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JAN 28 2016

Q4 & Year-End: PotashCorp Reports Full-Year 2015 Earnings of $1.52 per Share

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Jan 28 16

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Key Highlights

  • Fourth-quarter earnings of $0.24 per share1; full-year total of $1.52 per share
  • Annual cash provided by operating activities of $2.3 billion
  • Indefinite suspension of Picadilly, New Brunswick potash operation in January 2016
  • Quarterly dividend reduced by 34 percent to $0.25 per share
  • Full-year 2016 guidance of $0.90-$1.20 per share; $0.10-$0.20 for the first quarter

CEO Commentary

"Weaker fertilizer prices late in the year reduced our earnings for the quarter, giving rise to a more cautious outlook for all three nutrients as we begin 2016," said PotashCorp President and Chief Executive Officer Jochen Tilk.

"Against this backdrop, our focus has been not only to navigate these challenges but to further strengthen our company for the future by:

  • supporting our longstanding potash business model, including matching supply to demand;
  • enhancing our best-in-class assets; and
  • protecting our long-term financial health and flexibility.

"We made the very difficult decisions to suspend potash production in New Brunswick and realign our dividend. These actions are part of our thoughtful and holistic approach to strategically position the company and balance the interests of our shareholders, debtholders, employees and communities who depend on our enduring success. Longer term, we maintain our conviction that the drivers of fertilizer demand – rising global crop production and supportive farmer economics – will support improved market conditions."

Saskatoon, Saskatchewan – Potash Corporation of Saskatchewan Inc. (PotashCorp) reported fourth-quarter earnings of $0.24 per share ($201 million), bringing earnings for the full year to $1.52 per share ($1.3 billion). These totals for the quarter and full year trailed the $0.49 per share ($407 million) and $1.82 per share ($1.5 billion) earned in the same periods of 2014.

Gross margin for the quarter ($386 million) and the year ($2.3 billion) was below 2014 levels ($746 million and $2.6 billion, respectively), due primarily to weaker nitrogen prices and lower potash volumes.

Cash from operating activities of $623 million for the quarter and $2.3 billion for the year was below 2014 results by 13 percent and 11 percent, respectively. Quarterly and annual earnings before finance costs, income taxes and depreciation and amortization (EBITDA)2 of $482 million and $2.6 billion, respectively, were also lower than in the comparable periods of 2014.

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 $27 million to our quarterly earnings, trailing the $31 million generated in the fourth quarter of 2014. Our earnings for the year from these three investments – plus a dividend from Sinofert Holdings Limited (Sinofert) in China – totaled $162 million, below the $210 million earned in 2014, which included a special dividend from ICL. The market value of our investments in these four publicly traded companies was approximately $3.5 billion, or $4 per PotashCorp share, at market close on January 27, 2016.

Market Conditions

Challenging conditions, including currency weakness relative to the US dollar in emerging markets, continued to weigh on fertilizer markets through the fourth quarter. Cautious buying patterns resulted in deteriorating prices across all three nutrients as the year ended.

Global potash shipments for the fourth quarter remained relatively flat compared to 2014, with increased deliveries to China offsetting slightly weaker demand in most other markets.

Nitrogen markets continued to feel the effects of falling energy prices. Lower production costs in key producing regions increased competitive supply, which – combined with a weaker-than-normal fall application season in the US and slower demand in Brazil – caused prices for nearly all nitrogen products to trend lower during the quarter.

In phosphate, record Chinese exports, seasonally slow demand in India and the US and continued caution in Brazil weighed on prices for solid fertilizers. Prices for feed, industrial, and liquid fertilizer products were more resilient, supported by strong demand and tighter supply.

Potash

Reduced sales volumes and a softening price environment – particularly in the second half of 2015 – resulted in gross margin of $183 million for the quarter and $1.3 billion for the year, below 2014’s comparative totals of $445 million and $1.4 billion, respectively.

