acquisition of the ADM business, this year alone we've seen a 60% increase in MicroEssentials sales, and that's all due to higher availability. So with where we are sitting, I think this is a great story and one that will continue with the new capacity.

Sorry, I think I might have said Rich's name; but I will hand it to Rick to give us a little more detail --Rick McLellan.

Good morning. I'll just add to what Jacque said.

The production that came on at New Wales allowed us to point extra tons towards Brazil in the third quarter. So our growth in MicroEssentials is really coming out of this new production and is occurring in Q3 into Brazil and in Q4 in North America.

Just a reflection of how we are changing, our MicroEssentials sales for the third quarter were a record effort for Mosaic; and up until now, we've been supply-constrained. Now we can go and look at those markets where we have been developing the market for this product.

And just highlight as well, just before we leave that, I don't want to miss saying that the big benefit in Latin America is we not only get the producer margin for the MicroEssentials, but we also take that distributor margin. So it's a great market for that product.

Vincent Andrews, Morgan Stanley.

Thanks and good morning, everyone. A question on your CapEx forecast going from $1.2 billion to $800 million. Could you just give us a sense of what's allowed it to come down so much, and is there any impact to your plans for K3?

Sure. Thanks, Vincent. Let me say, first of all, we prioritize our capital as we've always prioritized our capital, which is making sure we protect the integrity, both mechanically and structurally, of our plants. That our key strategic projects continue on pace. Beyond that, we assume that all of our capital is negotiable.

So what have we done? We have reduced or eliminated any capital that we believe isn't in that critical group for now. Some of it's been deferred; some of it's been eliminated. In terms of K3, we absolutely are focused on maintaining the critical path of the K3 project. We will be getting to the bottom of that in February, or a little later than February, and continuing that project on schedule.

Next year, our focus is to have a capital allocation of between $800 million and $900 million, and then decreasing to $800 million after that. Thank you.

Vincent, this is Rich. Just one supplemental comment to Jacque's review there. And that is keep in mind, we have spent ample capital in prior years. So the condition of our assets and the quality that we find our business is in right now are in great shape. So that does allow us some additional flexibility to time some of the spending in the years ahead of us.

Jeff Zekauskas, JPMorgan.

Hello. Good morning. Thanks very much.

I was listening to Rich's comments about the ammonia barges earlier on. I just wanted to clarify somewhat. Does this mean you'll be taking ammonia from CS in midyear 2017 rather than at the beginning of 2017?

Simple answer is yes. I'll leave it to Rich to give any color to that.

Yes, your assumption is correct, Jeff. I don't think there is any more color to it.

Just to add one thing, Jeff. We had made an agreement with CF to handle the delay. So we are taking tons from them, but in a different manner than through the barge.

Mark Connelly, CLSA.

Just to circle back to the CapEx question, is it fair to assume that the $600 million target still has a decent amount of growth CapEx in it? Where would that growth CapEx tend to be focused post Esterhazy?

Sorry. Hello. Thanks, Mark. First, let me clarify. I heard you say $600 million. We're $800 million or $900 million next year.

I'm sorry. $800 million, yes.

So where is that focused? Let me just break it down. Our sustaining capital, which we were targeting in the $600 million range, we are now targeting in the, let's say, $450 million or $400 million to $500 million range. The other $300 million to $400 million will be spent on growth capital.

The first priority one is clearly Esterhazy K3. We have a few small projects that are coming to completion, like the New Wales MicroEssentials plant, the barges, and others. Then we will be focusing, I guess, early in the next decade probably on the new mines in Florida. Other than that, most of them are complete.

Steve Byrne, Bank of America.

How much of that $650 million of cash that you have is offshore and therefore would be subject to tax if repatriated?

Steve, I'm going to hand that straight to Rich to give you the details on the cash position.

Steve, I don't have an exact number for you, but there's a portion of it that would be offshore and be subject to the minimal withholding taxes.

Ben Isaacson, Scotiabank.

This is Oliver Rowe for Ben.

Could you please provide some color on the dynamic that you are seeing in the global rock market? We're beginning to see some pricing slippage in international markets that have been stable historically. Then how does this play into your stripping margins, which we've seen falling for the last few years?

Okay, Oliver. I'm going to hand that straight to Mike. Mike keeps pretty close tabs on the global S&Ds for all of the [bulk] potash and, obviously, the phosphate products. So I think the phosphate rock market is something Mike keeps pretty close tabs on.

