美盛公司 (MOS) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to The Mosaic Company's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Your host for today's call is Laura Gagnon, Vice President, Investor Relations of The Mosaic Company. Miss Gagnon, you may begin.

Thank you, and welcome to our third quarter 2018 earnings call. Presenting today will be Joc O'Rourke, President and Chief Executive Officer; and Clint Freeland, Senior 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 are using during the call are available on our website at mossaicco.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 yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our first quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing also contain important information on these non-GAAP measures.

Now I'd like to turn the call over to Joc.

Good morning, everyone. Thank you for joining us today. Mosaic's momentum continued to build in the third quarter. Our results reflect improved market conditions as well as the benefits of the many moves we've made to strengthen the company. Our key points today are: First, Mosaic has made tremendous progress. We've transformed our businesses and created significant operational leverage. Second, global potash and phosphate market fundamentals are improving. Demand growth remains strong while supply is materializing slowly. And third, as a result of our increased operational leverage and improving market conditions, we are optimistic about our future, both near and longer term. We have a road map to generate significant cash and drive strong shareholder returns.

For the quarter, Mosaic's net earnings were $247 million compared with $227 million a year ago. Year-to-date, net earnings were $358 million. We delivered earnings per share of $0.64 or $0.75 net of notable items, a year-over-year increase of 78% despite our higher share count.

Just 1 year ago, we announced significant financial and operational moves to position the company for success. We idled our Plant City phosphate operations and indicated we would focus on increasing the efficiency and recovery rate at our remaining phosphate plants. We announced significant increases in our expected transformational targets related to Mosaic Fertilizantes and we announced our intention to delever the balance sheet by 2020. Since we announced these actions, we have accelerated our progress and created significant earnings leverage as today's results clearly indicate.

We reported year-to-date adjusted EBITDA of $1.4 billion. We increased our 2018 synergy expectation from Mosaic Fertilizantes and we announced we've reached our through cycle debt-to-EBITDA targets. Overall, good market conditions and robust performance across our 3 business units are leading to better 2018 results than our initial expectations. Today, we increased our guidance for 2018 annual adjusted EBITDA to a range of $1.9 billion to $2 billion and our adjusted earnings per share guidance to a range of $1.80 to $2 per share.

Let's start with Mosaic Fertilizantes, our business in South America. Year-to-date in 2018, Mosaic Fertilizantes has delivered adjusted EBITDA of $277 million compared with a pro forma EBITDA of $50 million a year ago. The performance of that business has been helped by excellent Brazilian agricultural market conditions and a weaker Brazilian real. But the key driver of the improved earnings has been our transformation of the business. We are achieving synergies faster than expected and we now expect to reach $140 million to $160 million in net savings in 2018. We also expect to reach our target of $275 million in net savings well before the end of 2020.

The transformation of the business and the benefits of our upstream, downstream integration are easily visible, both on the ground in Brazil and in our results. Across our plants and mines, employees are energized and they are bringing innovative ideas to improve our operating efficiency. When we announced the transaction, we expected it to be accretive to earnings. Year-to-date, the acquired business has added $0.11 per share, inclusive of the impact of issuing $1 billion in debt and 34 million shares but exclusive of the $8 million reserve in the third quarter for the potential of paying out on the contingent portion of the purchase price.

Moving on to be phosphate market, which remains relatively tight. Prices held steady following a $75 increase over the past year. Margins are under a bit of pressure with raw material prices rising. Still, fundamentals are very strong. In fact, our outlook for phosphates has continued to improve over the past several quarters. Global demand continues to grow and our market analysis team expects another record year for shipments in 2019. Several actions have tightened supply, including the idling of our Plant City facility, slower-than-expected ramp-ups of new facilities and reduced Chinese exports. In 2019, we expect global demand growth to outpace supply additions, requiring higher global operating rates and providing support to prices and margins. The market is feeling a temporary impact from the wet fall in North America. The expectation of an early harvest and, in turn, an early fall fertilizer application season has not come to fruition. Shifts in agricultural seasons can delay or accelerate demand but they rarely affect the full year sales. It is important to remember that this business is seasonal as well as cyclical.

This expected seasonality is reflected in our guidance for the quarter and for the full year. The changes we've made in our phosphate business magnify the impact of these improving market conditions. Transformation is well underway in our Phosphates business unit, which has produced $653 million of year-to-date adjusted EBITDA, up almost twofold compared to the same period a year ago. We have made extensive, structural permanent changes to the way we operate, resulting in a much more efficient business for the long term. We said we would run our remaining plants harder and we have with operating rates up 7% year-over-year.

