PotashCorp's First-Quarter Earnings 50 Percent Higher Than...

PotashCorp's First-Quarter Earnings 50 Percent Higher Than Previous Record
PR Newswire
Posted: 2008-04-24 06:00:00
SASKATOON, SK, April 24 /PRNewswire-FirstCall/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced record first-quarter results with earnings of $1.74 per share(1) ($566.0 million), a 181 percent increase over the $0.62 per share ($198.0 million) recorded in last year's first quarter and 50 percent higher than the previous record of $1.16 per share set in the fourth quarter of 2007. The pressure to increase global food production continued to drive demand for potash, phosphate and nitrogen and pushed prices for all three nutrients to new heights. As a result, each segment contributed record gross margin and raised total gross margin for the quarter to $856.0 million, up from $369.7 million in last year's first quarter.




Cash from operating activities prior to working capital changes during the first three months of 2008 reached a record $625.5 million(2), compared to $283.0 million in the same period last year, while adjusted earnings before interest, taxes, depreciation and amortization grew to $872.0 million(2) from $381.0 million in first-quarter 2007.




The same global conditions that drove PotashCorp's record performance this quarter also improved earnings from our offshore investments. Arab Potash Company Ltd. (APC) in Jordan and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed a total of $23.4 million to other income during the quarter, up from $13.0 million in the first quarter of 2007. These investments, along with our positions in Israel Chemicals Ltd. (ICL) in Israel and Sinofert Holdings Limited (Sinofert) in China, currently have a total market value of $8.6 billion, equating to $26.50 per PotashCorp share.




"Another record quarter for our company reflects the ongoing growth in global demand for food and the fertilizers that are essential to maximizing crop production," said PotashCorp President and Chief Executive Officer Bill Doyle. "This is especially true of potash, where we have unmatched assets that continue to elevate our performance. In this environment, we are demonstrating the increasing value of our company - as an essential part of the solution to concerns about the world's food supply."




Market Conditions




Continued rising world grain demand reduced the expected global stocks-to-use ratio for wheat and coarse grains to a record low in the first quarter of 2008. Low inventories of grains and oilseeds, a long-standing problem, finally started to attract attention from the United Nations, governments and the general public. Some Asian and Latin American countries have now changed their export policies to ensure crops will be available for their own domestic use. This has put further pressure on distribution of the world's grain supply.




This tight supply has resulted in higher prices for grain and other crops which, in turn, have raised global demand for fertilizers. Combined with product supply constraints and higher raw material input costs, particularly for phosphate and nitrogen, prices for all three nutrients were pushed to record levels in the first quarter. Although the expiration of contracts for seaborne potash to China at the end of 2007 resulted in reduced shipments to the world's largest potash importer in the first quarter of 2008, rising demand in other markets more than offset this reduction. At quarter-end, North American potash producer inventories remained 37 percent below the previous five-year average.




In phosphate, tight supply and rising costs for key inputs led to higher prices. Spot prices for phosphate rock and sulfur rose fourfold and sevenfold, respectively, over the same quarter last year, putting pressure on producers that do not own their own rock supply and resulting in significant price increases for downstream phosphate products. In nitrogen, global energy demand raised prices for oil and natural gas. As the natural gas industry continued to become more global, nitrogen producers in regions that had benefited from lower-cost gas, including Russia and Ukraine, faced higher input costs, raising the floor price for nitrogen globally. Natural gas costs also continued to rise in the US and, by the end of the quarter, NYMEX contracts for the next 12 months carried an average price of more than $10 per MMBtu. Strong industrial and agricultural demand supported higher nitrogen prices, particularly for ammonia, which by March exceeded $600 per tonne on a delivered basis to the US Gulf.




Potash




Strong demand in all key markets, tight global supply and a sharp upturn in prices resulted in record potash gross margin of $514.6 million for the quarter. This is 195 percent higher than the $174.2 million generated in the first quarter of 2007 and more than half the record gross margin for the entire year of 2007. Potash gross margin as a percentage of net sales rose to 71 percent from 53 percent in the first quarter last year.




