SASKATOON, SK (Canada NewsWire via COMTEX) – Third-quarter impairment and shutdown charges contributed to a quarterly net loss of $185.9 million or $3.57(1) diluted loss per share for Potash Corporation of Saskatchewan Inc. (PotashCorp). Net income, adjusted to exclude impairment charges and shutdown- related costs recorded in the third quarter, was $15.9 million(2), or a diluted net income per share of $0.30(2), as compared to diluted net income per share of $0.28 in the same period of 2002.(1) The third-quarter impairment charges and shutdown-related costs totalled $201.8 million ($262.0 million before tax) and pertained to asset write-downs, workforce reductions, and contract terminations at the Company's Yumbes, Geismar, Memphis, and Kinston properties.
In addition, the strengthening Canadian dollar, compared to the U.S. dollar, negatively affected earnings in the third quarter by $0.10 per share. This was comprised of a $0.03 non-cash balance sheet translation loss and $0.07 on operating and overhead costs in Canada. On a year-to-date basis, the diluted net income per share adjusted to exclude impairment charges and shutdown-related costs was $0.96(2) per share. This would have been $0.68 higher if the exchange rate at December 31, 2002 had been maintained, of which $0.48 would be non-cash.
The Company reported third-quarter consolidated gross margin of $84.5 million compared to $75.1 million during the same period last year, a 13-percent increase. Higher potash sales volumes and strong nitrogen prices more than offset weak phosphate markets.
Third-quarter cash from operating activities was up $43.1 million or 51 percent over the same quarter last year ($128.4 million - third-quarter 2003, $85.3 million - third-quarter 2002). Cash before changes in working capital(2) was $65.4 million and free cash flow(2) was $28.1 million. On a year-to-date basis, cash from operations was $239.4 million, cash before changes in working capital(2) was $269.2 million and free cash flow(2) was $173.2 million.
"This was a very important quarter for PotashCorp, as we laid the foundation to put the company in better shape to take advantage of future opportunities," said Bill Doyle, President and CEO. "Our actions were important steps in restructuring our business portfolio. By writing down two of our North American nitrogen plants and agreeing to divest PCS Yumbes, we are addressing our problems head-on. With our recent investment in Arab Potash Company (APC), we are pointing toward the future. What was already a strong company is even better positioned for earnings growth in fertilizer; growth which will come with less volatility."
Gross margin increased in the third quarter as PotashCorp benefited from higher sales volumes and lower costs. Third-quarter volumes were up 14 percent in the domestic market. July was the Company's second-best month ever for North American potash volumes as dealers purchased in advance of price increases. Offshore volumes were up 20 percent, with Brazil, India and Indonesia all increasing imports. Brazil is on track for another record year. Overall, third-quarter volumes were up by 17 percent.
Strong demand has created low inventories and higher prices in North America. Canadian producers are 22 percent below normal seasonal inventory levels and the Company's price increased more than 15 percent over the course of the quarter. Although offshore volumes were up and prices in the spot market improved, an unprecedented spike in ocean freight rates reduced the price realized on previously agreed-upon sales. On a quarter-over-quarter basis, North American prices FOB mine were up 5 percent while offshore prices realized were down 10 percent, after increased freight charges, for a total reduction of 3 percent.
The Canadian dollar and higher natural gas prices continued to have an impact on the cost of potash operations. Although the stronger Canadian dollar alone increased cost of sales by nearly $5.00 per tonne, overall the unit cost decreased 4 percent through efficiencies gained by higher operating rates.
Phosphate gross margin was down as poor fundamentals in the solid fertilizer DAP and feed products more than offset an industrial phosphate improvement. Domestic and offshore phosphate sales volumes were up 37 and 17 percent, respectively, compared to the third quarter of last year. This was primarily due to additional DAP production from the company's White Springs, FL operation and the expanded industrial acid plant in Aurora, NC.