Let's move on to potash. The potash market is tighter today than it has been in years and prices are moving up as a result. In addition, the discount we saw recently in the U.S. has largely disappeared. Supply disruptions experienced by some of our competitors and the slow ramp-up of new supply, combined with growing global local demand, have driven potash prices higher by approximately $60 per tonne over the prior year. The Potash business unit began as transformation before the other segments as its consistently low cost base demonstrates. The teams at our 3 world class potash mines are executing at a very high level with strong day-to-day production and, like our other business units, excellent safety and environmental performance. At the same time, the ramp-up of Esterhazy K3 continues according to our expectations. As the transition progresses, we will have the ability to drive production costs still lower with an efficient new mine and phasing out of brine management expenses at K1 and K2. In fact, we completed the conveyor belt tie-in from the K3 shaft to the K2 mill this summer.

Now I'd like to turn the call over to Clint Freeland to discuss current period results and near-term guidance. Clint?

Thanks, Joc. During the third quarter, Mosaic generated $0.64 in fully diluted earnings per share, $0.75 per share after adjusting for notable items and adjusted EBITDA of $606 million. As noted earlier, these strong results were driven by the combination of continued progress on our cost structure and business transformation initiatives across the company and improved market conditions. With these strong quarterly earnings came strong cash flow from operations at $524 million. As you can see, Mosaic ended the third quarter with just over $1 billion in unrestricted cash, roughly in line with the balance at the end of the second quarter despite paying down $400 million in debt during the quarter, investing $241 million in CapEx and experiencing a $200 million reversal in customer prepayments in Brazil. Based on the strong financial performance to date and our outlook for the rest of the year, we are increasing our full year earnings guidance for the third time this year. We now expect the company to generate adjusted EBITDA of $1.9 billion to $2 billion and adjusted earnings per share of $1.80 to $2.

In addition to strong year-to-date results, our guidance reflects continued to strength into the fourth quarter, albeit with normal seasonality; the accelerated realization of synergies in Brazil as outlined earlier; and a foreign exchange rate of roughly BRL 3.7 to the U.S. dollar. The primary risk in our fourth quarter outlook is currency related given the recent volatility of certain currencies, particularly the Brazilian real. That said, as always, we continue to monitor grain and oil seed prices and international trade developments and any impact that they may have on finished fertilizer markets.

Mosaic's substantial cash generation over the course of this year has allowed us to pay down $700 million of debt, meeting our deleveraging commitment 2 years ahead of schedule. While our debt metrics are now more in line with previously disclosed through cycle target levels, we are cognizant of the cyclical nature of our industry and the necessity for financial strength and stability through all parts of the cycle. It's important to note the sensitivity of our leverage ratio to prices. For example, a $20 per tonne change in product pricing can move adjusted EBITDA by $340 million and net debt-to-EBITDA by 0.4 turns. As such, we intend to continue evaluating whether further debt reduction over time as part of balanced capital allocation program is appropriate. With that said, our capital philosophy has not changed. Our top priority continues to be ensuring a solid long-term foundation for the company. We will continue to invest in our core assets to ensure their safe, reliable and efficient operation; and maintain financial strength and flexibility through prudent balance sheet management. Beyond that, we allocate capital to the highest risk-adjusted return opportunities available to the company, while also keeping in mind that a regular return of capital to shareholders is a key element to a balanced and efficient capital allocation program.

With that, I'll turn it back to you, Joc, for closing comments.

Thank you, Clint. We expect to have many opportunities to grow in the years ahead. Of course, there are many factors we keep an eye on. At the moment, we are monitoring the impacts of the recent election in Brazil and the strengthening Brazilian real as well as Chinese phosphate export volumes. But the cyclical trend for industry is clearly up and Mosaic has earned a very strong position from which to outperform. We have created a highly efficient, low-cost franchise and we are confident that we have the talent and that we will continue to generate the capital necessary to win and grow for the long term.

Now I will take your questions. Operator?

(Operator Instructions) Your first question comes from the line of Steve Byrne.

This is Ian Bennett on for Steve. The Ma'aden JV that you have is not really showing up in equity earnings right now. It seems like that's just a small loss. Could you talk a little bit about what your expectation is for operating that facility in terms of when it would hit full production rates and when it would contribute to Mosaic's equity earnings?

