Mr. Jochen Tilk reports
POTASHCORP REPORTS THIRD-QUARTER EARNINGS OF $0.10 PER SHARE
Potash Corp. of Saskatchewan Inc. has released its financial results for the third quarter of 2016 (all amounts are in U.S. dollars).
Key highlights
- Third quarter earnings of 10 cents per share;
- Record third quarter potash sales volumes;
- Canpotex sold out for fourth quarter 2016;
- Full-year 2016 earnings guidance range adjusted to 40 cents to 45 cents per share;
- Announced agreement to combine in merger of equals with Agrium Inc.
Chief executive officer commentary
"With strong engagement in nearly all key potash markets, we achieved record third quarter sales volumes, and Canpotex is now sold out through the remainder of the year," said Potash Corp. president and chief executive officer Jochen Tilk. "Supported by improved market fundamentals, spot prices have increased by approximately 15 per cent from the lows experienced earlier in the year. We will continue with a disciplined approach to our operations and the markets and expect favourable consumption trends and lower inventories to lead to stronger demand in 2017.
"During the quarter we announced a merger of equals with Agrium to create a world-class integrated global supplier of crop inputs. We believe this transaction will generate significant value for our shareholders, provide multiple paths for growth and enhance our financial flexibility.
"The support expressed by shareholders has been very encouraging, with early vote results overwhelmingly in favour of the merger and positive recommendations from leading independent proxy advisory firms Institutional Shareholder Services and Glass Lewis. We look forward to realizing the value that is unlocked through this transaction."
Potash Corp. reported third quarter earnings of 10 cents per share ($81-million), including merger-related costs of one cent per share ($6-million), which bring the nine-month total to 33 cents per share ($277-million). Results for both periods were down from the 34 cents per share ($282-million) and $1.28 per share ($1.1-billion) earned in 2015's respective periods.
Gross margin for the quarter was $190-million and $667-million for the first nine months, below 2015 levels of $505-million and $1.9-billion, respectively, primarily due to weaker prices for all three nutrients. Cash from operating activities was $295-million in the third quarter and $907-million for the first nine months of 2016, below last year's comparable totals of $358-million and $1.7-billion, respectively.
Investments in Arab Potash Company (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile and Sinofert Holdings Ltd. in China contributed $32-million to quarterly earnings, trailing the $37-million from the prior-year quarter. Contributions for the first nine months of $97-million -- partially offset by a non-cash impairment charge of $10-million related to the company's investment in Sinofert -- were below the $134-million realized in the same period in 2015. The market value of the company's investments in these four publicly traded companies was approximately $4.0-billion, or $5 per Potash Corp. share, at market close on Oct. 26, 2016.
Market conditions
Global potash demand strengthened in the third quarter. Shipments to Latin America accelerated ahead of Brazil's key planting season, and the settlement of contracts with customers in China and India led to the re-emergence of deliveries to these markets late in the quarter. Low dealer inventories and anticipation of a strong fall application season supported robust demand in North America. In this environment, global spot prices increased from last quarter's lows.
Nitrogen markets remained at multiyear lows through the quarter. Benchmark prices were pressured by lower global energy costs and increased supply, including in North America, where a number of new projects began ramping up. This impact was most evident in ammonia, while urea prices were more resilient due to relatively strong global demand and reduced exports from China.
Global phosphate markets were subdued during the third quarter as reduced Chinese exports were largely offset by increased production in other key producing regions. Liquid fertilizer prices declined more significantly as markets adjusted to the deterioration in prices of solid phosphate fertilizer products earlier in the year.
Potash
A weaker pricing environment relative to the same periods last year was the primary reason that potash gross margin of $106-million for the quarter and $317-million for the first nine months trailed the 2015 results of $294-million and $1.1-billion, respectively.
