PotashCorp Q4 & Year-End Conference Call - Replay now available
Key Highlights
- Fourth-quarter earnings of $0.07 per share1; full-year total of $0.40 per share
- Annual cash provided by operating activities of $1.3 billion
- Record second-half Canpotex2 shipments in 2016; fully committed for first-quarter 2017
- Initiated Rocanville ramp-up; expect company-wide potash cost of goods sold to decline by approximately $10 per tonne in 2017
- Full-year 2017 guidance of $0.35-$0.55 per share, including merger-related costs of $0.05 per share
- Currently undergoing an impairment assessment of the carrying value of certain assets, with a particular focus on phosphate; the impact of that review is not reflected in the preliminary results
CEO Commentary
“Strong customer engagement and positive potash pricing trends from the second half of 2016 are expected to carry into the new year,” said PotashCorp President and Chief Executive Officer Jochen Tilk. “Supported by healthy underlying consumption, lower global inventories and with Canpotex fully committed for the first quarter of 2017, we see a continued potash recovery. Balancing this constructive market view is a more cautious second-half outlook for our nitrogen earnings and expected challenges for our phosphate results.
“We continue to proactively position the company for opportunity and resiliency in any market conditions. Our multi-year potash expansion program was completed in 2016 and we are now in the process of ramping up Rocanville, our lowest cost operation. Consistent with our long-held strategy, we have aligned our operating capability with expected market conditions. This includes operational changes recently initiated at Cory – as well as the previously announced suspension of operations in New Brunswick – to optimize production to our lowest cost facilities.
“Our work on the merger of equals with Agrium continues. The regulatory review and integration processes are advancing, and we expect the transaction will close mid-2017. Our Board and management team look forward to the opportunity to deliver significant value for our shareholders through this transaction, including up to $500 million of annual operating synergies,” said Tilk.
Saskatoon, Saskatchewan – Potash Corporation of Saskatchewan Inc. (PotashCorp) announced preliminary unaudited financial information, and reported fourth-quarter earnings of $0.07 per share ($59 million), bringing earnings for the year to $0.40 per share ($336 million). Results were down from the $0.24 per share ($201 million) and $1.52 per share ($1.3 billion) earned in the respective periods of 2015.
Gross margin for the quarter ($183 million) and the year ($850 million) were well below 2015 levels, primarily due to weaker prices for all three nutrients. Cash from operating activities was $353 million in the fourth quarter and $1.3 billion for the year, also well below last year’s comparable totals.
Investments in Arab Potash Company (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $28 million to our quarterly earnings, exceeding the $27 million they generated in the fourth quarter of 2015. Our earnings for the year from these investments – plus a dividend from Sinofert Holdings Limited (Sinofert) in China – totaled $125 million. This total was partially offset by a $10 million non-cash impairment charge earlier in the year related to our investment in Sinofert and trailed the $162 million realized in 2015. The market value of our investments in these four publicly traded companies was approximately $4.5 billion, or $5 per PotashCorp share, at market close on January 25, 2017.
During the quarter, we determined that the carrying value of certain assets should be assessed for potential impairment. This assessment is ongoing, with a particular focus on phosphate. If any impairment charge is necessary, we would not consider it to be significant to our operational outlook. Any required charge would be a non-cash adjustment only. As a result, these financial results for the fourth quarter and year ended December 31, 2016 are preliminary, do not reflect the impact of any such potential required impairment charge, and remain subject to the completion of our financial closing procedures and audit by our independent auditors. We expect to complete our impairment assessment no later than late February, when we will file our Annual Report on Form 10-K for the year ended December 31, 2016, which will include our audited consolidated financial statements.
Market Conditions
With consistent buyer engagement, potash demand was strong in the fourth quarter. The pace of shipments to China and India increased following deferred contracts earlier in the year, and engagement in key spot markets remained steady – including in North America, where demand was supported by a healthy fall application season. Against this backdrop, spot prices were modestly higher compared to the trailing quarter.
