PotashCorp Reports Second-Quarter Earnings of $0.73 per Share
July 25, 2013 (Source: PotashCorp) — Key Highlights
- Second-quarter earnings of $0.73 per share1; first-half 2013 earnings of $1.37 per share
- Second-quarter potash sales volumes of 2.5 million tonnes; six-month total of 4.8 million tonnes
- Record first-half cash provided by operating activities of $1.9 billion
- Third-quarter 2013 earnings guidance of $0.45-$0.60 per share
- Full-year 2013 earnings guidance adjusted to $2.45-$2.70 per share
Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported second-quarter earnings of $0.73 per share ($643 million), bringing earnings for the first six months of 2013 to $1.37 per share ($1.2 billion). The second-quarter and first-half totals surpassed the $0.60 and $1.16 per share earned in the respective periods of 2012, although the previous year’s results included a $0.39 per share impairment charge related to our investment in Sinofert Holdings Limited (Sinofert).
Second-quarter gross margin of $1.0 billion trailed the $1.2 billion generated in the same period last year, as contributions from each of our three nutrients fell. As a result, the $1.8 billion generated during the first six months of 2013 was slightly below the $1.9 billion earned in the comparative period last year.
Adjusted earnings before finance costs, income taxes and depreciation and amortization2 (EBITDA) of $1.1 billion for the quarter and $2.1 billion for the first six months both trailed 2012 results. Second-quarter cash flow provided by operating activities of $1.2 billion approached the record established in the same period last year, elevating our 2013 first-half total to $1.9 billion – the highest six-month total in our history.
Our offshore 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 in China contributed $89 million during the quarter and $166 million for the first half of the year. Before the impact of an impairment charge recorded against our earnings in 2012, both totals trailed prior-period levels. The market value of our investments in these publicly traded companies equated to approximately $6.8 billion, or $8 per PotashCorp share at market close on July 24, 2013.
“Global fertilizer demand was strong during the quarter, but highly competitive markets around the world had an impact on our results,” said PotashCorp President and Chief Executive Officer Bill Doyle. “Despite some weakening of prices in each of our nutrients, the continued engagement of buyers in our key markets was a positive sign. Farmers demonstrated their commitment to improving soil fertility and capitalizing on favorable agricultural economics, which benefits global food production and our company.”
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The pace of global potash shipments remained robust during the quarter as buyers in all key markets were actively securing new supply. In North America, challenging spring planting conditions affected fertilizer activity in some regions, but a late push by farmers to ensure the required nutrients were in place to maximize yields and economic returns kept dealers engaged throughout the quarter. Shipments from North American producers surpassed the second-quarter and six-month totals of 2012, even as dealers managed their supply to minimize inventories at the close of the planting season. In offshore markets – both contract and spot – buyers actively procured new supply or took delivery of committed tonnes, which helped raise shipments from North American producers to record levels for both the second quarter and the first half. Despite a strong demand environment, increased competitive pressures resulted in lower prices in all key markets relative to the same periods last year.
In nitrogen, robust industrial and agricultural demand led to increased shipments from US producers for most products during the quarter. Even with substantial domestic requirements, a delayed spring application season and significant product availability from offshore suppliers put downward pressure on key benchmark prices. This was most notable in urea as US imports rose sharply during the past nine months, whereas prices for ammonia and other nitrogen products fell less dramatically on tighter supply/demand fundamentals.
Global phosphate markets continued to be impacted by the lack of substantive engagement from buyers in India, the world’s largest phosphate importer. Although fertilizer dealers managed their supply requirements cautiously in the absence of clear market direction, demand in North America stayed relatively strong and shipments from US producers to Latin American countries were robust. Despite India’s return to the solid fertilizer market midway through the quarter, prices for all phosphate fertilizer products trended lower.
Second-quarter potash gross margin of $613 million – down from $801 million in the same period last year – brought the six-month total of $1.1 billion on par with the comparative period of 2012.
Sales volumes reached 2.5 million tonnes for the second quarter and 4.8 million tonnes for the first six months – totals that reflected a small decline from the same quarter last year but a 24 percent increase for the first half. In North America, robust demand at the farm level pushed sales volumes well above the comparative periods of 2012 for both the quarter (28 percent) and first six months (55 percent). Canpotex3 shipments to offshore markets maintained their record pace, with the majority of this quarter’s volumes directed to Latin America (26 percent), China (15 percent), India (12 percent) and other Asian countries (44 percent). Although second-quarter offshore sales volumes (1.7 million tonnes) trailed the total for the same period last year – largely the result of a decline in our Canpotex entitlement and a larger percentage of first-half shipments from New Brunswick during the first quarter of 2013 – our six-month total (3.1 million tonnes) surpassed that of the same period of 2012.
Our average realized potash price declined to $356 per tonne from $433 per tonne in the second quarter of 2012, primarily due to competitive pressures moving contract and spot market pricing lower.
