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JUL 28 2016

Q2: PotashCorp Reports Second-Quarter Earnings of $0.14 per Share

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Jul 28 16

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Key Highlights

  • Second-quarter earnings of $0.14 per share1, including:
    • Share of Canpotex’s2 Prince Rupert project exit costs of $0.02 per share
    • Unfavorable discount rate adjustment to asset retirement obligations of $0.01 per share
    • Impairment of investment in Sinofert Holdings Limited (Sinofert) of $0.01 per share
  • Intend to reduce quarterly dividend by 60 percent to $0.10 per share
  • Full-year 2016 earnings guidance lowered to $0.40-$0.55 per share, including:
    • Notable charges through the first half of 2016 of $0.11 per share
  • Third-quarter earnings guidance set at $0.05-$0.10 per share

CEO Commentary

“Fertilizer markets have been under pressure through the first six months of 2016, however we believe the uncertainty that weighed on potash market sentiment is now lifting and a recovery is beginning,” said PotashCorp President and Chief Executive Officer Jochen Tilk. “With key Asian contract prices settled by a number of producers – and buyer inventories at reduced levels – we are seeing improved engagement in all key markets.”

“This recovery process requires patience and we believe adherence to our strategy will continue to position us for long-term success. Consistent with our strategy, we have taken meaningful steps over the past 12 months to align our operating capability with expected market conditions and to reduce costs, including the suspension of potash operations in New Brunswick and production curtailments in Saskatchewan,” said Tilk.

“This measured approach to markets and operations is also reflected in our approach to capital allocation. Protecting our balance sheet while maintaining a competitive dividend remains a top priority as it not only enables us to weather challenges like those experienced this year, but it also positions us to seize opportunities as we go forward. In that context – and with a need to balance the interests of our shareholders and debtholders – we intend to realign our quarterly dividend to $0.10 per share beginning with the declaration of our next dividend in September.”

“With customer sentiment improving and announced industry shutdowns, we anticipate a more supportive potash environment through the balance of the year. Importantly, we see the potential for record demand in 2017 with annual shipments in the range of 61-64 million tonnes, as strong affordability incents farmers to replenish soil nutrients. We are positioned to benefit from an improved environment next year and we support Canpotex as they take a cautious approach to the Chinese and Indian markets, committing volumes only through the remainder of 2016.”

Saskatoon, Saskatchewan –  Potash Corporation of Saskatchewan Inc. (PotashCorp) reported second-quarter earnings of $0.14 per share ($121 million), resulting in first-half earnings of $0.23 per share ($196 million). Results for both periods trailed those in 2015 and included notable charges of $0.04 per share ($38 million) and $0.11 per share ($94 million), respectively.

Gross margin for the quarter ($243 million) and first six months ($477 million) was below 2015 levels ($711 million and $1.4 billion, respectively), primarily due to weaker prices for all three nutrients and lower potash sales volumes to offshore markets. Cash from operating activities of $424 million for the second quarter and $612 million for the first half of 2016 were both well below prior year totals.

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 $44 million to our quarterly earnings, bringing first-half totals to $66 million. These contributions were partially offset by a non-cash impairment charge of $10 million related to our investment in Sinofert. Totals for both the second quarter and first half trailed the respective amounts generated last year. The market value of our investments in these four publicly traded companies was approximately $3.8 billion, or $4 per PotashCorp share, at market close on July 27, 2016.

Market Conditions

Global potash markets were subdued in the second quarter. Despite healthy demand in North America and Latin America, delayed contracts in China and India, combined with cautious buying patterns in Other Asian markets, weighed on shipments. Spot prices declined from those in the first quarter, though they began to show signs of firming as market fundamentals improved at the end of the quarter.

Nitrogen and phosphate markets also experienced near-term headwinds. In nitrogen, lower energy costs and additional capacity pushed benchmark prices for most products to multi-year lows, despite reduced Chinese urea exports and relatively strong global demand. In the US market, strong offshore imports and increased domestic supply put additional pressure on prices following the spring application season, especially for urea and UAN. Global phosphate prices also trended lower during the second quarter due to declining input costs, increased competitive supply and weaker Indian demand.