Okay. Thank you, Ian. Welcome. If I'm looking at Ma'aden and our involvement in Ma'aden, I would say, look, our expectations for Ma'aden was that over the long term, this would be involvement in one of the largest, lowest cost phosphate developments in the world. As such, it was not meant to be an early, quick return. And as you know, it's a very large complicated project and with those, we expect at least, it will take time for that to ramp up. And so our expectations and I think you really need to go to Ma'aden to see the official expectations of their ramp up but as we come to full production, that will be a very low cost producer and we should start to see earnings from it.

Your next question comes from the line of Andrew Wong.

So on the K3 mine, can you just maybe provide a little bit more updates there, when you expect that to be fully up and running, what that does for your brine cost? And maybe just help clarify the conveyor system from K3 to K1, K2. What's that capacity and -- I mean, within the near term and then over the longer term?

Sure. So the K3, in terms of timing, we are on the same schedule we've been on for some time now, which was to integrate K3 and -- start up K3 and slowly ramp it up to completely take over from K1 and K2 in that 2023 to 2025 timeframe. What is happening today is, as we mentioned earlier, we have just connected the conveyor from K3 to K2. That will allow the startup of commercial production and ramping up of the incremental 1 million tonnes that would go into the K2 and K1 mills. Each of those conveyors will be capable of approximately, let's say, 3 million tonnes of finished product or approximately 9 million tonnes of ore. So what that allows us to do is over time completely reproduce the production from K1 and K2 from K3. Once that is complete, we will decommission K1 and K2, which will eliminate all brine costs.

Your next question comes from the line of Joel Jackson of BMO Capital Markets.

This is Robin on for Joel. Can you walk us through cadence of the guidance reduction for the phosphate margins in terms of both phosphate and feedstock prices? And how do you expect margins to fare in Q1 '19 and, if you can, into the rest of the year?

Sorry, Robin, could you repeat the start of that question? It was a little unclear on the call.

Yes, sorry. So if you can just walk us through more of the cadence of the about $10 per tonne gross margin decline in phosphate business in terms of both phosphate pricing and feedstock prices in Q4? And just how you expect that margin to fare in Q1?

Sure. Okay, great. What I'll do here, Robin, is I will hand this to Corrine, but as we mention in our prepared remarks, there is some margin pressure on -- which is normal seasonality at the end of the year and mostly due -- more than price, due to raw material tightness. One thing I will say, though, on this is, although the margins do tighten, we end up having a small competitive advantage at these prices of ammonia and beyond because most of our ammonia is based on production costing. So that actually helps us against the competitive market. In terms of the Q1 outlook, let me ask Corrine and Mike -- or Mike to give a few comments.

Sure, thanks, Joc. We are seeing a little bit of seasonal price pressure on the margin. This is pretty normal factor. We have had a late start to the fall season. And although it's been late, now that things have gotten moving, we're seeing very big volume movements. And so some of the nervousness in the market that happens at this time seasonally is starting to abate because of the strong movement in the shipments. Some of that margin pressure is a little bit of price compression only in the North American market, which was at a significant premium to the other global markets, as well as a little bit of raw material price increase. The other thing I would say about these seasonal dips that we see for the winter-fill time period is that we virtually always see that recover as we get into those spring seasons. So it's a very temporary seasonal setback. Mike, do you have anything you want to add?

No, the only thing I would add is if you look at the seasonal pattern, I mean, margins in Q4 have dropped in 5 of the last 5 years, and they've rebounded in 4 of the last 5 years by more than the seasonal drop in the fourth quarter. So yes, I would term this just a normal seasonal adjustment in margins.

Mike, do you want to give just a little bit color on the market going forward in through Q1 and beyond in terms of the tightness of the phosphate market?

Yes. If you look at our supply and demand for 2019, we see decent growth start on the demand side. We're looking at about 1.8% or 1.2 million metric tonnes of additional demand in 2019. And that should start, I think, in a normal seasonal way as far as positioning for the southern hemisphere crop and the northern hemisphere crop. And what's interesting, if you look on the supply side, we see several puts and takes there. We expect that, on the negative side, we're seeing a couple of shutdowns in the U.S -- or in North America with the Redwater plant and the Geismar plant. We are seeing some incremental capacity come on in terms of a continued ramp-up of the Ma'aden joint venture, the Jorf phosphate hub #4, as well as some smaller plants coming on stream in Turkey and Egypt. So we've put all that together and when you add up the changes in demand versus the changes in supply, we still come up with roughly a balance, not taking into account any changes in China. And our assessment is that we could see a 0.5 million to 1 million tonne or more decline in Chinese exports. So what we see is another period much like this year where the phosphate market remains in deficit. And what we're saying there is that the world doesn't run out of phosphate, but you see pipelines get drawn down, you maybe see a little bit of demand curbed on the edges in some markets, and you do see existing producers probably squeezing out a few more tonnes to reach an equilibrium in the market.

