Fertilizer companies have faced huge challenges lately, and Mosaic (NYSE:MOS) has had to respond to weakening conditions in the industry in order to sustain its strong past track record of consistent profitability. Poor prices for fertilizer products have gone on longer than many had predicted, but Mosaic has taken steps to overcome the challenges that weakness in the industry has caused. Earlier this week, Mosaic CFO Rich Mack presented at the 28th Annual Basic Materials Conference, discussing some key points that the company sees as important going forward. Let's take a closer look at what Mack told investors and what those comments say about Mosaic's next steps.
1. "We believe potash supply and demand balance is not as bad as some experts believe it is."
Potash prices have plunged and stayed low for a long time, hurting Mosaic and other potash producers. Yet Mack pointed to how the industry defines capacity numbers as producing overstated numbers, arguing that they don't represent a company's ability to sustain production levels over the long run. Moreover, as Mack notes, actual production during years of top demand suggests that supply is more constrained than currently believed. Despite other producers bringing on new capacity, Mosaic still thinks there's reason to be more optimistic about potash.
2. "The demand story for phosphates, unlike perhaps the more uncertain and volatile nature on the potash side, has been extraordinarily consistent."
Mack pointed out that over the past 20 years, phosphate fertilizer growth has risen at a 2% to 3% annual rate quite consistently. Moreover, he notes that even with that rising demand, there aren't many anticipated sources of new supply coming into the market, with relatively few projects over the next five to 10 years to disrupt the supply and demand balance there.
3. "In Brazil, you've got the political issues. ... In India, you've got a lower-than-average monsoon season. ... In China, you've got the introduction of this [value-added] tax, and you also have the decoupling of the renminbi from the U.S. dollar."
Mack defended his thesis on fertilizer supply and demand by noting that even though prices have fallen, those movements reflect weakness in key customers in emerging markets. Between China, India, and Brazil, adverse conditions have had a dramatic impact on demand, and uncertainty has held back a potential recovery. Once those markets get clearer direction, Mosaic hopes to see them improve and return to a faster growth trajectory.
4. "Mosaic's potash business is one of the largest and most efficient potash businesses in the world."
Mosaic has competitors in potash, but it has focused on low-cost operations by closing down higher-cost production in areas like Carlsbad and Hersey. Moreover, with initiatives to control brine management expenses, Mosaic thinks it can save another $200 million going forward. As a result, Mosaic thinks it can boost margins even in a flat environment for potash prices.
5. "We believe our phosphates business is underappreciated as we also believe that it's undervalued."
Mosaic thinks it leads the market in phosphates, and the acquisition of the phosphates business of CF Industries came at a good time strategically for the company. By controlling input costs, Mosaic has seen margins rise, and further growth should result from strategic relatioships and further cost containment with the unit.
6. "We're going to pursue opportunistically acquisitions and joint ventures if they become available."
Although Mosaic wants to grow organically, Mack also pointed to the possibility of further M&A deals. As he noted, the bottom of the cycle is a good time to consider strategic combinations, as it makes any opportunities that do appear that much more attractive from a valuation standpoint. Mosaic has worked hard to keep its balance sheet and financials healthy, and so it's in a position to take a hard look at any company in distress that could create a chance at greater growth for Mosaic.
7. "We think buying our shares makes a lot of sense, and we've been doing exactly that."
Mack thinks Mosaic stock is bargain-priced right now, and he pointed out that the company has cut its share count by more than 20% over the past two to three years. Ever since some corporate restrictions were lifted, Mosaic has been aggressive in returning capital to shareholders, and Mack thinks that the result will be greater share-price appreciation during the next upward cycle in the industry. Fewer shares means more participation among remaining investors, and Mosaic thinks even modest increases in fertilizer prices could produce big gains for patient shareholders.
Mosaic hasn't seen a huge jump in its stock price, but the company remains optimistic about its future. If long-term trends favoring fertilizer use reassert themselves, then Mosaic stands ready to capitalize on new growth opportunities.