SASKATOON, SK CNW – Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported second-quarter net income of $29.9 million or diluted earnings per share of $0.57, more than double the $11.9 million or $0.23 per share earned in the same period last year. Volumes were up in all three nutrients, but the main contributors to better earnings were higher nitrogen prices and the gas hedge realization.
The strengthening Canadian dollar, relative to the U.S. dollar, negatively affected earnings in both the second quarter and the first half of 2003. There was a quarterly foreign exchange translation loss of $0.26 per share, which was primarily non-cash. Additionally, foreign exchange affected the Canadian cash costs of potash production, freight and administration. This reduced earnings by another $0.10 per share during the quarter. Based on the December 31, 2002 exchange rate of 1.5796, the stronger Canadian dollar has reduced earnings by $0.58 per share on a year-to-date basis.
Second-quarter cash flow remained strong as the foreign exchange loss, which was mostly non-cash, was accompanied by higher earnings. Free cash flow(1) of $85.6 million was up quarter-over-quarter due to higher depreciation, lower capital spending and higher future income taxes. Cash provided by operating activities at $67.0 million was down from second-quarter 2002 due to higher receivables from large June sales volumes and higher nitrogen inventory.
While the Company's potash, phosphate and nitrogen sales volumes were all better than last year's same quarter, lower-than-expected corn and wheat plantings in North America took away most of the potential spring season upside. As expected, the higher production costs in all three nutrients experienced in the first quarter continued in the second quarter, but potash and phosphate prices did not rise enough to offset these increased costs. Even nitrogen prices, which were up substantially, at times were below the higher gas-driven North American production cost.
"When we entered 2003 we expected to double our 2002 earnings and increase our cash flow by 50 percent," said Bill Doyle, President and CEO. "On a business basis, the year is reasonably on target with original expectations. The Canadian dollar has negatively affected earnings but, as that is mainly non-cash, we are still expecting cash flow to be close to our original guidance. Some of the short-term market gyrations during the second quarter were frustrating as they hindered our potential for increased earnings, but we remain confident about the outlook for our industry and the value of our business model."
Strong second-quarter potash volumes (up 10 percent) followed on the heels of healthy first-quarter volumes. PotashCorp ended the first half of 2003 with volumes up 11 percent over last year's first half. In the offshore market Brazil continued to be a big customer, with PotashCorp's volumes to that country up 54 percent in the first half of 2003. Brazil could take record volumes this year. In the domestic market, a recovery of some market share along with a large June fill in advance of scheduled price increases raised second-quarter volumes.
Second-quarter prices in North America were up slightly from last year's same quarter and up significantly from this year's first quarter (higher by $5.74 per tonne or 8 percent). In the offshore market, increased prices were more than offset by higher ocean freight rates, resulting in lower returns to the Company.
The main factor in the reduced potash gross margin in this year's second quarter was increased costs. On a per-tonne basis, approximately half of the higher cost was the result of the stronger Canadian dollar. The remainder was due mostly to higher natural gas costs and a greater percentage of volumes sourced from the higher-cost New Brunswick facility.
Volumes and prices were up in all phosphate products except feed, where both indicators were down. The feed business continued to be under pressure, with increased competition and soft demand. In addition, PotashCorp's costs per tonne were up as it reduced production in response to lower sales volumes and worked to reduce inventories to more sustainable levels. Industrial volumes were up as the expansion of the purified acid plant that was completed in the first quarter of 2003 provided more of these high- margin tonnes.
In fertilizer phosphates, more solid tonnes were sold reflecting the restart of the White Springs DAP plant which was shut down most of 2002. More than three quarters of these additional tonnes were sold domestically as PhosChem has yet to complete a new contract with customers in China, its largest market. PotashCorp is the largest supplier of liquid phosphate fertilizer in the U.S. with 80 percent of its second-quarter liquid sales focused there.
The gains in improved phosphate rock costs that began in the first quarter of 2003 were firmly established in the second quarter. On a per tonne basis, quarter-over-quarter rock costs were reduced by over $6.00 but were more than offset by higher costs for ammonia and sulfur (up 56 and 61 percent respectively).
During the second quarter of 2003, PotashCorp sold more nitrogen tonnes when compared to the same quarter of 2002. Additional sales volume was provided by purchased product tonnes that were nearly double those during the same period last year. At the beginning of June, the Company indefinitely shut down its Memphis plant as well as the production of ammonia and UAN at its Geismar plant due to poor margins resulting from high natural gas costs. Ammonia prices tend to follow gas prices as North American producers shut down capacity when gas prices rise, tightening supply and demand. This increased the margin for ammonia made offshore with less expensive gas. During the quarter, 40 percent of the Company's gross margin in nitrogen came from its Trinidad production with the bulk of the remainder coming from the liquidated gas hedge contracts.
Between the U.S. and Trinidad, the Company's average natural gas price during the quarter was up 55 percent from the same quarter last year. Gas prices were higher for a longer period than anticipated when entering the second quarter. In fact, at June 30 gas prices were 80 percent higher than one year earlier. These higher costs dissipated some of the value of the previously liquidated hedge as customer commitments were satisfied.