Your next question comes from the line of Don Carson.

This is Jake Lacks on for Don. On capital deployments that hit your debt paydown target, and then should be a reflection of cash flow next year given where Nutrien prices are today. Can you kind of give a little bit color on your priorities there?

Sure. Thanks, Jake. I'm going to talk a little bit and maybe hand this over to Clint to talk some more and give us some more color. But to summarize, with the impact of our business improvements, obviously the impact of our Brazil acquisition and improved market conditions, this year, we've been able to generate approximately $1.2 billion of operating cash flow, which really highlights just the kind of earnings power we've created in this business. And this, as you mentioned, has allowed us to pay down the $700 million of term loans well ahead of our target, as a matter of fact over 2 years ahead of our schedule. So this has put us in a position to really review our overall capital allocation philosophy and targets. So let me hand it over to Clint just to give a little more color on how we've been thinking about our capital philosophy going forward.

Yes, thanks, Joc and hi, Jake. So I think when it comes to allocating capital, as we've talked about before, our first priority is ensuring that the company has a really solid financial and operational foundation, making sure that the company's leverage profile and liquidity position is where it should be to remain strong and flexible through the cycle. I think it's also important to invest appropriately to maintain the safe and efficient operation of our core assets. Now beyond that, I would look to, and I think we look, to allocate capital to the highest risk-adjusted return opportunities available to us. We also pay a common dividend on our stock. And while it's fairly modest at this point, we do think it's an important part of a balanced allocation program and we'll continue to evaluate what that payout looks like over time. I think going forward, when we expect earnings and cash flow to be strong, I would expect to see a balanced capital allocation program where we continue to strengthen the balance sheet, invest to grow the business and provide a regular return of capital to our shareholders. So I think that's how we tend to think about capital allocation and try to prioritize our program.

Your next question comes from the line of Jeff Zekauskas.

2 questions. Why do you think Chinese phosphate exports will decrease another 0.5 million tonnes next year, that is, what's behind it? And in terms of your cash flows, your receivables jumped up a couple of $100 million sequentially, so did your payables. What's behind that? And how did the $200 million reversal of Brazilian prepayments flow through? Was that a benefit or not a benefit? What line did that touch?

Sorry, Jeff, got the mike. First of all, let's talk about Chinese exports and what we think of Chinese exports. And I'm going to leave this to Corrine to really talk about but at a high-level, we do see active things by the Chinese government to reduce both water and air pollution and particularly, to reduce pollution along the Yangtze River. And those are now starting to take effect and they're increasing the cost to produce phosphates in China but also reducing the overall availability of Chinese phosphates. So with that, let me hand that one to Corrine, and I will come back to the cash flow question.

Thanks, Joc. We are seeing a decrease in Chinese exports. While we've seen a small increase year-to-date, January through September, in those DAP exports, the MAP exports are off very significantly, about 23%. And that really is a result of what Joc was talking about with the environmental pressures happening on producers. There are a number of things happening in the environmental area and that's what we've been talking about for a while on Chinese exports. The first is, there are taxes that have been levied against the producers that are adding $10 to $15 a tonne in their operating costs because they have to pay tax against the environmental pollution. The second thing that's happening is higher operating costs. So there is a significant reduction in rock mining because the government has disallowed mining in some environmentally sensitive areas. And so the Chinese National Bureau of Statistics reports that phosphate rock mining is down 30% through September. So you have producers that used to be integrated with the rock mines are now nonintegrated producers having to purchase rock from others and rock prices are up significantly. We're also starting to see the start of rock imports into China, indicating a shortage of that raw material. And then lastly, I would say there's significant capital cost at risk here as well. You've got plants that are within the 1 mile region of the Yangtze River are being forced to relocate. And some that are a little farther out from 1 mile are being told that they have significant capital they have to spend to manage their gypsum differently and handle other environmental pollutions differently. And so we believe -- and the timing on those changes and those plant relocations is by the end of 2019 and then some by the end of 2020 for the capital investments. So we really believe that there will be a watershed year here in 2019, 2020 on the environmental impacts affecting these Chinese producers, and we expect exports will be down. Again, we're carefully watching these exports. And if you take a rolling 12-month look at exports, they are down about 11%. Mike, anything you want to add?

Yes. Just I'd highlight that the rolling 12 months total on September 30 was down, I think, 1.17 million tonnes from September 30, 2017, so there has been a substantial decrease. If there are other questions later on, maybe we can come back and talk about a specific example.