Good morning, Oliver. Yes, you're correct that we've seen some slippage in phosphate rock prices. As you probably know, rock is transacted a little bit differently than the finished products in that if you are running a plant that's not integrated and relies on rock, you typically contract for a period of time. So as fundamentals change, there is a lag in terms of when rock prices adjust.

That said, we haven't seen a draconian drop in rock prices. I think in terms of the structure of that market, rock prices have held up reasonably well in the current environment.

With respect to how that plays into the stripping margin, our stripping margin is calculated based on a finished phosphate price DAP less the cost of ammonia and sulfur. So it doesn't come into play in terms of the stripping margin that you might see coming from us. I think as we've indicated earlier, our actual rock costs have varied a little bit over time, but remain fairly constant in terms of trend costs.

Adam Samuelson, Goldman Sachs.

Yes, thanks. Good morning, everyone.

Maybe a question in potash in North America. Your volumes in the quarter were up pretty strongly. You've laid out an interesting outlook for producer inventories through early next year to be down maybe about 1 million tons year over year in 1Q 2017.

You talked about your view on distributor inventory levels into early next year, and specifically thinking about your shipment outlook for North America to be flat year over year, if you are actually seeing underlying consumption growth with the American farmer. Thanks.

Thanks, Adam. I'm going to leave this over to Rick, but let me start by saying, yes, in fact, we believe that producer inventories are well down and going to continue to go down due to curtailments, including our own Colonsay curtailment and good demand in North America.

In terms of the distributor and channel inventories, the market has been such that nobody wants to have extra inventory in their system. So I think that bodes well for people buying hand-to-mouth, which means there isn't a great buildup in that channel.

I'll let Rick give that some color.

Thanks, Jacque.

Good morning. Frankly, there's a couple things happening. I think between Jacque and Mike's information, we've seen, and will continue to see, producer inventories draw down.

In North America, we are shipping only to people that are buying right now. So we are not able to, because of our inventory position, kind of fill the pipeline like maybe in other years that we would have. Early indications coming from the farm is that at this type of price level, application rates are as good or better than we've seen in the last two years.

Mike?

Yes, I would just add maybe a little bit of a global perspective. We've seen global shipments come down over the last two years by about 1.8 million tons per year. That goes back to the big build of channel inventories worldwide in 2014. If you recall from charts that we've shown earlier, shipments in 2014 ballooned about 9.2 million tons. It's taken a couple of years to work that down. I think what's exciting, and I think there's a very good and under appreciated story in potash shaping up for 2017.

We're finally going to see, I think, growth in global potash shipments next year to the tune of 2.5 million tons or so, due to the fact that we can't live off the pipeline anymore. Secondly, we've seen some very significant adjustments on the supply side with, in North America alone, about 2.25 million tons of capacity get permanently closed.

So you add that all together, and I think the projected producer inventories that we are showing for North America are probably similar for most producers around the globe. The bottom line is I think there have been some very positive developments take place in the global potash market.

Joel Jackson, BMO Capital Markets.

Hello. Good morning. I had two questions.

First, on Colonsay, I know you talked about making a decision whether you will keep Colonsay off-line in 2017; you'll make it later. Can you give us a bit of insight into where you are right now and the puts and takes on that decision?

<y second question would be you guided to earlier this year that the issue at New Wales, the sinkhole would cost maybe $20 million to $50 million over the next couple years. I think you expensed $60 million in Q3? I don't know if there's some insurance or some accruals going on, but can you give a little color on that? Thank you.

Thanks, Joel. Well, let me touch on Colonsay first. Colonsay we shut down to ensure that we maintained our inventory position over this period of time to what I would say is low but manageable levels. As we go into 2017, we are frankly expecting a pretty good spring for all the reasons that Mike Rahm has just explained. So we are believing that it will probably be necessary for us to be starting up Colonsay in the early new year, as per the original expectations that we set.

In terms of New Wales, and I'll let Rick talk a little bit more about Colonsay in a second and the potash market in North America, but in terms of New Wales, yes, we certainly guided to I think $30 million to $50 million. The difference between the upper end of $50 million and the $60 million was more testing and water treatment for a longer period of time than was originally anticipated.

Just to be clear, I think this is a reserve. This is not an outflow at this stage. This is the reserve that will cover the cost over the next 14 to 20 months, so it's not a cost today.