With tighter supply and relatively stable demand, nitrogen prices rebounded from multi-year lows. The most pronounced recovery occurred in urea markets as increased Chinese production costs and lower exports drove global benchmark prices higher. Ammonia prices increased late in the quarter as production curtailments, plant turnarounds and gas availability issues in key exporting regions reduced product availability.
Global phosphate markets remained subdued during the fourth quarter as record Chinese exports and seasonally slow demand in India offset stronger shipments to Latin America. Prices for most products were generally stable, but remained well below those of the previous year.
Potash
Potash gross margin of $120 million for the quarter and $437 million for the year reflected a lower-price environment, as results in both periods trailed 2015’s respective totals of $183 million and $1.3 billion.
Sales volumes of 2.2 million tonnes for the fourth quarter were 27 percent higher than in the same period last year. In North America, shipments exceeded 2015’s historically low fourth-quarter figures, while offshore shipments also increased, with Canpotex achieving record sales volumes in the second half. The majority of its shipments for the quarter were to China (34 percent) and Other Asian markets outside of China and India (31 percent), while Latin America and India accounted for 21 percent and 9 percent, respectively. Full-year North American shipments were up 30 percent relative to last year’s historically weak total, while a lack of engagement in key contract markets during the first half of 2016 kept full-year offshore volumes 15 percent below 2015 levels. Overall, sales volumes of 8.6 million tonnes were down slightly compared to 2015.
Our average realized potash price of $157 per tonne for the fourth quarter was down from $238 per tonne in the same period last year, a result of the decline in spot prices experienced in the first half of 2016 and lower contract prices settled in the second half.
Optimizing production to our lower-cost mines in Saskatchewan more than offset an unfavorable adjustment to asset retirement obligations and contributed to average per-tonne manufactured cost of goods sold of $101 for the quarter. This amount was down from $132 per tonne in the same period last year when inventory-related shutdowns and the closure of our Penobsquis, New Brunswick operation reduced production volumes and increased per-tonne cost of goods sold.
Nitrogen
In nitrogen, weaker prices for all our products resulted in gross margin of $55 million for the fourth quarter and $361 million for the year, down from $142 million and $706 million, respectively, in 2015. Our US operations accounted for 70 percent of our nitrogen gross margin for the quarter, with our Trinidad operations providing the remainder.
Total sales volumes of 1.6 million tonnes for the quarter were slightly higher compared to the same period in 2015, primarily due to stronger demand for nitrogen solutions relative to ammonia. For the full-year, shipments of 6.4 million tonnes were up from 5.9 million tonnes in the previous year, reflecting a full year of increased production at our expanded Lima facility.
Our average realized price of $182 per tonne during the quarter was down significantly from the $288 per tonne achieved in the same period last year as lower global energy costs and increased supply pulled down realizations for all our nitrogen products.
Cost of goods sold for the quarter averaged $151 per tonne, down from $199 per tonne in 2015’s fourth quarter; this change was driven primarily by lower natural gas costs in Trinidad.
Phosphate
Weaker prices for nearly all our phosphate products resulted in gross margin of $8 million for the quarter and $52 million for the year, significantly lower than in the comparable periods of 2015.
Sales volumes of 0.7 million tonnes for the quarter and 2.7 million tonnes for the year trailed last year’s comparable amounts of 0.8 million tonnes and 2.9 million tonnes, respectively, primarily due to weaker demand for our feed and industrial products.
Our average realized phosphate price for the quarter was $404 per tonne, down from $522 per tonne in the same period last year, the result of weaker fertilizer realizations.
Cost of goods sold per tonne of $393 for the fourth quarter was lower than the $443 per tonne in the same quarter in 2015, largely due to lower sulfur and ammonia input costs.
Financial
Provincial mining and other taxes for both the quarter ($36 million) and the year ($124 million) were lower than in the comparable periods in 2015 ($46 million and $310 million, respectively), due to lower potash prices.
Other expenses of $26 million for the quarter and $30 million for the full year were impacted by transaction costs related to the proposed merger with Agrium Inc. (Agrium). This compared to other income amounts in 2015’s comparable periods of $11 million and $22 million, respectively.