Sure.

Good, Jeff. I'm going to leave that one there. Obviously, the bottom line is what we're seeing is we're seeing stuff on the ground, and these higher prices are driving probably some higher utilization in plants that may not necessarily have otherwise been running at this time. Now we're going to move on to the question -- I'm just going to rephrase this a little bit to make sure I've got it right. But if I heard you correctly, cash flow from receivables is actually up by 2 months this year and you are asking us to clarify what is the impact of the Brazil prepayments on our cash position. I'm going to hand that straight over to Clint who I think has a pretty good understanding of what you're trying to get.

Yes. Thanks, Joc. So I'll start with the Brazilian prepayments. Those prepayments at the end of the second quarter were about $500 million in cash, and where you see that on the balance sheet is in the cash balance and in our payables. And when that reverses, what you have is it almost gets transferred from balance sheet, goes to the income statement where that $200 million reduction in prepayments comes out of the cash balance and then flows through your P&L, and then to the extent that you have margin on those sales, which obviously you do, that would then come back through the cash flow statement onto your balance sheet. And so net-net, you'll have a reduction in overall cash balance for those prepayments but not the full $200 million because you'll end up with the margin on your balance sheet. I think the other part of your question was around receivable and payable balances. And one of the things that I would -- I assume that you're looking at our balance sheet, recall that we closed on our acquisition on, I believe, January 8. And so the effect of the acquisition and bringing the working capital balances onto the balance sheet is part of that delta. As you look at the quarter in particular, I would say that from a receivables standpoint, we had pretty high sales in September, in North America in particular, and so that would have been booked into receivables. That should, again, turn in the fourth quarter. So that would be the story around receivables. I think payables, nothing really out of the ordinary there. I think it's just a matter of timing of various accruals and other things throughout the year. So I would say nothing of particular note there.

Okay. Thank you, Clint.

Your next question comes from the line of Ben Isaacson.

It's Oliver Rowe on for Ben. So looking at your phosphate shipment outlook on Slide 18, you have a meaningful increase in shipments to India in 2019. Do you not expect any demand destruction from India's rupee depreciating rising phosphoric acid prices in the higher MRP's which are all impacting affordability? Maybe to put that another way, if the currency were to revert and/or the MRPs dropped, would there be further upside to your demand estimate for India?

Okay. Thanks, Oliver. I'm going to mostly hand this to Corrine, but let me make just a general statement and India probably is the most sensitive to this. But in any situation, and next year I believe is a situation where we're going to be somewhat supply constrained in terms of growth, I think then, that at some point, you do have to ration ultimate supply. And so the least affordable markets will have to ration their growth. And I think that is something that could happen depending on price movements in India, but it will only be because of those price movements. So there's obviously some sensitivity to both currency and prices in a market where their product is not sold on the international market but sold at a controlled price in country. Corrine, do you want to talk about that a little bit, please?

Sure. I think there's a couple things that we're watching very closely here and we have been looking to see if there's any evidence of demand destruction and we aren't seeing it yet today. It is sensitive to the currency changes. All of those seem to have stabilized and they have adjusted their MRPs several times throughout the year. And at each level, we're continuing to see farmer purchasing. And so as of today, it looks like we are continuing -- we're not seeing demand destruction, we are continuing to see strong demand for phosphate. We also have an increase in the 2019 shipments because you've seen a relatively significant reduction in the domestic production and operating rates of the domestic producers. And that needs to be made up with some important volume.

Okay, thanks, Corrine.

Your next question comes from the line of Alex Falcao.

My question is regarding Brazil. What made you increase the targets from synergy there? And you said that you're monitoring the new government. There's a massive shift in the currency from 4.50 to 3.70 now. Just wanted to understand the impacts of that going forward for you. And within which, I know you guys have a very complex hedging policy and what you're exposed to. Were you long the currency there or short the currency there? Just wanted to understand what's going to -- that effect is going to have going forward.