As per the original expectations, we expect that repairing the hole will take around the $30 million. Other treatment and whatnot around the plant will take the second $30 million.

Rick, do you want to talk about the potash market?

Yes, Jacque.

Good morning, Joel. I would just add to Jacque's comment about needing to bring back Colonsay early in the new year. As we look at global inventories in country, we are sitting in Brazil right now with their in-peak season; but there's a lot less inventory sitting in distributor hands there.

We're seeing drawdowns in India, and the market is beginning to move a lot faster in China. So we see those inventories, in the distributor hands globally, being drawn down. And for that purpose, we're going to need to make sure that we have got the inventory to make that happen.

The other thing, I just want to not let that comment about seasonality get missed. Our demand for this product is highest in those spring months, and we have to be positioned to meet our customers' needs. As we've always said, we're very disciplined. We run to value, not volume. When there is a market need, we will have the volume available for our customers. Thanks.

Chris Parkinson, Credit Suisse.

Perfect. Thank you. You've seen the Chinese take off a few million tons of phosphate capacity this year, which clearly helps offset some increases elsewhere. You've also seen the remaining exports FOB prices continue to decline, which has been reflected in lower Central Asian prices.

So can you just comment on your expectations for the phosphate global cost curve over the next few years, given the high-priced Chinese capacity is now being offset by lower capacity in the Middle East and North Africa? How should investors really kind of parse out these themes through 2018, 2019? Thanks.

Yes, thanks, Chris. I think this is easiest just let straight over to Mike. I might add a bit at the end, but I think Mike Rahm can give us some talk on the FOB.

Yes, Chris. It's a good question and is something that we are watching very carefully. As you saw from the statistics, if you look at year-to-date exports out of China, they are down 29%, 2.4 million tons. We think that is clearly on track for our projection for quite a while here that we'd see about a 3-million-ton drop.

I think just to kind of look at the big picture of phosphate, we see a very constructive longer-term outlook. There are some uncertainties in the near term, and I think one of those is how quickly we see restructuring take place in China. When you look at global phosphate shipments, they really have flattened a bit. They've flattened due largely to declines that have taken place in China and India.

Fortunately, all of those declines have been offset by gains in other parts of the world; but the fact that we've seen declines in China and India has really hit the Chinese industry very hard. As a consequence, we've seen Asian prices, in particular, get hit. As a result, I think that will accelerate the restructuring taking place.

With respect to the industry cost curve, as you know, the Chinese industry is a very heterogeneous industry. There are high-cost players that we think will get driven out. As we've indicated, the Chinese make no bones about the fact that they, too, believe that restructuring is needed.

I guess the bottom line is when we look ahead, we see decent demand growth of 2%, 2.5% per year. If you look at shipments of 65 million tons, 2% growth is 1.3 million tons per year. Over five years, it is 6.5 million tons, which is roughly equal to the additional capacity coming on in Morocco and Saudi Arabia.

So we think that will happen. In China, we would expect that there will be restructuring and at the end of this decade, China will be operating a smaller, more efficient and a bit more competitive industry. So I guess the long-winded answer is that we do see a very constructive long-term outlook for phosphate. In the near-term, a few adjustments that I think the market will go through to set itself up for a very good medium-term outlook.

Don Carson, Susquehanna Financial.

I guess a question for Rich. If you were to do a major acquisition, would you still want to retain your investment-grade rating, or would you be willing to go below that for a while? Or said another way, if you did a major acquisition, would you have to issue equity to maintain that investment-grade rating?

Good morning, Don. We started out as a non-investment-grade Company in 2004 when we were formed. This industry just is not very conducive to be in that mode for any meaningful period of time, and that's one of the reasons why we have being investment grade as important as it is to us.

So I think that's a pillar here. I think you would expect that we would not, at least as currently envisioned, want to slip below non-investment grade, even in the context of an acquisition.

And any update on where you are in discussions with Volley?

Well, that's something you see in the news. We read the same things that you do in terms of these market rumors; but as you know, we can't comment on anything that we do relative to M&A. That's been our long-standing policy, and it remains the case today.

Let me highlight, however, though, that if we were to look at any acquisition, it is very situational, how we would use equity, how we would use debt. It's going to depend on how that affects our credit metrics, how affordable it is, how much cash flow the acquisition might bring, and the long-term returns to Mosaic. We always said that anything we do is going to be focused on adding long-term value to this Company and their shareholders.