The Canadian dollar exchange rate compared to the U.S. dollar started the year at 1.5796, ended the first quarter at 1.4693 and ended the second quarter at 1.3553. This strengthening of the Canadian dollar impacts the Company's financials in two ways: on its foreign exchange gain or loss line arising from currency conversion and on its Canadian dollar operating costs. The conversion is mostly future income tax liabilities on the balance sheet at month end. In the first quarter, this reduced the Company's earnings by $0.19 per share. During the second quarter, it reduced the earnings by $0.26 per share. The U.S. dollar equivalent of the Canadian dollar expenditures increase as the Canadian dollar strengthens. They include potash production, freight and administration, which are calculated by using an average exchange rate. The stronger dollar increased the equivalent U.S. costs by $10.9 million since the beginning of the year, which reduced earnings by $0.03 per share in the first quarter and $0.10 per share in the second quarter.
During the quarter, other income was up as the Company received dividends of $2.4 million from its investment in Israel Chemicals Ltd. In addition, nitrogen insurance proceeds of $2.0 million were received. Provincial mining and other taxes were down by 34 percent, on a per-tonne basis, due to lower profits and an over-accrual in the first quarter.
World corn prices have recently fallen as China has been exporting corn and U.S. futures markets have factored in a bumper crop. Nonetheless, world grain inventories remain low and global consumption is expected to outstrip production for the fifth consecutive year. In each of the last four years, China's grain production has not met its consumption requirements, so with its newly reduced inventories it could easily change from being an exporter to a net importer. This could rapidly escalate grain prices. Another driving factor would be production problems anywhere in the world, which would compound the already tight grain inventory situation.
Regardless of the current low grain prices, fertilizer prices have stabilized as North American potash, DAP and urea inventories remain below their five-year average. Good second-half offshore sales volumes in potash should continue to support pricing. Similarly, a new China DAP contract and a continuation of existing industry operating rates should aid DAP pricing. In addition, the high percentage of shut-down ammonia capacity in the U.S. (around 45 percent) should keep supply and demand tight and prices firm in that nutrient.
The Company's higher DAP production and industrial acid capacity should continue to provide increased volume on a year-over-year basis. Continued competition in feed is expected to keep that business under pressure. All phosphate products are expected to benefit from the lower rock costs already achieved and from projected lower sulfur costs.
The 2003 gas futures contracts that were liquidated during the first quarter will continue to provide earnings to the nitrogen business but to a lesser extent as fewer contracts had been in place for the second half of 2003. As of June 30, 2003, PotashCorp was 81 percent hedged at $3.27 per MMBtu for August through December of 2003 subject to collared profits.
The Canadian dollar exchange rate will continue to affect the Company's earnings. PotashCorp expects the Canadian dollar to weaken during the third quarter to 1.4000 and then remain essentially flat for the remainder of the year. If this occurs, the full year effect of the strengthening Canadian dollar would then be $0.61 per share, of which almost 60 percent is currency translation loss. The Company believes it can earn in the range of $1.50 per share this year with $0.25 to $0.35 in the third quarter.
These 2003 earnings would provide annual cash flow prior to working capital changes(1) of approximately $400 million (within 7 percent of initial guidance) and cash provided by operating activities of approximately $385 million. Capital expenditures, which have also been affected by the strengthening Canadian dollar, should be approximately $160 million for the year. Outstanding shares are expected to be 52.3 million.
PotashCorp was recently notified by the University of Toronto's Rotman School of Management that it had received the highest possible board effectiveness rating of AAA+ in a recent corporate governance study. The study included all companies publicly traded on the Toronto Stock Exchange and examined 151 different variables. PotashCorp was the only company to receive the AAA+ rating.
Doyle concluded by saying, "We are very pleased with this rating, as it acknowledges our board's commitment to effective corporate governance. It is just one of the many areas where we aspire to be a best practices company. Another is in our strategies, which are designed to deliver success for our company and our shareholders over the long term.
"Our operating strategies build on our advantages in each nutrient, while our business strategy focuses on using our healthy cash flow to leverage our existing strengths. One of these opportunities was presented to us when we were named the preferred bidder on the 26 percent of Arab Potash Company earlier this month. The negotiations are set to begin in the near future and although we cannot predict the outcome, we do believe it would provide logistical synergies for our potash business."
For further information please contact:
Senior Vice President, Corporate Relations
Phone: (306) 933-8521
Fax: (306) 933-8844
This release contains forward-looking statements, which involve risks and uncertainties, including those referred to in the Company's annual report to shareholders for 2002 and in filings with the U.S. Securities and Exchange Commission. A number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, fluctuation in supply and demand in fertilizer, sulfur and petrochemical markets; changes in competitive pressures, including pricing pressures; risks associated with natural gas and other hedging activities; changes in capital markets; changes in currency and exchange rates; unexpected geological or environmental conditions; and government policy changes.
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