Mr. Jochen
Tilk reports
POTASHCORP REPORTS THIRD-QUARTER EARNINGS OF $0.38 PER SHARE
Potash Corp. of Saskatchewan Inc.
had third-quarter earnings of 38 cents per share ($317-million), bringing the company's total for the first nine months of 2014 to $1.33
per share ($1.1-billion). (All currency amounts are in U.S. dollars, unless otherwise indicated.) Although potash and nitrogen performance
improved over last year's third quarter, higher tax expenses and weaker
contributions from offshore equity investments weighed on results. On a
comparative basis, both the quarterly and nine-month amounts trailed
last year's totals of 41 cents per share ($356-million) and $1.77 per
share ($1.6-billion), respectively.
Key highlights:
- Earnings of 38 cents per share for third quarter 2014; nine-month total of $1.33 per share;
- Third-quarter cash provided by operating activities of $574-million;
-
Higher potash sales volumes for both the quarter and first nine months;
-
Improved potash realizations (up $18 per tonne from second quarter 2014);
-
Record nine-month nitrogen gross margin of $776-million;
-
Full-year guidance now $1.75 to $1.85 per share; previous range $1.70 to $1.90
per share.
Gross margin increased to $589-million, significantly exceeding the $484-million generated during third quarter 2013. For the first nine months,
gross margin of $1.9-billion trailed the $2.3-billion earned in the
same period last year -- largely the result of lower potash prices and
weaker phosphate performance.
Cash from operating activities for both the quarter ($574-million) and
first nine months ($1.9-billion) were below last year's comparative
period amounts ($616-million and $2.6-billion). With declining capital
expenditures, free cash flow for both periods surpassed 2013 totals.
Lower contributions from the company's offshore investments were the result of
reduced potash earnings at these companies. The company's investments in Arab
Potash Company in Jordan, Israel Chemicals Ltd. in Israel
and Sociedad Quimica y Minera de Chile S.A. in Chile contributed
$24-million to the company's third-quarter earnings and brought the nine-month
total to $179-million. These amounts were well below the 2013
comparative period totals of $85-million and $251-million, respectively
-- with the nine-month total including a dividend from Sinofert Holdings
Ltd. in China. The market value of the company's investments in all
four of these publicly traded companies equated to approximately $4-billion, or $5 per Potash share, at market close on Oct. 22,
2014.
"We continue to see encouraging signs in each of our major potash
markets with a renewal of demand translating into higher sales
volumes," said Potash president and chief executive officer Jochen
Tilk. "Furthermore, we experienced another quarter of improved potash
pricing trends, which strengthened our earnings. Combined with internal
efforts to optimize our operations, these positive developments mark
important steps toward a stronger performance for our company."
Market conditions
Unlike 2013, when global potash demand stalled due to market
uncertainty, this year's third quarter saw all key markets engaged.
This shift was most significant offshore, with greater demand in Asian
and Latin American markets leading to higher shipments from North
American producers. Purchasing activity in North America remained
healthy as dealers worked to position product in advance of anticipated
fall requirements.
Global potash shipments through the first nine months of 2014 were at
all-time highs. During the third quarter, typical maintenance downtime
further tightened market fundamentals and resulted in prices moving
higher in all major spot markets.
In nitrogen, strong global demand and supply constraints in key
exporting countries led to higher prices for ammonia. Improved
fundamentals contributed to higher prices for urea and UAN products
compared to the prior year, although greater supply availability in
urea caused prices to show signs of seasonal softness as the quarter
came to a close. Similarly, phosphate prices for third quarter 2014
were stronger relative to the previous year, given healthier demand and
the influence of higher input and production costs.
Potash
Increased sales volumes raised the company's third-quarter potash gross margin to
$295-million, above the $228-million earned in 2013's same period.
Given that realized prices were higher through the first six months of
2013, the company's nine-month gross margin total of $990-million trailed the
$1.3-billion earned during the comparative period last year.
The company's sales volumes continued to outpace prior-year levels, with total
shipments of two million tonnes for the quarter and 6.8 million tonnes
for the first nine months exceeding the comparative periods by 29
per cent and 8 per cent, respectively. For the quarter, the rebound was
most pronounced offshore where sales volumes were up 45 per cent as the
comparative period in 2013 saw significantly more volatility and
uncertainty there than in the North American market. The majority of
Canpotex shipments were to other Asian countries (38 per cent) and Latin America
(32 per cent), while India and China accounted for 14 per cent and 9
per cent, respectively. In North America, sales volumes increased 9
per cent from last year's comparative period as customers took
deliveries in anticipation of strong farmer demand to replenish crop
nutrients following an expected record harvest.