Yonah Weisz, HSBC.

Yes. Hello. Good afternoon. A question or two if I may.

First of all, given the operational issues that you've had with the sinkhole and I think with the US Department of Labor issue, would you not think that a bit more sustaining capital could be needed in 2017 to shore up these types of safety issues? In addition, could you talk a bit about how you see taxes developing in 2017? What kind of tax rate you think you may be paying?

Okay. I got to understand if I got the questions right.

First of all, the sinkhole is part of our capital and expenditures that we will spend in 2017. We go through a very detailed and comprehensive process to determine our capital needs. In doing so, decide what we can do balancing off our need for cash, the benefits of long-term sustaining capital, et cetera. So all of those things come into play.

The sinkhole, in terms of capital, will probably be half of that. $60 million will be capital, and so it is virtually not an issue from a capital perspective.

I don't know what you are referring to in terms of Department of Labor, so I'm going to leave that. But recognized that the sinkhole itself, a natural event. These things do happen. It is very unfortunate, and our goal is to make it right.

We take it very seriously. We will make it as per before. We will treat the water, and we will spend the money that it requires to do a great job of that. That is our social commitment.

Yonah, this is Rich.

If you were referring to the RCRA settlement or matter that we had previously, that would be included in our forecasted capital. So we would not see any incremental capital beyond what you've heard earlier today.

You asked the question about taxes in 2017. I think that taxes, at least in the short-term with the lower level of profitability because of just simply the lower pricing environment you have for phosphate and potash. You should that expect that in 2017 a good proxy for our effective tax rate would be around 10%. Then as the cycle continues to turn in 2018 and later, a normalized level for us would be approximately 20%.

John Roberts, UBS.

Thank you. How much of the margin improvement in international distribution is timing effects? I assume what you are buying is going down faster than what you are selling.

I'm going to hand this over to Rick. Now clearly, as you sell down inventories at higher prices in a distribution business, you will make some gains. But the underlying performance of the business is actually improving, and that's driving our earnings. Rick?

I think when we look at the margin tower that we get in our international distribution businesses, it's driven by how we go about selling it. It is the logistics, and it's how we choose to operate our plants and our blending plants in each of the countries.

So with better utilization and making use of how we move product into the country and how we move it out to the customer, we are able to increase margins. The biggest portion driving the margin increase is us being able to being able to deliver a premium product like MicroEssentials in those places.

Vincent Anderson, Stifel.

Good morning. Thanks for taking my question. I just wanted to touch, high-level, on you marketing strategy for Ma'aden. As that ramps, are you thinking about maximizing net back on every ton or targeting larger tenders or, given what we're seeing in the market over the next couple of years, walking that capacity out gently?

I'm going to hand that again back to Rick. Let me say Ma'aden will come in, and it offers two advantages to Mosaic that I want to emphasize. One is geographic diversity and the ability to reach our Asian markets at a beneficial freight cost. The other is just its low, low position on the cost curve, which is a low sustainable bottom-of-the-cost-curve position. So we see that as an important addition to our portfolio of products.

How we bring that to market will depend largely on how the market is developing at the time. As Mike said earlier, we fully expect that this product will be needed as the Chinese industry is restructured. So let me hand it over to Rick to talk a little more detail on the marketing strategy.

Yes, Jacque. I think you've cut, you've really cut to the big items. We've got existing sales books on and will have them; and from a Mosaic perspective, we're going to fit those tons into our existing sales book.

The beauty about having the tons coming out of Ma'aden is, frankly, we will be the first multi-hemispheric phosphate producer. We will be able to move product to markets, which gives us significant advantage when we go to looking at where we might ship product out of against our sales book. The details of the Ma'aden marketing plan are still being developed, though.

Now, I'm going to hand it over to Rich Mack to make a couple of comments as well. He sits on the Board of the joint venture and is intimately involved in the details.

Yes, and I was just going to speak to timing. We've noted that the ammonia production has begun in Saudi Arabia, and that will continue to ramp up. I think with respect to phosphate production, as we have noted in the past, I think a good date is going to be the middle part of 2017.

This is not like when you are commissioning a brand new plant, you don't just turn on the spigot and have 3 million tons the next day. So it will be a ramp-up process that will take likely several months before we would be anywhere near a full capacity rate.

Michael Piken, Cleveland Research.