Lower total earnings and a smaller percentage of income earned in higher-tax jurisdictions reduced our income tax expense compared to 2015 for the quarter and full year. During the fourth quarter, a $5 million deferred tax recovery on a dividend received from an equity-accounted investee contributed to an income tax recovery of $8 million. This compared to an income tax expense of $69 million in the same period last year.
Potash Market Outlook
We maintain our global potash shipment estimate of 61-64 million tonnes for 2017 and anticipate consistent customer engagement throughout the year. This view is supported by healthy underlying consumption trends and lower dealer inventories in most key buying regions. With increased demand and limited new capacity additions, we anticipate relatively balanced market fundamentals in 2017.
In North America, compelling fertilizer affordability and the need to replenish soil nutrients following a record harvest are expected to support potash demand. We anticipate shipments in the range of 9.3-9.8 million tonnes, similar to 2016 levels.
In Latin America, we expect favorable crop economics, lower inventories and substantial agronomic need will lead to robust consumption in 2017. We anticipate deliveries of 11.5-12.0 million tonnes, exceeding 2016’s total and potentially surpassing record levels.
In China, we anticipate supportive domestic crop prices and strong affordability to encourage consumption growth in 2017. We expect this growth, in conjunction with lower inventories to start the year, will support demand in the range of 14.5-15.5 million tonnes, significantly above last year’s level.
In India, we believe lower nutrient retail prices and reduced inventory levels will support increased demand in 2017. We maintain our expected shipment range of 4.2-4.7 million tonnes, well above 2016 levels.
In Other Asian markets, we expect strong palm oil prices and improved moisture conditions to support demand in 2017. We maintain our estimated shipment range of 8.8-9.3 million tonnes, above 2016’s total.
Financial Outlook
Based on these market factors, we anticipate our 2017 potash sales volumes will be in the range of 8.7-9.4 million tonnes. We believe recent positive pricing trends will carry into the new year and – along with our expectations of lower per-tonne costs – forecast full-year potash gross margin of $550-$800 million.
In nitrogen, we see 2017 as a transition year as the market adjusts to new capacity, particularly the ramp-up of new plants in the US, which we anticipate will shift trade patterns and weigh on domestic prices. While we expect some seasonal price strength, competitive pressures are expected to keep margins below 2016 levels.
In phosphate, we expect challenging market fundamentals to weigh on realizations for our products and profitability in this segment.
Given these considerations, we forecast combined nitrogen and phosphate gross margin will be in the range of $150-$400 million in 2017.
Capital expenditures are anticipated to be approximately $600 million – lower than the previous year – as our multi-year expansion-related spending is now complete.
Based on these factors, we forecast full-year 2017 earnings of $0.35-$0.55 per share, including merger-related costs of $0.05 per share.
All annual guidance numbers – including those noted above – are outlined in the table below.
| 2017 Guidance | |
| Annual earnings per share | $0.35-$0.55 |
| Potash sales volumes | 8.7-9.4 million tonnes |
| Potash gross margin | $550-$800 million |
| Nitrogen and phosphate gross margin | $150-$400 million |
| Capital expenditures* | ~$600 million |
| Effective tax rate | 17-20 percent |
| Provincial mining and other taxes** | 17-20 percent |
| Selling and administrative expenses | $225-$235 million |
| Finance costs | $220-$230 million |
| Income from offshore equity investments*** | $145-$165 million |
| Annual foreign exchange rate assumption | CDN$1.32 per US$ |
| Annual EPS sensitivity to foreign exchange | US$ strengthens vs. CDN$ by $0.02 = +$0.01 EPS |
| Annual EPS sensitivity to potash exchange | Increases by $20 per tonne = +$0.14 EPS |
| * Does not include capitalized interest ** As a percentage of potash gross margin, excluding New Brunswick severance costs *** Includes income from dividends and share of equity earnings | |
Notes
PotashCorp is the world’s largest crop nutrient company and plays an integral role in global food production. The company produces the three essential nutrients required to help farmers grow healthier, more abundant crops. With global population rising and diets improving in developing countries, these nutrients offer a responsible and practical solution to meeting the long-term demand for food. PotashCorp is the largest producer, by capacity, of potash and one of the largest producers of nitrogen and phosphate. While agriculture is its primary market, the company also produces products for animal nutrition and industrial uses. Common shares of Potash Corporation of Saskatchewan Inc. are listed on the Toronto Stock Exchange and the New York Stock Exchange.