Record quarterly performance demonstrated the impact of higher prices, as Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers, realized substantial spot-market price increases to Southeast Asia and Brazil. As a result, our first-quarter offshore realized prices were 105 percent ($141 per tonne) higher than in the same quarter last year. In North America, PotashCorp fully realized the benefits of $30- and $50-per-short-ton price increases announced in late December 2007 and January 2008, respectively, and began to realize a further $80 increase announced for March 1, 2008. These increases helped raise our North American realized prices by 76 percent ($130 per tonne) from last year's first quarter. Compared to the fourth quarter of 2007, offshore prices were up 61 percent ($105 per tonne) and North American prices 41 percent ($87 per tonne). The pricing gap between the distinct offshore and North American markets narrowed from 27 percent in the first quarter of 2007 to 9 percent in the first quarter this year.




Offshore sales volumes of 1.6 million tonnes were 23 percent above last year's first quarter, as Canpotex increased shipments to India by 88 percent (180,000 tonnes) and other Asian countries - excluding China - by 48 percent (364,000 tonnes). Canpotex volumes to Brazil were up 35 percent (160,000 tonnes) quarter over quarter. This strong demand more than offset a 57 percent reduction in shipments to China, which did not reach a price settlement until after the end of the first quarter of 2008.




In North America, first-quarter sales volumes of approximately 1 million tonnes represented an 8 percent increase over the first quarter of 2007, as rail shipment disruptions experienced last year were largely eliminated. Our North American customers continued to receive potash on the established allocation basis, as supply remained extremely tight.




Potash per-tonne cost of goods sold increased substantially compared to the first quarter of 2007, as a much stronger Canadian dollar added almost $11 per tonne to our costs. Higher brine inflow costs at New Brunswick added a further $6 per tonne to all tonnes versus the same period last year, but were comparable to the trailing quarter.




Nitrogen




Nitrogen gross margin reached a record $185.4 million in the quarter, up from $131.3 million in the first quarter of 2007, driven by higher prices for all our nitrogen products and particularly strong performance from our US facilities. Our Trinidad operations, which benefit from long-term, lower-cost natural gas contracts, continued to provide the strong foundation, delivering $96.0 million (52 percent) of nitrogen gross margin. Our US operations generated $81.5 million (44 percent), while our natural gas hedging program contributed $7.9 million.




Higher global natural gas costs and strong world demand for agricultural and industrial nitrogen drove up realized ammonia prices by 56 percent from last year's first quarter and 61 percent from the trailing quarter. The impact was also evident in urea prices, which rose 32 percent from the first quarter of 2007 and 17 percent from the fourth quarter of 2007. The increased demand also affected prices for downstream nitrogen products, such as nitrogen solutions; its price was 39 percent higher than in the first quarter of 2007.




Ammonia sales volumes for the first quarter were 9 percent below the same quarter last year as Trinidad production was reduced by approximately 80,000 tonnes due to required plant maintenance. This was partially offset by our US plants producing approximately 35,000 additional tonnes. Urea sales volumes were down 12 percent from the first quarter of 2007, as less inventory was available to sell following a strong sales push in the fourth quarter of last year, and due to a slow start to the spring season, particularly in the US Southeast. Sales volumes for nitrogen solutions were up 37 percent quarter over quarter, as we continued to use our Geismar facility to meet increasing US demand for liquids.




Our total costs for natural gas for both Trinidad and US operations rose to $6.72 per MMBtu, up 52 percent from last year's first quarter. Higher global and US gas prices and strong demand contributed to higher Tampa and NOLA ammonia prices, which was a significant net positive for this segment's performance but increased our Trinidad gas costs in the quarter.




Phosphate




Significant price increases pushed phosphate gross margin to a record $156.0 million, up from $64.2 million in the first quarter of 2007. The impact of higher prices was most evident in solid fertilizers, which generated $85.3 million in gross margin - more than four times their contribution in the same period last year. Liquid fertilizers added $20.0 million, while feed and industrial products contributed $32.6 million and $15.4 million, respectively.




Our realized prices for solid fertilizers in the quarter reached $660 per tonne, a 134 percent increase from last year's first quarter and 55 percent more than in the trailing quarter. While significant, pricing gains were not as substantial for our other phosphate businesses, which have historically benefited from contract pricing in weaker markets. Liquid fertilizer and feed prices rose 47 percent and 48 percent, respectively, from the same quarter last year, while industrial prices were up 30 percent quarter over quarter.




Solid phosphate fertilizer sales volumes were 37 percent below those in last year's first quarter, largely as a result of lower beginning inventories and the delayed spring season. Sales volumes for liquid fertilizer and feed each rose 3 percent from the first quarter of 2007 on continued strong demand, while industrial sales volumes were up 11 percent.




Rising costs for key inputs continued to have a major impact; our sulfur costs rose 249 percent from last year's first quarter and ammonia costs were up 42 percent. This was more than offset by rising phosphate prices.