Good morning. I just wanted to see and dig in a little bit more into India and your outlook for 2017.

Do you see the change in the subsidy levels having a big impact next year, or do you think it's more just a function that India's worked down their inventories that's driving the growth that you are forecasting for that market? Thank you.

Thank you, Michael. I'm going to hand that straight to Mike Rahm again to talk about the India market.

Yes, Michael, I think there are several factors that underpin our optimistic outlook for India next year. One, I'm going to start with the rupee. That has remained relatively stable compared to the volatility of other currencies.

Secondly, international P&K prices have come down. As a consequence, that has, with current subsidies schemes, that's translated into lower retail prices. That is underpinning going on-farm demand, which is resulting in a pull-down of channel inventories, especially at kind of that retail level.

As we go forward, I think there's great opportunity for India to try to address the imbalance between nitrogen phosphate and potash use. I think what they've done so far with the subsidy is conducive to trying to achieve a better balance. So I wouldn't see any major change in that. I think given where international prices are headed, given a stable outlook for the rupee, there will be a subsidy in place that continues to encourage P&K consumption in India.

Jacob Bout, CBIC.

Good morning. Thanks for taking my call.

Jacque, maybe you can comment about how you're thinking about the recent wave of consolidation in the [Camen] fert sector. Do you think you need to be bigger to be competitive? Maybe specifically thinking about the potential Agrium and Potash merger, how does that change your operating environment?

Thanks, Jacob. Look, in terms of consolidation, we have long said that there would likely be consolidation towards the bottom of the cycle. Having said that, bigger is not necessarily always better. I'm not referring directly to any of those. I think they have their own benefits and their own reasons for doing it; but for us particularly, I don't think we need to be bigger to be competitive.

I'm very comfortable in our competitive position. I'm very comfortable in our position and how we will compete with those bigger companies, and particularly the NewCo or combined Agrium/Potash company. I feel comfortable we can compete with that.

How does that affect our strategy? Look, I think our strategy has long been to serve our customers well, make sure we run for value, not volume, to make sure that we run for a long-term customer relationships that gives great service and product to our customers. I believe as long as we do that, we will do very well in any market.

Okay. We have time for a couple more questions here, and then we will have to go.

PJ Juvekar, Citigroup.

Good morning. Jacque, you mentioned bigger is not better. Your competitors are merging, and you want to be smaller in relation to their size. But you also don't have the kind of cost cutting opportunity that they will have. So would you be willing to align with another, maybe a smaller, distributor?

I think that's getting into a little too much detail to ask if we would align with a different distributor. We have a number of customers, all of whom are important to us, including CPS, Agrium's retail arm, is an important customer. I don't believe the alignment of retailers with suppliers is necessary in this case.

I want to go to your other comment about not having the cost-cutting potential. I think Mosaic has cut $575 million over time, or is committed to and close to completing a $575 million cost-cutting program, which I believe is industry-leading. We have seen fantastic changes in our cost structure. We've done great things with respect to our capital management.

So again, on a per-ton basis, we absolutely believe we have the same potential to cut our cost. We believe we are as focus, or more focused, on cost than anybody else in this industry.

Brent Wong, Piper Jaffray.

Thanks for fitting me in here at the end, guys. I appreciate it.

Mike, just wanted to ask if you could talk about some of the currencies in your outlook into 2017 and impacting potash pricing, specifically your Russia, China.

Yes, thanks, Brent. That's a good question. To some extent, we think the key potash currency is going to follow oil. I guess if you've got a view on oil, I think you have a view on some of the key currencies. If you look at what the Russian and Belarusian ruble have done since the first quarter of 2014, they collapsed about 55% through the first quarter of this year.

With some improvement in oil prices, we've seen the Russian ruble appreciate a bit. I think looking ahead, I guess we are not oil experts, but I think if you are trying to assess where that is going, having a view on oil is probably your best guide.

Okay. Thank you. So to conclude our call, I just want to reiterate a couple of our key messages.

First, business conditions are improving and have improved throughout the quarter, as expected; and our outlook remains positive.

Second, the actions we've taken to reduce our costs, to optimize our assets and lower our capital spending are clearly benefiting our bottom line.

Third, our international distribution business is exceeding expectations, primarily because of strong economics and our investments to grow in Brazil.

Mosaic remains well-situated to succeed through this low point in the business cycle and to thrive as conditions continue to improve. So thank you for joining our call and have a great day.

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