Although we took fewer shutdown weeks than in last year’s second quarter, our production declined by 5 percent to 2.7 million tonnes as we operated our Lanigan facility at reduced rates to match our production to demand. The absence of higher-cost tonnes from Esterhazy more than offset the impact of reduced production and led to improved per-tonne cost of goods sold, which was down 9 percent for the second quarter and 13 percent for the first half relative to the comparable periods last year. During the quarter, we safely and successfully completed a Canpotex entitlement run at our Cory facility that will increase our allocation for the second half of 2013 to a level more closely aligned with that of the previous year.
Despite recent volatility in nitrogen prices, we generated gross margin of $276 million in the second quarter, trailing only the record $302 million earned in the same period last year. Of this total, our Trinidad operation generated $90 million while our US operations contributed $186 million – with approximately $30 million of that from our recently expanded Geismar facility. Gross margin for the first six months of 2013 reached a record $547 million, eclipsing the previous mark of $521 million earned in the same period last year.
Second-quarter sales volumes of 1.4 million tonnes exceeded the 1.3 million tonnes sold in the same quarter of 2012. Our ability to increase production of downstream nitrogen products following the restart of ammonia capacity at Geismar was the primary driver of this increase, although this benefit was partially offset by lower ammonia production at our Trinidad facility due to natural gas curtailments. For the first six months, sales volumes of 2.9 million tonnes were 11 percent above the same period of 2012.
Our average realized prices for the quarter fell to $406 per tonne from $436 per tonne in the same period last year, primarily reflecting a sharp decline in urea prices.
Per-tonne cost of goods sold declined in the quarter despite a marginal increase in natural gas costs, as we incurred significantly lower costs at Geismar relative to the same period of 2012.
Second-quarter phosphate gross margin of $90 million trailed the $96 million generated in the same period last year. Our ability to capture more stable margins in feed and industrial products helped deliver $49 million of this quarter’s total, while fertilizer products contributed $37 million. Gross margin for the first six months of $182 million was below the $248 million earned in the same period last year, primarily due to lower realized prices for fertilizer products.
Phosphate sales volumes for the quarter totaled 0.9 million tonnes and 1.8 million tonnes for the first six months, both relatively flat with the comparative periods of 2012.
Our average realized phosphate prices for the quarter were $517 per tonne, down from $552 per tonne during the same period last year. The change primarily reflects a $44-per-tonne decline in prices for fertilizer products, while prices for feed and industrial products were relatively flat.
Per-tonne cost of goods sold decreased 7 percent from last year’s second quarter, largely because the 2012 total included a significant asset retirement obligation charge and severance expense. Lower costs for sulfur – a key input in the production of phosphate products – further improved our 2013 results, although this was partially offset by higher ammonia costs.
Provincial mining and other taxes increased to $81 million in the second quarter from $72 million in the same period last year. Our capital-related cash expenditures totaled $354 million in the quarter.
The change in our quarter-over-quarter ordinary earnings (before the non-tax deductible Sinofert impairment charge during the second quarter of 2012) led to our income tax expense decreasing to $245 million from $304 million in the same period last year.
In May, we announced a 25 percent increase in our dividend. This was our fourth dividend enhancement since the start of 2011, representing a cumulative increase of 950 percent.
Although global crop markets experienced volatility in the first half of 2013, the agronomic and economic incentives that drive fertilizer demand remain attractive for farmers. Strong demand for potash, nitrogen and phosphate materialized as expected in the first six months of the year and we anticipate that agricultural conditions will continue to support healthy fertilizer applications in major growing regions for the balance of the year.
In potash, we believe the demand story that is unfolding is a product of renewed growth in many developed and emerging markets. We expect that 2013 global shipments will be similar to the record set in 2011 (nearly 56 million tonnes) with shipments to each major market relatively in line with previous forecasts.
In North America, we anticipate strong engagement through the balance of the year as dealers work to position potash in expectation of an active fall application season. Prices for our summer-fill program reset to $420 per short ton (Midwest warehouse), or approximately $463 per metric tonne, and we are beginning to see buyers returning to the market to restock depleted inventories. While the late spring planting could result in a condensed fall application window, we anticipate that a push by farmers to address declining potassium levels in their soils will result in second-half shipments exceeding historical totals.
Demand from Latin America, especially Brazil, has been particularly strong through the first six months of 2013. We anticipate this market will continue importing potash at high levels in preparation for its key planting season later this year, although it may slow slightly from last year’s record second-half levels. For the year, we forecast total demand in this market will surpass previous period totals.
Shipments of first-half potash volume commitments to China by major suppliers are now reported to be largely complete – with those from Canpotex completed in early July. Discussions on second-half contracts are continuing and we anticipate a new supply agreement will be reached, although shipments during the third quarter could be minimal.