For further information please contact:
| Investors | Media |
| Denita Stann Senior Vice President, Investor and Public Relations Phone: (306) 933-8521 Fax: (306) 933-8844 E-mail Denita | Randy Burton Director, Public Relations and Communications Phone: (306) 933-8849 Fax: (306) 933-8844 E-mail Randy |
This release contains “forward-looking statements" (within the meaning of the US Private Securities Litigation Reform Act of 1995) or “forward-looking information” (within the meaning of applicable Canadian securities legislation) that relate to future events or our future performance. These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements often contain words such as “should,” “could,” “expect,” “forecast,” “may,” “anticipate,” “believe,” “intend,” “estimates,” “plans” and similar expressions. These statements are based on certain factors and assumptions as set forth in this document, including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, including the completion of the proposed merger of equals with Agrium, and effective tax rates. While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are subject to risks and uncertainties that are difficult to predict. The results or events set forth in forward-looking statements may differ materially from actual results or events. Several factors could cause our actual results or events to differ materially from those expressed in forward-looking statements including, but not limited to, the following: our proposed merger of equals transaction with Agrium, including the failure to satisfy all required conditions, including required regulatory approvals, or to satisfy or obtain waivers with respect to all other closing conditions in a timely manner and on favorable terms or at all; the occurrence of any event, change or other circumstances that could give rise to the termination of the arrangement agreement; certain costs that we may incur in connection with the proposed merger of equals; certain restrictions in the arrangement agreement on our ability to take action outside the ordinary course of business without the consent of Agrium; the effect of the announcement of the proposed merger of equals on our ability to retain customers, suppliers and personnel and on our operating future business and operations generally; risks related to diversion of management time from ongoing business operations due to the proposed merger of equals; failure to realize the anticipated benefits of the proposed merger of equals and to successfully integrate Agrium and PotashCorp; the results of our impairment assessment regarding the carrying value of certain assets; the risk that our credit ratings may be downgraded or there may be adverse conditions in the credit markets; variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur and petrochemical markets; changes in competitive pressures, including pricing pressures; risks and uncertainties related to any operating and workforce changes made in response to our industry and the markets we serve, including mine and inventory shutdowns; adverse or uncertain economic conditions and changes in credit and financial markets; economic and political uncertainty around the world; changes in capital markets; the results of sales contract negotiations; unexpected or adverse weather conditions; risks related to reputational loss; the occurrence of a major safety incident; inadequate insurance coverage for a significant liability; our inability to obtain relevant permits for our operations; catastrophic events or malicious acts, including terrorism; certain complications that may arise in our mining process, including water inflows; risks and uncertainties related to our international operations and assets; our ownership of non-controlling equity interests in other companies; our prospects to reinvest capital in strategic opportunities and acquisitions; risks associated with natural gas and other hedging activities; security risks related to our information technology systems; imprecision in reserve estimates; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in, and the effects of, government policies and regulations; earnings and the decisions of taxing authorities which could affect our effective tax rates; increases in the price or reduced availability of the raw materials that we use; our ability to attract, develop, engage and retain skilled employees; strikes or other forms of work stoppage or slowdowns; rates of return on, and the risks associated with, our investments and capital expenditures; timing and impact of capital expenditures; the impact of further innovation; adverse developments in pending or future legal proceedings or government investigations; and violations of our governance and compliance policies. These risks and uncertainties are discussed in more detail under the headings “Risk Factors” and “Management’s Discussion and Analysis of Results and Operations and Financial Condition” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, the joint information circular of the company and Agrium, filed as Exhibit 99.1 to the company’s Current Report on Form 8-K dated October 6, 2016 and with Canadian provincial securities commissions, in connection with the proposed merger of equals with Agrium and in other documents and reports subsequently filed by us with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking statements are given only as of the date hereof and we disclaim any obligation to update or revise any forward-looking statements in this release, whether as a result of new information, future events or otherwise, except as required by law.