Record sales volumes of 2.5 million tonnes for the third quarter were 16 per cent higher than in the same period last year. Nonetheless, volumes of 6.4 million tonnes for the first nine months were 9 per cent below the comparable period in 2015 as lack of engagement in key contract markets limited offshore deliveries earlier in the year. Canpotex achieved record third quarter shipments, with the majority of sales volumes to Latin America (35 per cent) and other Asian markets outside of China and India (32 per cent), while India and China accounted for 19 per cent and 11 per cent, respectively. North American volumes reached a new third quarter record, up 49 per cent from the previous year, while domestic shipments for the first nine months were up 24 per cent compared with 2015.
The company's average realized potash price of $150 per tonne for the third quarter was down from $250 per tonne in the same period last year, reflecting the significant price decline experienced in the first half of 2016.
Per-tonne manufactured cost of goods sold for the quarter averaged $106, down from $113 per tonne in the same period last year. Optimization of production to the company's lower-cost mines as well as lower royalties more than offset the benefit realized in the comparable period of 2015 when maintenance costs were deferred from the third quarter to the fourth quarter.
Nitrogen
Weaker prices for all nitrogen product categories resulted in gross margin of $69-million for the quarter and $306-million for the first nine months, trailing last year's comparable periods by 57 per cent and 46 per cent, respectively. U.S. operations accounted for 65 per cent of nitrogen gross margin for the quarter, with Trinidad operations providing the remainder.
Total sales volumes for both the quarter (1.6 million tonnes) and first nine months (4.7 million tonnes) were up from the same periods in 2015 (1.4 million tonnes and 4.4 million tonnes, respectively), reflecting increased production at the expanded Lima facility.
The average realized price of $200 per tonne during the quarter declined from $319 per tonne in the same period last year as weaker benchmark pricing pulled down realizations for all products.
Cost of goods sold for the quarter averaged $158 per tonne, down from $210 per tonne in 2015's third quarter, driven primarily by lower natural gas costs in Trinidad.
Phosphate
In phosphate, weaker prices resulted in gross margin of $15-million for the third quarter and $44-million for the first nine months of 2016, down from $50-million and $180-million, respectively, in the previous year's comparable periods.
Sales volumes of 800,000 tonnes for the quarter and two million tonnes for the first nine months were both relatively flat with the same periods in 2015.
The company's average realized phosphate price for the quarter was $385 per tonne, down from $538 per tonne in the same period last year as prices for all products decreased -- most notably liquid fertilizers.
Cost of goods sold of $366 per tonne for the third quarter was lower than the $475 per tonne in the same period in 2015, primarily due to lower input costs and notable charges taken in the third quarter of last year.
Financial
The third quarter total for provincial mining and other taxes was down 61 per cent to $31-million compared with 2015, largely as a result of lower potash prices.
Lower total earnings resulted in income tax expense declining to $2-million in the third quarter from $90-million during the same period in 2015.
Potash market outlook
The company expects strong customer engagement will continue in the fourth quarter, with a healthy order book in place for fall application in the domestic market and Canpotex fully committed through the remainder of the year. The company maintains its 2016 global shipment estimate of 58 million to 61 million tonnes and anticipates fundamentals to remain supportive as it enters 2017.
In North America, all signs point to another record harvest. Strong affordability and significant nutrient removal are expected to support demand through the final months of 2016. For the full year, the company expects shipments in the range of 9.2 million to 9.7 million tonnes, consistent with previous estimates and above 2015 levels.
With its substantial agronomic need and favourable crop economics, the company expects shipments to Latin America will remain robust for the rest of the year and it has increased its full-year shipment range to 11.0 million to 11.5 million tonnes, slightly above the previous year.
In China, deliveries under 2016 contracts are expected to support shipments for the balance of the year. The company estimates annual shipments in the range of 13.5 million to 14.5 million tonnes, consistent with previous estimates but below last year's record level. Even with healthy second half deliveries, the company expects strong underlying consumption will keep inventories well below those seen at the beginning of 2016.
In India, lower farm retail prices are expected to support increased consumption for the remainder of 2016. However, given the slow pace of shipments due to contract delays earlier in the year, the company has lowered its range to 3.5 million to four million tonnes, below 2015 levels. Canpotex has commitments to ship to its customers in this market for the rest of 2016.