Okay, Alex, thank you. So let me hit this in order if I've got it. There's sort of 3 aspects here I just want to hit. First of all, let's talk about the election of Mr. Bolsonaro. Bolsonaro ran on a pro-business, pro-agricultural campaign. In fact, Bolsonaro was officially endorsed by the agricultural parliamentary group during the elections. So that is a positive from an agricultural perspective. However, in Brazil, to make things happen, you really have to build coalition, so it's a little early to see. The one thing I will say however, though, is his first appointees, including his nominee for Justice Minister, Sergio Moro, and his nominee for Finance Minister, Paulo Guedes, have both been very well received, and I believe those bode well for his success, which we look forward to. The second question you asked was about the synergies and what I would say there is, if we -- what we had was a Brazil team that really took this on and has done a very good job of going after synergies and improvement, which has put us in a position to achieve more than the $100 million that we originally thought we'd achieve this year. Matter of fact, our $140 million to $160 million. But also puts us ahead of schedule to achieve our total $275 million of synergies we ultimately expect to achieve from that business. In terms of the currency and the hedging, I really think there's enough detail there that I should hand out over to Clint to talk a little bit about our strategy.

Yes. Hi. Thanks, Joc. So I think from a currency hedging standpoint, we typically hedge on a rolling 3-month basis to the extent that we are long the BRL. And so when you have at least short-term volatility in the BRL, we should generally be hedged against that. Longer term, we do also hedge against some of our BRL expenses. If you recall, a lot of our revenues there are dollar based and our expenses are BRL based. And so what we try to do is to have, again, a kind of a rolling program over time that at least allows us to navigate some of the shorter-term volatility. But I think longer term, you are a little more subject to the currency fluctuations that you see again over time.

Thanks, Clint.

Your next question comes from the line of Chris Parkinson.

This is Graeme Welds on for Chris. Was just wondering about the volume guidance on both kind of the phosphate and the potash side. Around the phosphate side, it looks like you took it down a little bit, and I think at the beginning of the call you spoke about some seasonal factors, particularly in North America, maybe influencing that. I was wondering if you could give any color on the composition of what that volume outlook looks like in terms of that MAP versus MicroEssentials, et cetera. And then on the potash side, a similar question where your volumes appear to be quite strong. I'm just curious where you're seeing kind of the most of that strength heading into 4Q.

Okay. Thank you, Graeme. I'm going to hand this over to Corrine, but let me start with the volume guidance for potash. Clearly, with the strength and the tightness of the potash market globally, we're seeing good international demand right now, which has more than offset the slight seasonal weakness you might have expected at the end of the normal North American season. In terms of phosphate guidance, the volume drop there is normal seasonality. That's probably driven mostly by the completion of the biggest season in Brazil and the end of the North American fall application season. Corrine, do you want to make a few comments?

Yes. Not a lot to add there, Joc. I completely agree on the potash side. We have big shipments going on and good volume expected in the fourth quarter. The only limitation really is going to be just getting all of those logistics to get that volume moved and the phosphate guidance issue is largely that winter-fill season, do we end the fall season and the peak fall season with a strong winter filled program that moves into December? Or does it really move into that January time period? And we're forecasting a normal amount of winter-fill activity for December rather than last year was an exceptionally large winter fill early in December.

Thanks, Corrine.

Your next question comes from the line of Jonas Oxgaard.

I'm trying to make sense of your Q4 guidance. Your phosphate guidance is down, but your potash guidance is up, and then your Vale Fertilizantes is down. If I tally them all up, I end up with about a $0.10 reduction, which is usually about what you usually get in Q4. And yet your implied guidance for EPS in Q4 is minus 20 or so. Am I missing something? Or are you being conservative? Or how should I think about that?

Sorry, Jonas, we're looking at each other to try to understand if we can -- we don't actually -- as you know, we don't actually give EPS guidance on a division by division thing. I'm not sure I know how to answer that. I'm going to hand it to Clint to see what he can...

Yes. No, Jonas, I would maybe suggest that we take it offline and provide you some clarity. I think we're having a little -- somewhat of a challenge kind of understanding and answering your question right now, but I think we can follow up with you, if that's okay.

Your next question comes from the line of Adam Samuelson.

A lot of grounds covered. Just on the potash side, your guidance for next year on shipments. Can you talk about your supply outlook? What's the assumption in incremental capacity coming from K+ S, from EuroChem, closures in the rest of the world? And is there any assumption or early kind of view that Canadian production ex K+ S would be up in any material amount in 2019?

Okay. Thanks, Adam. Sure, we'll give you -- I'll get Mike to give you an overall look at the S&D. The one thing you just asked that I would like to highlight, I think our view is over the next 5 years, one of the things that will happen is the output of the North American suppliers ex K+ S will actually increase as the other supply is used up and the market gets tighter, really the only excess capacity out there today sits with the big 2 North American suppliers. And so with that, I expect the utilization rate by those 2 might well increase in the next few years. Mike, do you want to just give a quick highlight of the S&D?