Feed margins were under pressure as overall market demand is down about 7 percent year to date, and supply was up with new competitive capacity in the market. This put pressure on prices, which were down 5 percent quarter over quarter. In addition, the company worked through production problems at its new DFP plant, which increased costs and reduced gross margin by approximately $4 million.
While phosphate fertilizer prices were up over the same quarter last year, they were still disappointing. With China importing less DAP than anticipated, North American buyers waited to measure the impact on prices, causing further deterioration. For DAP, both volume and prices were less than expected. Overall, phosphate prices were down 3 percent, largely because of the reduction in feed prices.
At the same time, costs were higher as the prices of key inputs continued to climb. Ammonia costs were up 54 percent and sulfur was up 41 percent compared to the third quarter last year. Rock costs fell by 6 percent, quarter over quarter, as a result of mining higher-quality rock.
Higher prices for nitrogen products led to a gross margin increase of 156 percent from the same quarter last year, even though sales volumes were 9 percent lower. Of the $41.9 million in gross margin, almost half came from the sale of the Company's natural gas hedges earlier in the year with the remainder from its Trinidad operations. Rising natural gas prices led to additional shutdowns across the industry, with third-quarter production reduced by approximately 30 percent. That tightening of supply led to significant price increases for nitrogen.
PotashCorp's decision to shut down Memphis and Geismar ammonia production led to a quarter-over-quarter drop in volumes of 19 percent for ammonia and 43 percent for nitrogen solutions. This was more than offset by price increases of 76 percent for ammonia and 39 percent for nitrogen solutions. Overall prices for nitrogen products were up 51 percent over the third quarter of last year.
Costs for nitrogen production continued to climb in tandem with natural gas prices. The Company's gas costs were up 22 percent over last year's third quarter. However, PotashCorp is a net beneficiary of high-priced natural gas, as its Trinidad facility operates with long-term, low-cost natural gas contracts with sheltered margins. With higher global ocean freight costs, Trinidad's proximity to the large U.S. market further demonstrates the value of this asset.
The rate of exchange between the Canadian dollar and the U.S. dollar started the year at 1.5796, ended the second quarter at 1.3553 and the third quarter at 1.3504. 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 applied to, among other things, future income tax liabilities on the balance sheet at month end. In the first nine months of 2003, it negatively affected the Company's balance sheet and earnings by $41.5 million or the equivalent of $0.48 per share. The U.S. dollar equivalent of Canadian dollar expenditures increases as the Canadian dollar strengthens. Such expenditures 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 $10.2 million since the beginning of the year, or the equivalent of $0.20 per share.
During the quarter, other income was up $4.0 million as the Company received a dividend of $3.2 million from its investment in Israel Chemicals Ltd. In addition, a revised tax structure for potash producers in Saskatchewan, adjusted for the first nine months of the year, contributed $4.1 million, or the equivalent of $0.05 per share, to earnings. While the base tax remains unchanged, the Government of Saskatchewan has reduced the profits tax on all incremental sales tonnes above the 2001 and 2002 average effective January 2003. This will benefit PotashCorp as it increases production with improved market demand.
During the quarter, PotashCorp provided to Sociedad Quimica y Minera de Chile S.A. (SQM) an irrevocable option to acquire its interest in PCS Yumbes S.C.M. (PCS Yumbes). If the option is exercised, the parties will enter into a share purchase agreement under which SQM would acquire the shares of PCS Yumbes. PotashCorp recorded a charge of $140.5 million with respect to PCS Yumbes in the third quarter, recognizing a write-down of certain assets and costs associated with workforce reductions and contract terminations.
PotashCorp had indefinitely shut down its Memphis, TN plant and suspended production of ammonia and nitrogen solutions at its Geismar, LA facilities in the second quarter due to high U.S. natural gas costs and low product margins. In the third quarter, management determined that there were no immediate intentions of re-starting the unprofitable plants. PotashCorp recorded a charge of $118.8 million in connection with the shutdowns during the quarter, recognizing a write-down of certain plant assets and costs associated with eliminating approximately 190 job positions by the end of the year. The Company also recognized an additional asset impairment charge of $2.7 million during the quarter in connection with its Kinston, NC phosphate feed plant.