The company's average realized potash price for the quarter was $281 per tonne,
trailing the $307 per tonne realized in last year's third quarter. This
decrease was the result of lower offshore prices as the sharp decline
through the final half of 2013 had yet to be fully reflected in
prior-period results. A greater proportion of sales to lower-priced
offshore markets also had a negative impact.
Improved operational efficiencies from the company's work force realignment, as
well as higher production levels and a weaker Canadian dollar,
contributed to lower per-tonne cost of goods sold. While costs
reflected the usual seasonal increase due to the company's maintenance
turnarounds, they improved by $28 per tonne relative to the comparative
period in 2013 and $16 per tonne through the first nine months of 2014.
Nitrogen
In nitrogen, higher sales volumes and strong price realizations raised
gross margin for the quarter to $233-million. This surpassed the $178-million generated during the same period last year, raising the company's total
for the first nine months of 2014 to $776-million -- the highest in the company's
history.
Improved production levels across all nitrogen facilities more than
offset losses from gas curtailments in Trinidad and raised
third-quarter sales volumes to 1.5 million tonnes, 8 per cent above
third quarter 2013. Nine-month totals reached 4.8 million tonnes,
exceeding the comparable period last year by 10 per cent.
With key benchmark pricing at higher levels, the company's average realized price
for this year's third quarter ($356 per tonne) increased 6 per cent
relative to the same period in 2013.
Cost of goods sold for the quarter was $209 per tonne, relatively flat
compared with the same period last year, as efficiencies from increased
production more than offset higher natural gas costs.
Phosphate
In phosphate, third-quarter and nine-month gross margin totals of $61-million and $135-million trailed the $78-million and $260-million
earned during the respective periods in 2013. Reduced production and
increased costs (including approximately $20-million in notable charges
during this year's third quarter) weighed on the company's results in this
nutrient.
The closure in July of the company's Suwannee River chemical plant, combined with
mechanical challenges at the company's White Springs facility, constrained the
number of tonnes available for sale. The company's total third-quarter sales
volumes were 700,000 tonnes, 21 per cent below the comparative
period total in 2013, with production largely shifting away from
certain lower-margin fertilizer products. For the first nine months,
sales volumes of 2.3 million tonnes were below the 2.7 million tonnes
sold in 2013.
The company's average realized phosphate price for third quarter 2014 was $517 per
tonne, exceeding the $467 per tonne in last year's same period. This
increase was largely due to a greater proportion of the company's production
being allocated to higher-netback feed and industrial products, in
addition to improved prices for the company's fertilizer products because of
better market fundamentals.
Third-quarter cost of goods sold of $437 per tonne was higher than the
$384 per tonne during 2013's same period. Lower production levels
coupled with unfavourable adjustments to asset retirement obligations
($4-million), higher water treatment costs due to excessive rainfall
($8-million) and accelerated depreciation charges related to the
closure of Suwannee River ($5-million) were the primary factors.
Financial
Provincial mining and other taxes for the quarter totalled $52-million,
well above the $10-million recorded in third quarter 2013, which
reflected significant adjustments to forecasted annual potash
production tax accruals given the rapidly changing market environment.
With a higher effective tax rate related to different income weightings
between jurisdictions and certain discrete tax adjustments, the $156-million income tax expense for the quarter significantly exceeded the
$116-million recognized in 2013's comparable period.
Market outlook
Moving into the fourth quarter, the company continues to see strong customer
engagement in all key potash markets. The company anticipates global shipments
will surpass the upper end of the company's previous guidance, and now forecasts
totals for 2014 to be in the range of 58 million to 60 million tonnes. While
recent weakness in crop prices is expected to result in some reduction
to global crop acreage, the company believes potash remains an affordable and
necessary investment for growers as they look to offset lower prices by
enhancing yields.
In North America, the fall application season is under way and product
demand remains strong. Given what the company believes are especially low potash
inventories throughout the North American supply chain, distributors
are actively positioning product in advance of anticipated needs. Even
though dealers are taking these steps, the company forecasts that sales volumes
will slow through the fourth quarter, with the majority of Potash's
shipments fulfilling previously committed summer-fill tonnes.
In Latin America, product for the key planting season is now largely in
place and the company believes buyers have shifted their focus to Safrinha crop
requirements. Although customers continue to secure potash tonnage, the company expects shipments to this region will begin to reflect the typical
seasonal slowdown as the end of the year approaches. Even with this
expected slowdown, the company believes annual Latin American demand will again
establish a record.