Sales volumes for both the quarter (down 31 percent) and the year (down 6 percent) trailed those achieved in the same periods of 2014. The most significant decline for both the quarter and full year was in North America, which reflected a pullback in demand from 2014’s especially strong levels, as well as increased competition. Offshore, the majority of Canpotex’s3 shipments for the quarter were to China (40 percent) and Other Asian markets outside of China and India (30 percent), while Latin America and India accounted for 18 percent and 4 percent, respectively.

Our average realized potash price for the quarter was $238 per tonne, down considerably from $284 per tonne in the same period last year, reflecting the declining price environment in 2015.

Inventory-related shutdowns at our Saskatchewan mines and the closure of our Penobsquis, New Brunswick operation reduced production volumes and resulted in per-tonne cost of goods sold for the quarter of $132, which was 26 percent higher than in the comparable period in 2014. For the year, per-tonne cost of goods sold of $111 was relatively flat with the previous year as the favorable impact of a weaker Canadian dollar was offset primarily by increased shutdown weeks.

Nitrogen

In nitrogen, weaker prices had a negative impact on our results for the fourth quarter and the full year. Gross margin of $142 million for the quarter and $706 million for the year trailed results from the same periods in 2014 by 39 percent and 30 percent, respectively. Our US operations accounted for 61 percent of our nitrogen gross margin for the quarter, with Trinidad providing the remainder.

Sales volumes of 1.6 million tonnes for the quarter were similar to those in the same period of 2014. Extended expansion-related downtime, coupled with weaker demand, resulted in sales volumes for 2015 of 5.9 million tonnes, down 7 percent from the previous year.

Our average realized price of $288 per tonne during the quarter was down significantly from the $405 per tonne achieved in the same period last year as lower energy costs and increased global supply weighed heavily on prices for all nitrogen products.

Cost of goods sold for the fourth quarter was $199 per tonne, down 21 percent from 2014, driven largely by lower natural gas costs in the US and Trinidad.

Phosphate

Gross margin for the quarter totaled $61 million, down slightly from the $67 million earned during the same period last year, due to lower sales volumes and price realizations. For the year, we generated $241 million, up from the $202 million earned in 2014, primarily due to increased prices for liquid fertilizers.

For the quarter, sales volumes of 0.8 million tonnes were relatively flat compared to the same period in 2014, while volumes for the year of 2.9 million tonnes trailed 2014, due primarily to the absence of production from the Suwannee River chemical plant.

Our average realized phosphate price for the fourth quarter of $522 per tonne was similar to 2014’s as improved prices for liquid fertilizers offset declining prices for DAP and MAP.

Per-tonne cost of goods sold was $443 for the quarter, similar to last year.

Financial

Provincial mining and other taxes of $46 million for the quarter were lower than the $82 million in the same period last year, due to weaker potash earnings. For the year, provincial mining and other taxes totaled $310 million, 21 percent more than in 2014 because of a weaker Canadian dollar and changes in the timing of allowable deductions within Saskatchewan’s potash taxation regulations.

Income tax expense for the fourth quarter ($69 million) and full year ($451 million) was down from the same periods last year due primarily to lower earnings.

Potash Market Outlook

We expect global potash shipments in the range of 59-62 million tonnes, in line with 2015’s total of approximately 60 million tonnes.

In North America, lower dealer inventories and significant nutrient requirements following consecutive years of large crops are expected to support growth of potash shipments in 2016 to a range of 9.2-9.7 million tonnes

In Latin America, we expect agronomic need and favorable crop economics to keep demand at elevated levels, although credit availability and currency weakness are anticipated to keep growth in this market relatively modest. For the full year, we forecast shipments of 10.8-11.3 million tonnes, slightly above 2015 levels.

In China, elevated inventories are likely to keep demand below 2015’s record of more than 15.0 million tonnes. We anticipate shipments in the range of 13.5-14.5 million tonnes, with strong consumption trends for bulk blends and compound fertilizers continuing.