Sure. We actually published this in the Non-Deal Roadshow report that is on the website that there's detail in terms of our changes in the S&D. And in terms of, let me just talk a little bit about 2018 first and how that carries over. But when we look at there's been a series of either, call it, supply disruptions or supply changes that have probably taken a good 0.5 million tonnes out of the market. So as you know, the ICL closed their Boulby mine midyear. SQM is maximizing the amount of lithium they produce versus potassium chloride. K+ S had production problems at its Werra complex with low water levels in adjoining rivers and so forth. So you add that up, that's about 500,000 tonnes of lost production next year. When we look at this, K+ S is going to close their Sigmundshall mine, which is probably 450,000 tonnes. The Boulby mine produced half of this year, so there will be another half of a year loss there. So when we add up 1.2 million or 1.1 million tonnes of demand growth coupled with the supply changes that we see, we show a deficit of about 0.5 million tonnes. And again, as we said for phosphate, we're not expecting the world to run out of potash anytime soon, but we do think that implies that pipeline inventories worldwide get drawn down to very low levels, and that prices remain elevated enough to bring supply and demand into equilibrium.

Thank you, Mike.

Your next question comes from the line of Vincent Andrews.

This is Neel calling in for Vincent. A couple of questions on Mosaic Fertilizantes. You accelerated the 2018 synergy capture, but it seems that the gross margin per tonne for the segment is being guided down a bit sequentially to $40 per metric tonne at the midpoint versus $42 at 3Q. So what is driving that? And then, second, total synergies were kept flat at $275 million. Is there still an opportunity for additional upside to that number?

Okay, Neel, thanks. Well, first of all, let me talk about the Fertilizantes margin for the fourth quarter. That is almost exclusively driven by change of FX. There has been a strengthening of the Brazilian real particularly after the election of Bolsonaro and whether that holds or not, but it has given us a short-term expectation of a stronger real there. In terms of the synergies, we made a conscious decision not to increase synergies beyond $275 million and the reason for that was we -- in our investment thesis, which we brought out last year, we said $275 million was the amount we expected to gain by the combination of the 2 businesses. We fully expect that we will set goals for business improvement beyond that, but we do not believe they are necessarily something that we should call synergies after the original combination of those 2 businesses. So for that reason, we have looked at this as being a milestone that we're going to leave as it is.

Your next question comes from the line of John Roberts.

In Brazil, does the increase in acreage and the shift to soy present any logistical challenges for you to meet demand? Do you have any constraints down there in Brazil given the shift going on?

Thanks, John. Look, one of the huge advantages we have in Brazil is our distribution business is well positioned in all of the major agricultural areas of the country, and we support and supply farmers for a number of crops. And when we combine that with a production business that is right there as well in the main growing 8 regions, we think we are actually the best positioned to serve the growing soybean market in Brazil. And whether it's soybeans, corn or coffee, sugarcane, we believe our distribution business and our new production business are well positioned to serve those.

Your next question comes from the line of P.J. Juvekar.

Can you talk about Plant City operations? Is it safe to assume that those -- that plant is down and probably won't come back again? And then secondly, what is your demand expectations for North America given record crop this year, which means record nutrient removal from the ground? And also the shift from soy to corn that you had some demand for fertilizers here in North America.

Sure. Well, let me talk about Plant City. At this stage on Plant City -- sorry, thanks, P.J. Let me start with Plant City. But Plant City, we're gathering information and we're in active discussions with both the federal and state regulators right now. And we will be in a position before year-end to make a decision on Plant City going forward. And that's consistent with where we've been before and we're really not able to talk about that until those decisions are fully vetted and made. In terms of North American demand, I think the simple answer, and Corrine and I were just on a North American customer tour a couple of weeks ago. And what I would say there is you have it absolute right. The record crops are removing more and more fertilizer from the ground and that is, meaning, that there is an increasing need to replace that fertilizer. So while we don't expect huge growth rates in North America, we do see that market as solid. And now as the crops continue to grow, we expect a good demand. The other aspect of it is we saw in this marketing trip was, the move towards precision agriculture rather than hurting the demand for fertilizer is probably helping the demand for fertilizer because people are putting the right amount of crop nutrients in the right places, and that is really helping both the demand and the usage of that fertilizer. Corrine, do you want to touch on anything else?

Sure. The only thing I would add is, we've got our forecasted shipments for North America for phosphate for 2018 at about 10.2 million. And 2019 range is 9.8 to 10.1. So very similar. I think in 2018, what you saw was a little bit of a front-end building of the shipments. After we announced that Plant City closure, people were pretty optimistic about where prices would go and they started loading up a little heavier than a normal shipment, but we expect it to be relatively flat. A little bit the same on the potash side. There was just a little bit of that inventory build. Mike, do you want to add?