Potash

Potash gross margin of $123 million for the second quarter and $211 million for the first six months of 2016 reflected significantly lower prices and offshore sales volumes, as results in both periods fell short of 2015’s respective totals of $417 million and $845 million.

Sales volumes for both the quarter (2.1 million tonnes) and first half (3.9 million tonnes) were lower than those in 2015, down 16 percent and 20 percent, respectively. While North American volumes were up relative to last year’s totals, a lack of engagement in key contract markets kept offshore volumes well below 2015 levels. China accounted for 7 percent of Canpotex’s deliveries for the quarter while volumes to India were negligible. The majority of shipments were to spot markets in Latin America (47 percent) and Other Asian markets outside of China and India (37 percent).

Our average realized potash price of $154 per tonne for the second quarter was down from $273 per tonne in the same period last year. This decline was driven by a weaker pricing environment and a $26 per-tonne charge to our average offshore realized price related to PotashCorp’s share of Canpotex’s Prince Rupert project exit costs. The decision not to proceed with development of an export terminal in Prince Rupert, British Columbia – and avoid potential capital expenditures – was, in part, supported by the recent availability of up to 2.5 million tonnes of storage and loading capacity at the Port of Saint John in New Brunswick.

Optimizing production to our mines in Saskatchewan, combined with lower royalties and the favorable impact of a weakened Canadian dollar, reduced our per-tonne manufactured cost of goods sold to $91 per tonne for the second quarter compared to $105 per tonne in the same period of 2015.

Nitrogen

Weaker prices for all nitrogen products resulted in gross margin of $130 million for the quarter and $237 million for the first six months, a 41 percent decline from last year’s comparable periods. Our US operations accounted for 77 percent of our nitrogen gross margin for the quarter, with Trinidad providing the remainder.

Second-quarter sales volumes of 1.5 million tonnes marked an 8 percent decrease from the same period last year due to weaker North American industrial demand. Total first-half sales volumes were 3.2 million tonnes – 8 percent higher than the same period last year, primarily due to additional production at our recently expanded Lima facility.

Weaker benchmark pricing lowered our average realized price to $244 per tonne during the quarter, compared to $334 per tonne in the same period last year.

Cost of goods sold for the quarter was $160 per tonne, down from $201 per tonne in 2015’s second quarter, driven primarily by lower natural gas costs in the US and Trinidad.

Phosphate

Weaker phosphate prices, and notable charges of $29 million related to inventory writedowns and an unfavorable discount rate adjustment to our asset retirement obligations, resulted in negative gross margin of $10 million for the second quarter. These factors led to first-half gross margin of $29 million, 78 percent below first-half 2015.

Sales volumes of 0.5 million tonnes for the quarter and 1.2 million tonnes for the first six months were down 25 percent and 8 percent from 2015’s respective periods due primarily to weaker North American demand.

Our average realized phosphate price for the quarter was $485 per tonne, down from $553 per tonne in the same period last year as weaker demand weighed on prices for nearly all our products.

Cost of goods sold of $506 per tonne for the second quarter was higher than the same period in 2015 as lower input costs were more than offset by a $19 million inventory adjustment and a $10 million unfavorable discount rate adjustment to asset retirement obligations.

Financial

Provincial mining and other taxes for the quarter totaled $26 million, down 71 percent from last year’s corresponding period due primarily to lower potash prices.

Due to reduced earnings, income tax expense declined to $24 million in the second quarter, down from $152 million during 2015’s comparable period.

Potash Market Outlook

Following a prolonged period of market uncertainty and weakening fundamentals, we believe potash markets have reached their low point. Recently settled contracts in China and India and a reduction in inventory throughout the supply chain over the last six months are expected to support a more constructive environment. Much like recoveries seen after previous periods of delayed contracts, we anticipate stronger buyer engagement to support demand through the second half of 2016 with full-year estimates of 58-61 million tonnes.

