Is The Mosaic Company's Transformation Finally Complete?

By Dan

Image: The Mosaic Company.

The agricultural industry routinely goes through cycles of strong and weak conditions, and that affects fertilizer producer The Mosaic Company as much as it does food producers and farm-equipment manufacturers. Mosaic and peers, like Agrium , have had to deal with extensive pullbacks throughout much of 2015 as farm conditions deteriorated, and Mosaic investors had come into Tuesday's third-quarter financial report expecting further extensive declines in its top and bottom lines. Yet even though Mosaic did see sales and earnings shrink, the company fared better than most had expected, raising hopes that a turnaround could be in the works. Let's take a closer look at The Mosaic Company and how it managed to impress shareholders with its latest report.

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Is Mosaic still making progress?Mosaic's third-quarter results reflected the tough conditions in the agricultural industry right now. Revenue fell more than 6% to $2.11 billion, which was far worse than the expected 3% growth that investors were hoping to see from the company. On the bottom line, net income fell by more than a fifth to $160 million, but after excluding the impact of foreign-currency-based losses, adjusted earnings of $0.62 per share were a dime per share better than the consensus forecast among those following the stock.

Drilling down on Mosaic's different divisions, phosphates remain the essential source of profit growth for the company. Sales volume of 2.1 million tonnes was at the low end of the company's guidance, but selling prices were near the upper end of expectations, despite Mosaic seeing lower volumes and lower realized prices compared to the year-ago quarter. Gross margins fell as a result of Mosaic's decision to curtail production, and the company ran at 83% of operational capacity, down two percentage points from the third quarter of 2014.

Meanwhile, the potash unit continued to struggle. Sales volume of 1.6 million tonnes was also at the low end of guidance, and average prices of $265 per ton was in the lower half of Mosaic's stated range. Cost reductions helped offset the impact of higher Canadian resource taxes, but Mosaic operated at just 67% of capacity during the quarter.

Mosaic's international business did fairly well, delivering 2 million tonnes of volume and producing better gross margins than the company has expected. Revenue gains came from acquisitions, but operating earnings improved thanks to Mosaic's more extensive presence in Latin America.

New CEO Joc O'Rourke heralded the efforts that Mosaic has made internally to handle tough conditions. "Over the course of the last two years," O'Rourke said, "we have transformed Mosaic to become more efficient and made great progress in optimizing our balance sheet." O'Rourke was also pleased at how weak prices in the fertilizer market and tough macroeconomic conditions haven't held back Mosaic's ability to boost adjusted earnings per share.

Can Mosaic get growing again?Mosaic's fourth-quarter guidance still acknowledges that the industry won't turn around overnight. Mosaic expects phosphates sales volumes of 1.9 million to 2.2 million tonnes, down from last year's fourth-quarter figure of 2.4 million tonnes, and prices in a range of $410 to $440 per tonne. Potash volume of 1.8 million to 2.1 million tonnes would be down from last year's 2.3 million tonne figure, with prices staying weak at $235 to $255 per tonne. International Distribution volumes of 1.3 million to 1.6 million would be the sole growth point for the company.

Mosaic also gave some guidance updates for full-year results, saying it would rein in capital expenditures to the lower half of its previous range and reduced its expected liability for taxes and royalties by $5 million to $55 million. A $10 million cut in overhead-expense guidance should also help the bottom line, but the company didn't offer any direct input on revenue or earnings.

The biggest question mark for Mosaic is whether the overall industry will rebound. For a long time, Agrium avoided the share-price declines that Mosaic suffered, as Agrium has diversified its crop-nutrient exposure by doing business in seeds, crop protection, and a wide range of other services and products related to agriculture. The fact that Agrium has started to see pressure shows that the problem in the farm industry goes beyond fertilizer-specific supply and demand issues, and that could blunt the positive impact from Mosaic's extensive internal cost-cutting efforts.

Still, Mosaic investors were pleased to see signs of better times ahead, sending the stock up 4% within about the first hour of trading following the announcement. In the long run, worldwide demand for crop-enhancing products should reassert itself and help Mosaic shares climb back into a position of strength.

The article Is The Mosaic Company's Transformation Finally Complete? originally appeared on

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