In both China and India the company has seen encouraging potash consumption
trends, including increased demand for compound fertilizers with higher
potassium content. Canpotex continues to deliver product to both
markets under previous commitments and the company anticipates shipments will
remain strong during the final quarter of 2014.
Potash demand in other Asian countries (outside of China and India)
remains healthy. Stronger demand for standard product through the
second half of 2014 has translated into higher transacted prices in
recent tenders and is expected to be reflected in the company's realized prices
in early 2015.
Financial outlook
As a result of these market conditions, the company has increased its estimate
for potash annual sales volumes to nine million to 9.2 million tonnes.
Fourth-quarter shipments are expected to be heavily weighted toward
offshore contract markets and to result in lower average realizations.
The company now anticipates potash gross margin will approximate $1.3-billion to $1.4-billion.
The company expects robust nitrogen fundamentals, especially for ammonia, will
continue through the balance of the year. While gas supply restrictions
at the company's Trinidad facility are now anticipated to exceed the company's previous
estimates, sales volumes are expected to outpace previous-year levels
and result in record nitrogen gross margin in 2014. In phosphate, the company anticipates relatively stable markets through the balance of the year.
The company's sales volumes are expected to remain below those of fourth-quarter
2013 with the closure of the company's Suwannee River chemical plant. Given these
considerations, the company now forecasts its 2014 combined nitrogen and
phosphate gross margin will be in the range of $1.2-billion to $1.3-billion.
The company has revised its annual estimate for income from offshore investments
to a range of $205-million to $215-million to better align with projected earnings
and associated tax changes in Chile and Israel. The Chilean tax change
is also expected to impact the company's annual effective tax rate, which is now
anticipated to be in the range of 27 to 29 per cent.
Based on these factors, the company now expects its annual earnings range to be
$1.75 to $1.85 per share. Other guidance numbers remain unchanged.
2014 ANNUAL GUIDANCE
Potash sales volumes 9.0 million to 9.2 million tonnes
Potash gross margin $1.3-billion to $1.4-billion
Nitrogen and phosphate gross margin $1.2-billion to $1.3-billion
Capital expenditures $1.1-billion
Effective tax rate 27 to 29 per cent
Provincial mining and other taxes* 16 to 18 per cent
Selling and administrative expenses $235-million to $245-million
Finance costs $175-million to $185-million
Income from offshore investments** $205-million to $215-million
Earnings per share $1.75 to $1.85
* As a percentage of potash gross margin
** Includes income from dividends and share of equity earnings
Conclusion
"The potash market has exhibited strong growth this year, challenging
global supply and logistics," said Mr. Tilk. "We are working to ensure we
have the flexibility to respond to potash demand in 2015 -- which we
expect to be another strong year. As we look ahead, our management team
is focused on enhancing the position and potential of Potash Corp. for
the many stakeholders depending on our ongoing success."
Potash will host a conference call on Thursday, Oct. 23, 2014, at
1 p.m. Eastern Time.
Telephone conference
Dial-in numbers
From Canada and the United States: 1-877-881-1303
From elsewhere: 1-412-902-6719
Live webcast: visit the company's website
Webcast participants can submit questions to management on-line from their audio player pop-up window.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions of U.S. dollars except per share amounts)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Sales $ 1,641 $ 1,520 $ 5,213 $ 5,764
Freight, transportation and distribution (141) (139) (465) (435)
Cost of goods sold (911) (897) (2,847) (2,999)
------------ ------------ ------------ ------------
Gross margin 589 484 1,901 2,330
Selling and administrative expenses (49) (48) (172) (165)
Provincial mining and other taxes (52) (10) (175) (154)
Share of earnings of equity-accounted investees 20 57 85 174
Dividend income 7 31 100 85
Impairment of available-for-sale investment - - (38) -
Other income (expenses) 5 (9) 36 (21)
------------ ------------ ------------ ------------
Operating income 520 505 1,737 2,249
Finance costs (47) (33) (142) (107)
------------ ------------ ------------ ------------
Income before income taxes 473 472 1,595 2,142
Income taxes (156) (116) (466) (587)
------------ ------------ ------------ ------------
Net income $ 317 $ 356 $ 1,129 $ 1,555
============ ============ ============ ============
Net income per share
Basic $ 0.38 $ 0.41 $ 1.34 $ 1.80
Diluted 0.38 0.41 1.33 1.77
Dividends declared per share 0.35 0.35 1.05 0.98
We seek Safe Harbor.
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