The Mosaic Co. reported an increase in operating earnings for the second quarter ending Nov. 30, 2008, despite an inventory write-down of $293.5 million. Operating earnings were $682.0 million on sales of $3 billion, compared to the year-ago $529.6 million and $2.2 billion. Net earnings were up even more, to $959.8 million ($2.15 per diluted share), due in part to a $673.4 million gain from the sale of Saskferco. This compares to year-ago net earnings of $394.0 million ($.89 per share).
“Second quarter earnings were up from the prior year as we executed our strategic game plan and benefited from higher realized selling prices, especially in our potash business unit,” said Jim Prokopanko, Mosaic’s president and CEO. “Toward the end of the quarter, however, worldwide crop nutrient sales activity dropped sharply, and it is expected to remain weak through at least the third quarter. Because of these conditions, we are reducing our production to manage excess inventories, reducing capital expenditures, and working to maintain financial strength and flexibility.”
Mosaic said it would cut potash production by 1 million mt during the second half of its fiscal year, which ends in May 2009. Mosaic had already begun moving toward the cut with reduced rates during the recent holiday period. Mosaic already cut phosphate production by 1 million through December, and expects another 1 million cut in the second half of its fiscal year, which ends in May.
Despite the uptick in earnings and revenues, phosphate and potash sales volumes were off in the second quarter. Total phosphate volumes were 1.23 million mt, down from the year-ago 2.28 million mt. Phosphate crop nutrients to North America dropped to 366,000 mt, down from the year-ago 845,000 mt. International was also off, at 740,000 mt from the year-ago 1.2 million mt. While DAP prices have been on the decline, Mosaic second-quarter average prices still exceeded year-ago levels by a wide margin at $1,083 mt versus the year-ago $417/mt.
Second-quarter phosphate operating earnings were $258.8 million on sales of $1.75 billion, versus the year-ago $346.8 million and $1.23 billion, respectively.
Six-month phosphate volumes were down to 3.3 million mt from the year-ago 4.5 million mt. Six-month phosphate earnings were $1.2 billion on sales of $4.34 billion, versus the year-ago $657.0 million and $2.4 billion, respectively.
Second-quarter potash volumes were 1.72 million mt, down from 2.0 million mt. Most of the drop in potash crop nutrients was to North America, where volumes were down to 524,000 mt from the year-ago 789,000 mt. International volumes were off only slightly, at 921,000 mt from 948,000 mt. The average second-quarter MOP price was $529/mt versus the year-ago $174/mt. Second-quarter potash operating earnings were $547.5 million on sales of $973.2 million, versus the year-ago $161.2 million and $431.6 million, respectively.
Six-month potash volumes were down to 3.6 million mt from 4.1 million mt. Six-month earnings were $1.02 billion on sales of $1.95 billion, versus the year-ago $271.4 million and $843.4 million.
Mosaic’s Offshore business segment put in the worst performance during the second quarter with an operating loss of $120.1 million on sales of $562.4 million, compared to year-ago earnings of $25.7 million on sales of $644.3 million. For the first six months, the unit had operating earnings of $38.9 million on sales of $1.61 billion, versus the year-ago $55.8 million and $1.14 billion, respectively.
Much of the Offshore segment’s loss resulted from inventory valuation write-down of $149.3 million and lower sales volumes. Mosaic expects the unit results to remain weak at least through fiscal 2009, primarily due to slow demand, mainly in Brazil.
The remainder of the $294 million write-down came from phosphates at $213 million and nitrogen at $6 million. The write-down was partially offset with a net credit of $74 million in the Corporate/Other segment.
“We are experiencing a perfect storm in the crop nutrient markets with a combination of factors dramatically affecting farmers, producers and the entire supply chain in all parts of the agricultural world,” Mosaic Executive Vice President and CFO Lawrence Stranghoener told analysts.
Prokopanko added that a late harvest exacerbated the situation. He said a number of regions battled the elements through the end of November, with many farmers unable to complete all of their field work. As an example, he noted that the Iowa Department of Agriculture reported that farmers had completed just 43 percent of their planned fertilizer application by Nov. 30, compared to a five-year average of 66 percent in the state.
Stranghoener said potash sales volumes are expected to remain soft at least through the third quarter, with realized prices expected to decline slightly compared to second quarter levels due to a higher percentage of lower priced industrial sales. He put normal industrial sales at 15 percent of production.
“We expect the phosphates segment results to be much weaker at least through the third quarter because of lower selling prices and margins, soft sales volumes, and lower production levels,” he said. “Because of the write-down, we expect that most of our third quarter phosphate volumes will be sold at no gross margin.”
Stranghoener said Mosaic believes it has the best liquidity position among its peers, with total cash of $2.8 billion and debt of $1.4 billion as of Nov. 30, 2008. However, he noted that the company is now providing less guidance than in the past due to significant uncertainties in the market. The company has already withdrawn any sales volume guidance for the year, and has no current update now other than to say it expects weak sales volumes at least through the company’s third quarter, which runs through February. It has also not provided product price guidance, though it expects third-quarter realized phosphate prices to be down substantially and realized potash to be down slightly from the second quarter.
Stranghoener said the company is reducing capital spending guidance for the year down to $800-$900 million from the previous guidance of $900 million to $1.1 billion. He said the company remains committed to its planned potash expansions as it still likes the long-term outlook for potash. However, he said the company is evaluating whether to moderate the pace of its expansions in light of near-term market conditions and less robust cash flow.
Prokopanko was encouraged by a 25-30 percent increase in crop commodity prices since Dec. 5. “If this rally continues though to the spring, then higher grain prices coupled with lower production costs for diesel, propane and crop nutrients, will provide an added boost to farm economics and should provide the self-correction mechanism needed to reverse the current downturn.” He said he expects to see dealers will average down their inventory costs through new purchases at lower prices. “This along with lower retail prices eventually will facilitate movement of inventories through the pipeline. This difficult process will happen, but it may take some time.” He noted that many dealers had a great year in 2008, and they may have to give some of it back in 2009.
Prokopanko believes a new potash deal with China will come in the first half of the calendar year, perhaps the first quarter. He is hopeful China would buy more this year than next, but would not make that prediction. He said a continued rally in soybeans will have to occur for the outlook for tonnage to Brazil to improve.
Prokopanko said the company estimates that about half of the world’s phosphate production is shut down. “We are starting to get to a period where you just can’t turn that back on in a day and ship all the product and have it there next week. So you’ve got not just the phosphate producers that have idle capacity but you have the important links in the supply chain, rail companies that have idled capacity, and I think we’re starting to really play a dangerous game of chicken here that it’s going to be too late to get product into some positions when farmers actually want it.”
Prokopanko said that Morocco phosphate rock prices have fallen to as low as $250/mt FOB for the first quarter. While this price still puts pressure on non-integrated DAP makers, he noted that these producers still have existing inventories of rock to work through, which would mute the impact of the situation. Analysts noted that it would be difficult for a non-integrated producer to operate with $250/mt rock with current DAP prices.
Mosaic Vice President of Analysis and Strategic Planning Dr. Michael Rahm told analysts that the company is baking in a 5-10 percent drop in the national average application rates for P&K. Mosaic is projecting corn acreage in the mid-80s million acre range. This is based on about a 10 percent drop in P&K use in the U.S.