Financial




A number of items affected specific components of our consolidated financial statements, but were largely offsetting in nature, as discussed below.




Income tax recoveries of $42.0 million, related to an increase in permanent deductions in the US, reduced our reported income tax rate to 23 percent of before-tax earnings. Additionally, we purchased 194.3 million shares of Sinofert under a forward-purchase contract denominated in Hong Kong dollars that saw a change in the fair value of the contract from December 31, 2007 to settlement date, allowing us to acquire the shares for $173.7 million. This generated a tax-exempt gain of $25.3 million, which was reflected in our previous 2008 first-quarter guidance. In addition, sequential changes in the Canada/US dollar exchange rate contributed to a $27.7 million foreign exchange gain, although that is primarily non-cash.




These gains were offset by an additional $43.1 million charge in the first quarter (included in other income) related to investments in certain auction rate securities assessed as being other-than-temporarily impaired.




Substantially higher-than-forecast potash prices and gross margin in first-quarter 2008 raised provincial mining and other taxes to 19 percent of potash gross margin, for a total amount 206 percent higher than in the first quarter of 2007. Capital expenditures on property, plant and equipment were $196.5 million, 61 percent of which was spent in potash. This was principally related to our various debottlenecking and expansion projects at Lanigan, Patience Lake, Cory, New Brunswick and Rocanville, and loadout expansions at Rocanville and Allan.




Under the share repurchase program approved by our Board of Directors in January 2008, the company purchased for cancellation approximately 3.4 million shares at a net cost of $516.3 million.




Outlook




The ongoing growth in global food demand has brought issues of food security and food inflation to the forefront around the world. In contrast to the slowdown in the US economy, China, India and other Asian countries are continuing to experience significant, long-term population and economic growth. Because of this growth, people in these countries require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains.




These factors have increased pressure on the world's food supply, as global grain consumption is expected to exceed production again this year - for the eighth time in the past nine crop years - and has left only enough supply to meet global needs for less than two months. The problem has been masked for nearly a decade by the world's ability to draw grains from long-held inventories, keeping crop prices artificially low and giving farmers little incentive to significantly increase production. In order to have stocks today equivalent to what they were at the start of this decade, an additional 225 million harvested acres would have been required over the past eight years, or 28 million acres per year, based on the average yield over this period. Now crop prices are moving up sharply, with wheat, corn, soybeans, rice and palm oil recently reaching record levels. These higher prices are driven by the substantial growth in demand for food, which is expected to consume 95 percent of global grain production this year. With grain consumption expected to increase by approximately 30 million tonnes per year going forward, record crops are necessary each year just to match the anticipated demand.




The intense competition for global crops is giving rise to a new concern: food inflation. Even in North America, where food has been plentiful for generations and competition for crops from developing nations has been minimal, the effect on grocery store prices is becoming evident. While higher crop prices are among the factors behind rising food costs, the impact is minimal as farm costs make up less than 20 percent of the end-cost of processed food in the US. Similarly, biofuels have been targeted as part of the problem, but in reality, they consume only 5 percent of the world's grains. The primary driver of food inflation is the ever-increasing demand created by hundreds of millions of consumers choosing more nutritious diets in nations with growing populations and wealth.




The most practical solution to issues of food supply and food inflation is to increase crop production. The world's farmers can do this, and fertilizers will be integral to helping them achieve higher yields. With food demand driving up crop prices, farmers in all countries have the incentive to increase acreage, if available, as well as the money to purchase the inputs needed to maximize production. Our products - especially potash - can and will play a pivotal role in satisfying the increasing global demand for grain over the long term, and ensuring affordable food remains available.




With the push for increased food production, the growth in demand for fertilizers has accelerated beyond historical levels. This is especially true of potash, which has been under-applied for years in many regions. A soil fertility shortfall in any of the primary nutrients lessens the impact of the others, so many farmers are now attempting to improve the potassium levels in their soil to increase the benefits of all three nutrients. As a result, the compound annual growth rate in potash consumption has exceeded 5 percent annually over the past five years.




In North America, PotashCorp announced delivered potash price increases effective June 1, 2008 that range between $150 and $175 per short ton. Offshore, Canpotex recently entered into a new price and volume contract with India that included a 36 percent increase in volumes and a $355-per-tonne increase in delivered pricing from the previous base of $270 per tonne. Following that, Canpotex entered into a new 2008 agreement with China that included a $400-per-tonne increase, although that builds from a lower base price in China's previous contract. Given the late signing of this contract, Canpotex is stretching to provide 1 million tonnes to China through the remainder of 2008 - a reduction of 1.5 million tonnes from last year - and is in a sold-out position for the remainder of the year.