After a slow start to 2013, buyers in other Asian countries (outside of China and India) increased purchases in the second quarter and are working to ensure potash supply will meet anticipated demand. With supportive agronomic and economic incentives in place, we expect total shipments in this region will outpace 2012 levels.
In India, the potash situation remains complex. While an early and healthy monsoon led to an increase in fertilizer demand in June, India’s current fertilizer subsidy program continues to create a large pricing gap between nitrogen and potash fertilizers, and recent currency weakness has intensified the disparity. We do not expect any significant change to our previous forecast of total shipments to this market of approximately 4 million tonnes, although Canpotex’s third-quarter movements could slow from their strong pace in recent months.
In this environment, we have revised our financial outlook. We now forecast 2013 potash segment gross margin in the range of $1.8-$2.1 billion, with shipment estimates unchanged at between 8.5 million and 9.2 million tonnes. Included in our sales volumes assumption is an increase in our second-half Canpotex entitlement as a result of successfully proving 3 million tonnes of capacity at our Cory facility, raising PotashCorp’s allocation percentage to approximately 51.5 percent.
Even with the expectation of a healthy potash order book for the remainder of the year, we have taken the steps necessary to balance our supply with demand – as we have done consistently throughout our history. We plan to take our normal potash maintenance downtime during the third quarter, as well as six additional weeks at Cory. We also intend to operate Lanigan and Rocanville at reduced rates for the rest of 2013. We expect that per-tonne operating costs will rise – as is typical – for the third quarter as a result of reduced production levels, but anticipate annual costs will remain well below those of the previous year.
In nitrogen, the resumption of ammonia production at Geismar has us on track to surpass 2012 sales volumes, although we anticipate slightly lower ammonia availability during the third quarter due to a scheduled turnaround at our Trinidad facility. While the sharp contraction in nitrogen prices appears to be slowing, the full impact of the recent decline is likely to be reflected in our third-quarter realizations. We believe favorable cost variances will help offset lower prices and anticipate gross margin for 2013 could reach record levels.
Despite recent weakness in global phosphate fertilizer prices, we forecast gross margin will remain relatively stable through the balance of the year, aided by expectations that our sales volumes will surpass those of 2012 and the decline of costs for sulfur, ammonia and our mined phosphate rock. We anticipate that the stability of our feed and industrial products will counter volatility in fertilizer markets and enhance the profitability of our phosphate business.
In this environment, we now forecast nitrogen and phosphate will contribute combined gross margin of $1.3-$1.5 billion for 2013.
Given reduced profitability across the fertilizer industry, we now expect our offshore investments to contribute dividends and equity earnings between $320 million and $340 million for the year.
Other updates to our annual guidance include a reduction in our forecast for selling and administrative costs to $230-$240 million; finance costs adjusted to $130-$150 million; and annual effective income tax rate shifted to a range of 27-28 percent.
Capital expenditures, excluding capitalized interest and major repairs and maintenance, are still anticipated to approximate $1.5 billion.
Based on these factors and guidance items above, PotashCorp now forecasts full-year 2013 net income at $2.45-$2.70 per share, including third-quarter earnings in the range of $0.45-$0.60 per share.
“Rising global demand for all three crop nutrients continues to reflect the underlying reality that farmers and fertilizer buyers around the world are working to improve soil fertility and food production,” said Doyle. “As this need for crop nutrients, especially potash, continues to grow, we believe it translates into significant opportunities for our company. As we have seen throughout our history, the timing of increases in demand and prices is not perfectly predictable, but we are confident that a commitment to running our business responsibly and with patience will be rewarded. We will continue to do the right things for long-term success, managing our assets to maximize the benefits for all our stakeholders.”
|1.||All references to per-share amounts pertain to diluted net income per share.|
|2.||See reconciliation and description of non-IFRS measures in the attached section titled “Selected Non-IFRS Financial Measures and Reconciliations.”|
|3.||Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers.|
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 third largest producer 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.
This release contains forward-looking statements or forward-looking information (forward-looking statements). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements are based on certain factors and assumptions including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Several factors could cause actual results or events to differ materially from those expressed in the forward-looking statements, including, but not limited to the following: 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, transportation and petrochemical
markets; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in competitive pressures, including pricing pressures; adverse or uncertain economic conditions and changes in credit and financial markets; the results of sales contract negotiations within major markets; economic and political uncertainty around the world; timing and impact of capital expenditures; risks associated with natural gas and other hedging activities; changes in capital markets; unexpected or adverse weather conditions; changes in currency and exchange rates; unexpected geological or environmental conditions, including water inflows; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; acquisitions we may undertake; strikes or other forms of work stoppage or slowdowns; rates of return on and the risks associated with our investments; changes in, and the effects of, government policies and regulations; security risks related to our information technology systems; and earnings and the decisions of taxing authorities, which could affect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year ended December 31, 2012 under the captions “Forward-Looking Statements” and “Item 1A – Risk Factors” and in our other filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking
statements are given only as at the date of this release and the company disclaims any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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