In North America, we anticipate improved affordability will help support deliveries for the rest of 2016. We expect shipments for the full year in the range of 9.2-9.7 million tonnes, up from the prior quarter’s estimate and above 2015’s total.

In Latin America, favorable crop economics and agronomic need are expected to push 2016 shipments to 10.8-11.3 million tonnes – slightly above 2015 totals and in line with our previous guidance range.

In China, we expect recently settled contracts and strong underlying consumption to support 2016 shipments in the range of 13.5-14.5 million tonnes, consistent with our previous estimates, but below 2015’s record levels. While contract negotiations are ongoing, Canpotex expects to deliver tonnage to its Chinese customers in the second half of 2016.

In India, we anticipate that an improved monsoon and lower farm retail prices will support improved potash consumption for the rest of the year, but due to weaker first-half deliveries, we have lowered our 2016 shipment estimate to a range of 3.7-4.2 million tonnes. Canpotex has reached agreements with its customers in India for shipments over the next three months with deliveries expected to begin in the weeks ahead.

In Other Asian markets, adverse weather conditions and cautious buying patterns during the first half are expected to result in demand of 8.3-8.7 million tonnes for the full year, below our previous expectations and 2015’s total as well.

Financial Outlook

While markets have stabilized in recent weeks and we continue to forecast our 2016 potash sales volumes in the range of 8.3-8.8 million tonnes, lower prices earlier in the year are expected to weigh on our results for the remainder of 2016. We now expect potash gross margin to be in the range of $400-$600 million.

Similarly, we anticipate a weaker price environment to negatively impact our nitrogen and phosphate segments through the rest of 2016. We have lowered our combined nitrogen and phosphate gross margin guidance for the year to a range of $400-$550 million.

Lower earnings have reduced our expected provincial mining and other taxes for 2016, now forecast in the range of 23-26 percent of potash gross margin (excluding $32 million of New Brunswick severance costs). Additionally, our effective income tax rate is expected to fall to a range of 16-18 percent given reduced earnings and a greater proportion of income from lower-tax jurisdictions.

Anticipated selling and administrative expenses for the year have been lowered to a range of $220-$230 million. Due to the recent strength of the Canadian dollar, we have revised our full-year foreign exchange rate assumption to CDN$1.32 per US dollar.

As a result of the noted changes, we have lowered our full-year 2016 earnings guidance to $0.40-$0.55 per share, including notable charges through the first half of $0.11 per share. For the third quarter, we forecast a range of $0.05-$0.10 per share. We also intend to reduce our quarterly dividend from $0.25 per share to $0.10 per share commencing with the declaration of our next dividend in September.

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

2016 Guidance
Earnings per share Annual: $0.40-$0.55 Q3: $0.05-$0.10
Potash sales volumes 8.3-8.8 million tonnes
Potash gross margin $400-$600 million
Nitrogen and phosphate gross margin $400-$550 million
Capital expenditures* ~$800 million
Effective tax rate 16-18 percent
Provincial mining and other taxes** 23-26 percent
Selling and administrative expenses $220-$230 million
Finance costs $210-$220 million
Income from offshore equity investments*** $120-$140 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
* 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

1. All references to per-share amounts pertain to diluted net income per share.
2. Canpotex Limited (Canpotex), the offshore marketing company for PotashCorp and two other Saskatchewan potash producers.
3. See reconciliation and description of non-IFRS measures in the attached section titled "Selected Non-IFRS Financial Measures and Reconciliations and Supplemental Information."

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 appropriate 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, 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 actual results or events to differ materially from those expressed in 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 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; changes in currency and exchange rates; risks related to reputational loss; the occurrence of a major safety incident; inadequate insurance coverage for a significant liability; 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 new and pending 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 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.

Webcast Details

Jul 28 16

Forward-Looking Statements

Presentation Multimedia

Slideshow

Transcript

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