Canpotex also announced that, effective June 1, 2008, delivered prices to Brazil and Southeast Asia would rise to $750 per tonne for granular potash and $725 per tonne for standard grade. We expect to realize these higher prices in the third quarter. Compared to the first quarter of 2008, we expect to see a 30 percent increase in total potash realized prices in the second quarter and now expect 2008 potash gross margin to be more than three-and-a-half times higher than last year's levels.




As demand continues to rise, our Lanigan and Patience Lake projects will be the only major new sources of global potash production available for 2009. Even by ramping up approximately 1.9 million additional tonnes from these projects over the next two years, we anticipate it will be challenging to supply the full requirements of the market. Starting from a production base of 10.2 million tonnes this year, we are investing approximately $4.5 billion in a series of projects at our facilities in Saskatchewan and New Brunswick to raise our operational capacity in incremental steps to a total of 15.7 million tonnes by the end of 2012. We expect to develop an additional 1.5 million tonnes of potential capacity in Saskatchewan by 2015, further enhancing our ability to keep pace with expected annual growth in potash demand. If, for any reason, demand is less than anticipated, we will continue our practice of matching production to meet market demand to minimize downside risk.




In nitrogen, global supply grew even tighter when China recently announced that it will apply an export tax of 135 percent on urea between April 20 and September 30, 2008. During that period in 2007, it exported close to 1.8 million tonnes of urea. The market reacted immediately to this news, with global urea prices rising more than $150 per tonne within the last two weeks. Combined with higher prices for oil and natural gas and strong agricultural demand, the current conditions could reduce the traditional impact of seasonal weakening in nitrogen pricing that often occurs late in the second quarter.




The same export tax applies to China's export of solid phosphate fertilizers. Last year it exported almost 2.2 million tonnes of DAP and MAP during that period. This news, combined with rising prices for global prilled sulfur and phosphate rock, could increase offshore delivered DAP prices beyond the current $1,200 per tonne.




Other downstream phosphate product pricing is expected to adjust significantly upward over the next quarters. In feed, we have announced two $250-per-short-ton increases effective April 1 and May 1, 2008. In our liquid fertilizer business, PhosChem recently concluded pricing with India at $1,985 per tonne of phosphoric acid through the end of June 2008, a $1,419 increase over the annual contract that expired March 31. All our prices for our North American liquid fertilizer business are similarly expected to adjust upward as the new fertilizer year begins. In our industrial business, where we have longer-term contracts, we expect to see price increases over the balance of 2008 and into 2009.




Given these conditions, we now expect total nitrogen and phosphate gross margin to exceed prior-year levels by more than 85 percent, almost $700 million higher than our previous forecast. In phosphate alone, we expect to generate about $800 million in gross margin in the second half of 2008.




For 2008, we anticipate capital expenditures (excluding capitalized interest) of approximately $1.3 billion, of which $200 million will relate to sustaining and environmental capital. Our consolidated reported income tax rate should be 28-29 percent. Due to higher expected potash prices and margins, provincial mining and other taxes are forecast to be 15 percent of total potash gross margin for the year, but could fall within a range of 14-18 percent depending on price realizations, the Canadian/US exchange rate, and the timing and amount of capital spending on potash projects in Saskatchewan.




Due to higher expected overall gross margin, partially offset by higher provincial mining taxes, and assuming a Canadian dollar at parity with the US dollar, we are raising full-year net income guidance from $6.25-$7.25 per share to $9.50-$10.50 per share. We expect second-quarter net income per share to be in the range of $2.20-$2.50. In the current trading range of the Canadian dollar relative to the US dollar, each one-cent change in the Canadian dollar typically impacts our foreign exchange line by approximately $7.0 million, or $0.015 per share on an after-tax basis, and is primarily a non-cash item.




Conclusion




"The global need to increase food production is real and immediate, and it will be a part of our world for the foreseeable future," said Doyle. "It took nearly a decade to empty the global grain cupboard and we can't refill it overnight. The good news is that the world is more than capable of producing enough food, but improved farming and fertilization practices will be required. With our unique ability to incrementally raise our potash production to meet world demand over the next several years, we look forward to helping farmers increase food production as we deliver continued growth for our shareholders."