PotashCorp Reports Fourth-Quarter Earnings of $0.80 per Share January 28, 2010
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Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported fourth-quarter earnings of $0.80 per share(1) ($243.6 million), which compared to $2.56 per share ($788.0 million) in the same period last year. Full-year 2009 earnings of $3.25 per share ($987.8 million) were the third highest in company history but below the record $11.01 per share ($3.5 billion) earned in 2008, reflecting the impact of the global economic downturn - especially on potash sales volumes and prices for potash, phosphate and nitrogen products.
Despite the lowest potash sales volumes since becoming a publicly traded company in 1989, our core nutrient remained the largest driver of gross margin, contributing 74 percent of the $279.6 million generated in fourth-quarter 2009 and 71 percent of the $1.0 billion for the full year. Earnings before interest, taxes, depreciation and amortization(2) (EBITDA) totaled $414.2 million for this year's fourth quarter and $1.5 billion for the year, while cash flow prior to working capital changes(2) was $503.5 million for the quarter and $1.4 billion for the year. With the substantial decline in global fertilizer demand, both measures trailed the performance of the previous year.
Our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile and Israel Chemicals Ltd. (ICL) in Israel contributed $53.4 million in other income during the fourth quarter of 2009. For the full year, our investments in these companies, along with our position in Sinofert Holdings Limited (Sinofert) in China, provided $205.4 million in other income. The market value of our investments in these publicly traded companies was $7.4 billion as of market close on January 27, 2010, equating to approximately $24 per PotashCorp share.
"The fertilizer industry, like many other businesses, felt the impact of the global economic downturn in 2009," said PotashCorp President and Chief Executive Officer Bill Doyle. "While our earnings were well below our company's potential, we remain committed - as we have been for decades - to strategies that protect the long-term value of our assets. These include the continued expansion of our potash capacity and matching production to market demand. Our approach comes from enduring confidence that the world needs more food for its growing population, and we must be prepared to respond."
Market Conditions
In sharp contrast to the close of 2008, when economic uncertainty led farmers to become extremely cautious, the fourth quarter of 2009 reflected the beginning of the recovery in fertilizers. Strong crop margins - the result of improving commodity prices and lower input costs - appeared to refocus farmers and fertilizer dealers on the need to address nutrient shortfalls in the soils and the distribution chain created by nearly 18 months of limited fertilizer purchasing. This was most apparent in North America as farmers, although limited by a shortened fertilizer application window resulting from a delayed harvest, began returning to more normal application rates.
While demand in potash markets began to show signs of improvement during the quarter, buyers were resistant to commit to inventory restocking and prices moved lower. Domestic shipments from North American producers were up 10 percent over the fourth quarter of 2008, as fertilizer buyers responded to immediate demand from farmers. Offshore, India continued to receive contracted volumes from global potash suppliers and Brazilian customers purchased product to meet their immediate needs. After almost a full year without a contract, China reached a settlement at year-end with a major global potash supplier, and this appeared to renew buyer confidence that further downside pricing risk was limited. As the quarter closed, buyers in several markets were beginning to address their product needs.
Phosphate fourth-quarter sales volumes to North American and offshore markets approached historical levels, due to strong crop economics, low producer inventories and limited perceived pricing risk. In nitrogen, improved demand in the quarter for agricultural and industrial products resulted in US sales volumes increasing compared to the same period last year. Prices for both nutrients remained well below those of the previous year, but were moved up compared to the trailing quarter by higher input costs and strong demand.
Potash
Potash gross margin of $206.2 million for the fourth quarter and $730.4 million for the full year was significantly below the $744.8 million and the record $3.1 billion earned in the same periods of 2008. These results reflected lower prices and an unprecedented decline in sales volumes.
Fourth-quarter sales of 1.1 million tonnes represented more than one-third of our 2009 total of 3.0 million tonnes. This was 23 percent lower on a quarter-over-quarter basis, but reflected an improvement over the 65 percent decline experienced for the full year. We shipped 0.5 million tonnes to North American customers, a 30 percent increase over the same period last year, and 0.6 million tonnes to offshore markets, which was 42 percent below fourth-quarter 2008 levels. Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers, sold 36 percent of its volumes to India, 21 percent to Southeast Asia and 9 percent to Brazil; the remaining volumes were sold to other regions.
Average realized prices recalibrated over the course of the year, resulting in a 46 percent decline from the fourth quarter of 2008. Realized prices continued to be impacted by fixed transportation and distribution costs spread over fewer tonnes.
In keeping with our long-held strategy of matching potash production to market demand, we produced 1.1 million tonnes in fourth-quarter 2009, 46 percent less than the 2.1 million tonnes we produced in the same period last year - a comparative total that was unusually low because of work stoppages at three of our Saskatchewan mines in 2008. Potash per-tonne cost of sales in the fourth quarter increased as fixed costs were allocated over fewer tonnes.
Phosphate
Phosphate gross margin of $30.3 million in fourth-quarter 2009 was 73 percent less than the $110.4 million generated in the same quarter of 2008. For the year, phosphate contributed $103.8 million in gross margin, down 91 percent from the record $1.1 billion generated in 2008.
While prices for all product categories were significantly lower in 2009's fourth quarter, our industrial segment continued to benefit from sales tied to cost-plus or market index provisions that lag current market conditions. Industrial and feed products contributed nearly all of phosphate gross margin in both the quarter and the year, reinforcing the value of our product diversification strategy.
Phosphate demand improved near the end of the year. Quarterly sales volumes were 67 percent higher than those in the slow fourth quarter of 2008, primarily due to improved demand for liquid and solid fertilizers. Total 2009 phosphate sales volumes were 8 percent lower than those in 2008.