Grain inventories are at very low levels and the world's grain stocks-to- use ratio is at its lowest point in 30 years. Commodity prices are up for many crops around the world that require PotashCorp products, which should drive increased demand in all three nutrients.
Business conditions are better in potash and nitrogen than in phosphate. In potash, the combination of low world inventories, more cost-conscious Russian competitors and strong projected demand from major world customers is expected to support a positive price trend moving forward. Strong third- quarter volumes, however, could signal that North American dealers made purchases in advance of price increases, which could impact fourth-quarter sales. The stronger Canadian dollar will continue to hurt potash operating costs and higher freight rates will not all be covered in existing contract prices to offshore customers, continuing to impact offshore margins.
In phosphate fertilizers, too much production is chasing too little demand. However, changes to subsidy programs in India could have a positive impact on DAP imports. In North America, low phosphate soil nutrient levels need to be replenished but dealers continue to hold off on filling their bins. In feed, prices for cattle, poultry and hogs are up, which could create a rebound for both prices and volumes entering 2004. In the interim, the increased competitive environment as a result of the over-supply situation looks set to continue. Start-up issues at PotashCorp's new DFP facility have been addressed allowing for the shut down of the White Springs facility. This should have a positive impact on production costs moving forward, although higher-cost inventoried product remains in the system. Industrial products continue to be the one bright light in phosphate. This is reinforced by a recent industry plant closure and tight supply and demand.
With lower natural gas costs at quarter end, some nitrogen production has been restarted (North American production is now about 25 percent curtailed). However, supply-demand fundamentals in nitrogen are expected to remain tight due to cost pressures, restricted imports caused by high freight rates, limited new global capacity coming on stream and strong industrial demand in keeping with a better economic outlook. Prices are expected to hold or improve and more than offset higher production costs in North America due to higher natural gas costs. PotashCorp's Trinidad operation, with its low-cost natural gas contracts, will continue to be key to the Company's nitrogen profitability. Assuming current market-priced natural gas, PotashCorp expects positive earnings from its U.S. plants. Fourth-quarter earnings will also benefit from the sale of natural gas hedges earlier this year. As of September 30, 2003, the Company was 86 percent hedged at $3.41 per MMBtu for November through December 2003.
The Canadian dollar will continue to affect PotashCorp's earnings. The Company expects the dollar to end the year at 1.3310 (which would result in an $0.80 per share decrease from the results if the exchange rate entering the year had been maintained). In spite of this, PotashCorp believes that it can earn in the range of $0.30 to $0.50 per share in the fourth quarter.
Annual capital expenditures are expected to be approximately $150 million with additions to other assets of approximately $20 million. Cash from operating activities is expected to be over $390 million (a 24-percent improvement over 2002) with cash before changes in working capital of around $365 million(2) and free cash flow of approximately $195 million(2). Outstanding shares are expected to be 52.3 million.
A number of actions and decisions have positioned PotashCorp for future growth in all three nutrients. The successful purchase of 26 percent of APC provides closer access to many international markets. Production shutdowns at Memphis and Geismar have increased nitrogen gross margin. The revised provincial potash tax in Saskatchewan will support expected future growth and increased earnings. Finally, the 2003 costs in phosphates associated with the start up of the DFP plant, the restart of DAP at White Springs and the inventory control measures should be over.
Doyle concluded by saying, "Our investment in APC provides us another point of production and the opportunity to source product from the most freight-logical location, which is increasingly important in a period of rising freight rates. It is an important step in the globalization of our potash business. It will allow us to remain a low-cost supplier on a delivered basis."
"We believe the benefits of our third-quarter activities will become obvious as we move forward. Market conditions are encouraging, especially in nitrogen and potash. We have taken the steps necessary to capitalize on those changes in the marketplace."
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.
|Filter posts by topic:||rss|