In other Asian markets, the company expects good buyer engagement for the rest of 2016, supported by lower inventories, strong palm oil prices and improved moisture conditions. The company has maintained its estimated shipment range of 8.3 million to 8.7 million tonnes, slightly below 2015's total.
Financial outlook
Taking the above market factors into consideration, the company has narrowed the guidance range for its potash sales volumes to 8.5 million to 8.7 million tonnes and refined gross margin expectations to $400-million to $500-million. While signs of a recovery in potash are increasingly visible, most of the benefits from recent improvements are expected to be realized late this year and in 2017.
In nitrogen and phosphate, weaker prices are expected to affect the company's results for the rest of 2016. Accordingly, the company has tightened its gross margin guidance range to $400-million to $450-million.
With greater clarity on the remaining months of 2016, the company has refined its estimates for provincial mining and other taxes to a range of 23 to 25 per cent of potash gross margin (excluding $32-million of New Brunswick severance costs) and the range for income from offshore equity investments to $125-million to $135-million.
The company has lowered its estimate for its effective income tax rate to a range of 14 to 16 per cent, given reduced earnings and a greater proportion of income from lower-tax jurisdictions. Additionally, the company has brought down its range for selling and administrative expenses to $215-million to $225-million due to lower expected corporate expenses related to reduced earnings.
As a result of these changes, the company has narrowed its full-year 2016 earnings guidance range to 40 cents to 45 cents per share, which includes first half notable charges of 11 cents per share primarily related to the suspension of the Picadilly mine in New Brunswick and the company's share of Canpotex's Prince Rupert project exit costs.
All annual guidance numbers -- including those noted above -- are outlined in the table.
2016 GUIDANCE
Earnings per share Annual: $0.40-$0.45
Potash sales volumes 8.5 million-8.7 million tonnes
Potash gross margin $400-million-$500-million
Nitrogen and phosphate gross margin $400-million-$450-million
Capital expenditures* ~$800-million
Effective tax rate 14-16 per cent
Provincial mining and other taxes** 23-25 per cent
Selling and administrative expenses $215-million-$225-million
Finance costs $210-million-$220-million
Income from equity investments*** $125-million-$135-million
Annual foreign exchange rate assumption Cdn$1.32 per US$
Annual EPS sensitivity to foreign exchange US$ strengthens v. Cdn$ by $0.02 = +$0.01 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.Following a review of best practices in the provision of guidance, in 2017 the company will continue to provide annual guidance, including specific elements consistent with past practice, but it will discontinue quarterly earnings-per-share guidance.
Potash Corp. produces the three essential nutrients required to help farmers grow healthier, more abundant crops. Potash Corp. 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.
Potash Corp. will host a conference call on Thursday, Oct. 27, 2016, at 1 p.m. ET.
Telephone conference dial-in numbers
From Canada and the United States: 1-800-597-1419
From elsewhere: 1-604-638-5350
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 as otherwise noted)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2016 2015 2016 2015
Sales $1,136 $1,529 $3,398 $4,925
Freight, transportation and distribution (154) (128) (405) (380)
Cost of goods sold (792) (896) (2,326) (2,662)
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Gross margin 190 505 667 1,883
Selling and administrative (expenses) (59) (52) (167) (172)
Provincial mining and other taxes (31) (79) (88) (264)
Share of earnings of equity-accounted investees 25 32 74 103
Dividend income 8 7 24 38
Impairment of available-for-sale investment - - (10) -
Other income (expenses) 5 8 (4) 11
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Operating income 138 421 496 1,599
Finance costs (55) (49) (161) (148)
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Income before income taxes 83 372 335 1,451
Income taxes (2) (90) (58) (382)
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Net income 81 282 277 1,069
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Net income per share
Basic 0.10 0.34 0.33 1.28
Diluted 0.10 0.34 0.33 1.28
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Dividends declared per share 0.10 0.38 0.60 1.14
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We seek Safe Harbor.
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