Phosphate cost of goods sold declined compared to fourth-quarter 2008 due to lower input costs for sulfur and ammonia.
Nitrogen
Nitrogen generated $43.1 million of gross margin in fourth-quarter 2009 compared to the $17.9 million earned in the final quarter of 2008. For the year, gross margin of $191.8 million was well below the record $737.4 million generated in 2008. Our Trinidad operation, which benefits from long-term, lower-cost natural gas contracts and proximity to the US market, generated $27.1 million in fourth-quarter gross margin and $105.3 million for all of 2009.
Total average realized nitrogen prices for fourth-quarter 2009 were 34 percent below the same quarter last year. Sales volumes were up 7 percent quarter-over-quarter, while full-year 2009 sales were essentially flat compared to 2008 levels.
Our total average natural gas cost, including hedge, was $4.55 per MMBtu for fourth-quarter 2009 and $3.86 per MMBtu for the year, 26 percent and 49 percent lower than in the same periods of 2008, respectively.
Financial
With significantly reduced potash sales volumes and lower profitability, provincial mining and other taxes in fourth-quarter 2009 fell to $12.0 million from $109.0 million in the same period of 2008, and totaled $29.0 million for 2009.
Our expenditures on property, plant and equipment were $573.6 million in fourth-quarter 2009, the majority directed to our brownfield potash capacity expansions. This brought our full-year 2009 capital spending to $1.8 billion.
Outlook
Despite the severe global economic downturn of 2009, the long-term drivers of our business - growth in population and stronger economies in developing nations leading to greater demand for food - remain intact. Global grain consumption rose by 2 percent in 2009, demonstrating the power of these trends. Rising demand for food places pressure on the world's grain supplies and, as a result, crop prices remain well above historical levels. This has created a favorable situation for many farmers, whose planting decisions are influenced by the ability to generate a return on their investment. We believe crop prices will remain strong over the coming years, providing farmers with the financial incentive to strive for increased production.
This environment is supportive of our business, as the science of food production is inescapable: balanced fertilization is necessary to support healthy plant growth and optimize crop yields. Nutrients in the food supply come from the soil and, following a year of substantially reduced potash and phosphate applications, we believe that farmers now must address the resulting need to sustain future production. Replenishing nutrients in the soil is a long-term exercise. Recognizing the opportunity that comes with strong margins, farmers appear to be gradually returning to normal fertilization practices and are expected to demand more fertilizer in the years ahead.
At PotashCorp, we are preparing to meet rising demand for potash, and understand the importance of capacity being available to meet the world's growing needs. Developing capacity - brownfield or greenfield - requires significant time, capital and a margin sufficient to justify the investment.
We expect global shipments will be approximately 50 million tonnes in 2010, marking the transition between the historically low levels of 2009 and a return to higher demand in 2011. This will be a significant improvement from 2009 levels but will not address the multi-year process of refilling distributor inventories and soil nutrient levels. Weaker crop margins or delayed buyer engagement could result in potash shipments below the forecast for this year, while stronger crop economics or significant engagement of key markets could raise demand above this level.
Supportive crop prices, improved potash price clarity and an empty supply chain are prompting buyers to begin positioning product in advance of key growing seasons. We expect India to resume potash imports under a new contract in the first half of 2010 and import about 5.5-6.0 million tonnes. In Brazil, where soils are naturally deficient in potassium, the combination of strong crop economics and improved access to credit is expected to push 2010 imports up to 5.5-6.5 million tonnes. Southeast Asian markets are forecast to import 4.0-5.0 million tonnes. We expect China to consume about 8.0-9.0 million tonnes of potash (KCl), including 4.5-5.0 million tonnes of imports. Depending on the extent of farmer engagement in China, buyers there could pursue additional volumes later in 2010.
While these levels would mark an improvement in demand, many of these countries need to further increase food production, especially in light of reduced crop yields in 2009. We believe this will require them to apply more potash to improve the balance with other nutrients.
In North America, our order book suggests a strong start to the year, and spring demand appears to be robust. We anticipate potash demand in the domestic market to be 8.5-9.5 million tonnes.
Based on these conditions, we expect our 2010 potash gross margin to be in the range of $1.4 billion-$1.8 billion and total shipments of 7.0-8.0 million tonnes. With our 2010 potash operational capability expected to be approximately 11.5 million tonnes, we anticipate continued production curtailments.
In our other nutrients, we expect increased demand and higher prices to push 2010 combined phosphate and nitrogen gross margin to $400 million-$500 million.
We expect capital expenditures, excluding capitalized interest, to approximate $1.9 billion in 2010, of which $300 million will be sustaining capital. Depreciation and amortization expense is forecast to be approximately $360 million. Our 2010 annual effective tax rate is expected to be in the range of 24-26 percent. As a result of our significant capital expenditures, provincial mining and other taxes are forecast to approximate 4-6 percent of total potash gross margin for the year. Other income is expected to be in the range of $150 million-$200 million.
With these assumptions, PotashCorp is forecasting 2010 net income per share in the range of $4.00-$5.00, including $0.70-$1.00 in the first quarter.
Conclusion
"We believe the need for more food - and the nutrients to produce it - is irrefutable," said Doyle. "Even though fertilizer demand can be deferred on a short-term basis, as we saw in 2009, the long-term requirement cannot be denied. We enter 2010 with a sense of optimism, as we look ahead to helping fertilizer dealers and farmers begin replenishing nutrients in the soil and supply chain. We believe this is an opportunity to further demonstrate the strength of our assets, this year and for decades to come."
| 1. | All references to per-share amounts pertain to diluted net income per share. |
| 2. | See reconciliation and description of non-GAAP measures in the attached section titled "Selected Non-GAAP Financial Measures and Reconciliations." |
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, third largest in each of nitrogen and phosphate; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.