No. I guess the only thing I would add is that, as we said before, both the agronomic and the economic demand drivers remain strong. We've talked about the big withdrawals. But I think another important factor is, if you look at new crop prices for corn, soybeans and wheat, despite I think the perception that things have really changed, if you look at where they're today versus the last 3 years, corn prices are kind of at the top of that 3-year range. Wheat prices are above the 3-year range and soybean prices are kind of right in the middle. So the signals that farmers are getting today are no different than what they have been for the last 3 years and that combined with the need to replace nutrients taken out I think bodes well for the demand outlook for next year.

Yeah, and I'll just end by saying, you asked -- your final question was about the soy to corn shift. That has a big impact on nitrogen demand. But for us, both of those are great, great crops and we're pretty agnostic as to which crop is grown.

Your next question comes from the line of Mark Connelly.

It's Ashish for Mark. Beyond the Vale assets, you also picked up the port and warehouse assets in the North from ADM. How have those assets changed your competitive position in Brazil and affected your freight situation?

Yes. Thanks, Ashish. Look, the port position in Tiplam, in particular, I think is what you're referring to, what that has been able to do for us is now, as an importer, we have access to 2 of very good ports. One in Paranagua state and the one at Tiplam. And if you think about Brazil and infrastructure in Brazil, one of the key competitive advantages or one of the key competitive issues is access to infrastructure particularly port infrastructure. So as a major importer of both finished product but also raw materials, this really helps us better run our upstream and downstream businesses. And if you look at our statements on synergies, a big piece of the synergies or at least a piece of the synergies has certainly been associated with the upstream and downstream benefits of this infrastructure that we've added.

Your next question comes from the line of Michael Piken.

Most of my questions have been answered, but I just wanted to sort of get a sense, you guys mentioned on the prepared remarks that you're seeing some of your competitors tight on potash and supply right now. Were you referring to the ramps up of some of the future capacity? Or were you referring to existing competitors? And what has that meant in terms of the amount of tonnage you have booked maybe in some of those China and India contracts?

Okay, thanks, Michael. Look, I think it's both. Certainly, the new suppliers have been slower to come up than one would have expected or one might have expected. But also, there has been shutdowns in terms of ICL's ability, as an example, and there has been a refocus in terms of SQMs operations focusing more on lithium and moving away from potash. And then, of course, there's been environmental issues in Germany that have also impacted supply. And even some possible Russian supply, which we're not clear on what that -- whether it has or has not. But I mean, what we're seeing experientially is a tighter market than we have had previously and that's obviously being reflected in shipment volumes for us and Canpotex as well as price movement.

And your final question comes from the line of Duffy Fischer.

A question around the capital. So you called out that your debt is now down to the -- through the cycle level you need. I was unclear. Does not mean you still want to pay down a little bit now? Or maybe some at some future point, you would decide to pay down a little bit more as we move maybe to a rollover and towards a trough? And then on the capital allocation side, you talked about the risk adjustment you make. Could you maybe just highlight, if you looked at say, Fertilizantes versus a stock buyback, what would be the delta in the return that you would need or the risks rate that you would use in those types of investments?

Okay, Duffy. Well, let me first highlight. We set a near-term target of paying down $700 million and returning to a debt ratio of below 2.5:1. Now that's been achieved. As we look, though, longer term, we're not only looking at what the instantaneous debt ratio is but how are we positioned throughout the cycle. So not only at the middle of the cycle or the top of the cycle but also how would we be positioned at the bottom of the cycle. So we really want to think that through carefully and how we're going to address that before we take any steps to either pay down more or not pay down more debt. In terms of your question on the risk reduction, and rather than hand this to Clint, which I could do, I think what I would say is, we would look at share repurchases as being a cost of capital returned to shareholders as opposed to an investment of some sort. In terms of the risk-adjusted rate of return, we would have to look at currency risks, geographic risks, technical risks, et cetera, and then say how much above that, above the cost of capital, does that have to be for it to be an intelligent investment for us to make.

So with that, I would like to thank everybody who's been on the call. But I would like to emphasize before we leave a couple of our key messages. First, Mosaic has made tremendous progress. We've transformed our business and created substantial earnings potential. Secondly, our phosphates and potash market fundamentals have continued to be constructive. And third, we are highly optimistic about both the short and long term. Simply put, we've created an efficient franchise that is generating strong returns, and we expect our momentum to continue to grow.

Thank you for joining the call.

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