Demand in India is expected to strengthen in 2016. We forecast deliveries of 4.2-4.7 million tonnes to this market, a slight increase from 2015 when a weak monsoon and currency issues reduced demand late in the year.

In Other Asian markets, supportive crop economics and substantial agronomic need are expected to keep demand fairly robust in 2016. We anticipate deliveries in the range of 8.5-8.8 million tonnes, slightly above 2015 levels.

Financial Outlook

Based on these market factors, we anticipate our 2016 potash sales volumes will be in the range of 8.3-9.1 million tonnes. For the year, we forecast potash gross margin of $0.8-$1.1 billion, down significantly from 2015 as the sharp decline in potash prices through the second half of that year is expected to weigh on margins in 2016.

Our guidance reflects the suspension of our Picadilly potash operations announced in mid-January, including favorable impacts on our cost of goods sold of $40-$50 million and reduced capital expenditures of $50 million. The company has concluded that the announced change will not result in any impairment charges although our guidance does reflect approximately $35 million in severance and transition costs expected to be recorded in the first quarter of 2016.

In nitrogen, we expect improved operating rates at our US facilities and our recently completed Lima nitrogen expansion to increase our sales volumes in 2016. Despite higher sales volumes and reduced costs from lower natural gas prices, a weaker pricing environment – driven by an increase in competitive supply – is expected to result in considerably lower gross margin.

In phosphate, we anticipate weaker market fundamentals will keep prices for most products below 2015 levels, although our historically more stable feed and industrial products are forecast to be less impacted. We expect lower input costs and our focus on improved reliability will reduce costs and increase the amount of product available for sale, which we anticipate will help keep gross margin at a level similar to 2015.

Given these considerations, we forecast combined nitrogen and phosphate gross margin will be in the range of $0.7-$0.9 billion in 2016.

We estimate provincial mining and other taxes in the range of 22-24 percent of potash gross margin, similar to the 2015 percentage.

Based on these factors, we forecast full-year 2016 earnings of $0.90-$1.20 per share, including first-quarter earnings of $0.10-$0.20 per share. Our quarterly guidance reflects the severance and transition charges related to the suspension of production at Picadilly and an expectation of some potash demand being deferred to the second quarter.

Other annual guidance numbers – including those noted above – are outlined in the table below.

2016 Guidance
Earnings per share Annual: $0.90-$1.20 Q1: $0.10-$0.20
Potash sales volumes 8.3-9.1 million tonnes
Potash gross margin $0.8-$1.1 billion
Nitrogen and phosphate gross margin $0.7-$0.9 billion
Capital expenditures* $0.8-$0.9 billion
Effective tax rate 25-27 percent
Provincial mining and other taxes** 22-24 percent
Selling and administrative expenses $240-$250 million
Finance costs $210-$220 million
Income from offshore equity investments*** $120-$140 million
Annual Foreign Exchange Rate CDN$1.38 per US$
Annual EPS sensitivity to Foreign Exchange US$ strengthens vs. CDN$ by $0.02 = +$0.01 EPS
* Does not include capitalized interest
** As a percentage of potash gross margin
*** Includes income from dividends and share of equity earnings

Dividend

Our Board of Directors has declared a quarterly dividend of US $0.25 per share payable May 3, 2016 to shareholders of record April 12, 2016.

"We are committed to preserving a strong balance sheet and investment-grade credit rating, but also believe in retaining a competitive dividend. In consideration of these objectives, we have decided to reduce our quarterly dividend by 34 percent,” said Tilk. “We believe this level – representing a payout ratio of close to 100 percent of 2016 earnings – remains highly competitive and balances the interests of our many stakeholders, including equity and debtholders."

Notes

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.

Webcast Details

Jan 28 16

Forward-Looking Statements

Presentation Multimedia

Slideshow

Transcript

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Last Reviewed: Mar 22, 2013