Mosaic: Feeding on Higher Prices, But Outlook Is Scrawny

Mosaic (MOS) is one of the world’s largest providers of phosphates and potash fertilizers and feed ingredients for the global agriculture industry. The Mosaic Company announced this week net earnings of $959.8 million, or $2.15 per diluted share, for the second quarter ended November 30, 2008. These results compare with net earnings of $394.0 million, or $0.89 per share, for the second quarter ended November 30, 2007. (See conference call transcript.)

Analysts surveyed by Thomson Reuters estimated earnings of $1.43 a share on revenue of $3 billion. Excluding one-time items, the company posted earnings of $1.56 per share, topping the $1.36 per share that analysts had forecast, according to Reuters Estimates. Net sales in the quarter rose nearly 37 percent to $3.0 billion.

Key Factors

Operating earnings were $682.0 million, or 22.7% of net sales, up from $529.6 million, or 24.1% of net sales last year
Potash operating earnings more than tripled to $547.5 million
Mosaic recorded a gain on the sale of its interest in Saskferco of $673.4 million, or $1.03 per share
An inventory valuation write-down of $293.5 million, or $0.41 per share, was recorded, as the company expects to reduce phosphate and potash production significantly during the remainder of fiscal 2009 Mosaic’s second quarter results were driven by higher DAP and MOP selling prices and the gain on the sale of Saskferco, offsetting the impact of lower sales volumes and the inventory valuation write-down. Overall poor market conditions and steep declines in raw materials costs were the main causes for the valuation write down The inventory valuation write-down in the second quarter was necessary because the carrying cost of ending phosphate inventories, which included higher sulfur and ammonia costs, exceeded estimates of future phosphate selling prices

Jim Prokopanko, Mosaic’s President and Chief Executive Officer. “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.”

The Potash segment’s total sales volume was 1.7 million tonnes for the second quarter compared with second quarter volume of 2.0 million tonnes a year ago. The decline in sales volumes was primarily due to lower customer demand. Sales volumes are expected to remain weak at least through the third quarter with realized prices expected to decline slightly compared to second quarter levels. To better manage growing inventory levels, Mosaic is reducing potash production by up to one million tonnes in the second half of fiscal 2009.

Outlook

Long-term world grain and oilseed use is expected to continue to increase at a faster pace than historical trends due to steady population growth, higher per capita incomes and further increases in biofuels production. This will require additional harvested area and steady increases in yields, which can be accomplished through more intensive and balanced crop nutrient use and improved crop genetics.
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