SASKATOON Jul 30, 2015 (Thomson StreetEvents) -- Edited Transcript of Potash Corporation of Saskatchewan Inc. earnings conference call or presentation Thursday, July 30, 2015 at 5:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Denita Stann Potash Corporation of Saskatchewan Inc. - VP of IR and Public Relations * Jochen Tilk Potash Corporation of Saskatchewan Inc. - President and CEO * Stephen Dowdle Potash Corporation of Saskatchewan Inc. - President of PCS Sales * Mark Fracchia Potash Corporation of Saskatchewan Inc. - President of PCS Potash * David Delaney Potash Corporation of Saskatchewan Inc. - EVP and COO * Raef Sully Potash Corporation of Saskatchewan Inc. - President of PCS Nitrogen ================================================================================ Conference Call Participants ================================================================================ * Andrew Wong RBC Capital Markets - Analyst * Jeff Zekauskas JPMorgan - Analyst * Vincent Andrews Morgan Stanley - Analyst * Chris Parkinson Credit Suisse - Analyst * Mark Connelly CLSA Limited - Analyst * Michael Piken Cleveland Research Company - Analyst * Don Carson Susquehanna Financial Group / SIG - Analyst * Adam Samuelson Goldman Sachs - Analyst * Jacob Bout CIBC World Markets - Analyst * Ben Isaacson Scotiabank - Analyst * Joel Jackson BMO Capital Markets - Analyst * PJ Juvekar Citigroup - Analyst * Steve Byrne BofA Merrill Lynch - Analyst * Steve Hanson Raymond James & Associates, Inc. - Analyst * Matthew Korn Barclays Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Potash Corp second-quarter earnings conference call. (Operator Instructions) I would like to remind everyone this conference call is being recorded on Thursday, July 30, at 1 PM Eastern Time. I will now turn the conference over to Denita Stann, Vice President Investor and Public Relations. -------------------------------------------------------------------------------- Denita Stann, Potash Corporation of Saskatchewan Inc. - VP of IR and Public Relations [2] -------------------------------------------------------------------------------- Thanks, Brock. Good afternoon everyone and thank you for joining us. Welcome to our second-quarter earnings call. In the room with us today we have Jochen Tilk, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; David Delaney, Executive Vice President and Chief Operating Officer; Stephen Dowdle, President of PCS Sales; Joe Podwika, Senior Vice President and General Counsel; Mark Fracchia, President of PCS Potash; and Raef Sully, President of PCS Nitrogen; and Paul DeKok, President of PCS Phosphate. I'd like to welcome all those who are listening in and remind people we are live on our website. I would also like to remind everyone that today's call may include forward-looking statements. These statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of these statements, and actual results could differ materially. For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and our most recent form 10K. Also, today's news release which is posted on our website includes a reconciliation of certain non-IFRS financial measures to the most directly comparable IFRS measures. I will now turn the call over to Jochen for some comments, and then we will go to questions. -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thank you, Denita. Good afternoon and thank you for joining our call. We appreciate this opportunity to discuss our second-quarter performance and to share our thoughts on what we see ahead. We also know many of you are interested in an update on our proposal to K+S, so we will touch on that as well today. And we will remind you that we have not made a formal offer and we only confirmed our private proposal after it became known to the media. And we will be as fullsome as possible given these facts and, with that approach, would kindly ask that today's Q&A session remain focused on our business and market conditions. Our second-quarter earnings of $0.50 per share hit the mid point of our guidance range while the results for both the quarter and first six months each trailed their respective periods last year primarily due to weaker nitrogen earnings. In Potash, we generated $417 million in gross margin, exceeding last year's second-quarter total. This reflected weaker demand in North America that was more than offset by strong shipments to offshore markets. Canpotex shipped record volumes in the second quarter and through the first half as improved Canadian rail logistics and enhanced infrastructure and distribution capabilities helped them better meet customer demands. In our nitrogen business, our gross margin declined 27% to $222 million relative to last year's second quarter as weaker global demand and increased supply lead to lower prices for our products. Improved phosphate markets and greater focus on higher netback, less volatile feed, industrial and liquid fertilizer supported improved margins during the quarter. Higher prices for these products along with the absence of Swanee River closure costs more than offset lower sales volumes and raised margin to $72 million, far surpassing last year's total. Importantly, we continue to make great strides from a safety standpoint. Our total site recordable injury rate for the first half of the year was 24% lower than the same time frame in 2014. We're on track to improve over last year's annual record and toward our goal of being one of the safest resource companies in the world. From an operational point, we took some important steps as well. We achieved a significant project milestone at Rocanville this quarter. Our new shaft at Scissors creek poked through into the underground mine workings in late June. Our employees accomplished a great feat. In fact, it is the first time it has been done in Saskatchewan since 1978 when the service shaft was completed in Lanigan. Like any large scale project, there are challenges along the way, but we're working through the final phases of our expansion plans that will see us meaningfully enhance capability at this low-cost operation. Our next step will involve installing new hoisting units and readying up for rampup. In New Brunswick, we continued to advance development of our new Piccadilly Mine as planned. We're continuing to operate our Penobsquis mine to supplement production during the ramp of up Piccadilly to ensure we can meet customer needs. This asset is uniquely positioned to preserve the Brazilian market and fulfill Heringer's growing needs in the years ahead as well as other customers in Latin America and other locals. As we look ahead, we do so with long-term confidence but a somewhat tempered near-term view. Uncertain economic growth prospects in many developing markets have resulted in increased volatility in equity and currency markets around the globe. In this environment, prices for most commodities have weakened, and while fertilizer has weathered the storm better than many, it has not been immune. While these conditions act as headwind, we also see encouraging signs that support our long-term value proposition. Importantly, encouraging Potash consumption trends continue to unfold especially in markets like China and India. The rising demand for higher potassium content bulk blends and compound fertilizers in these regions is keeping global demand at elevated levels even as customer markets like the US take a more cautious approach on the market. We see global Potash volumes remaining relatively robust through the balance of the year. A strong base load of committed tonnage to contract markets as well as an acceleration of purchasing activity through the third quarter in Brazil is expected to see global shipments approximately 60 million tonnes in 2015, at the high end of our previous guidance range. While these demand trends are encouraging and have kept our annual Potash sales volumes estimates largely unchanged, we have lowered our full-year expectations for Potash gross margin given the declining prices through the second quarter. Increased supply and ongoing competitive pressure have created headwinds most visible in spot markets like the US where prices have fallen by more than 10% since the beginning of the year. These market dynamics impact all Potash producers, but relative to many peers, we believe we're advantaged in our ability to manage and success in this or any environment. We have unmatched flexibility to capture growth in our robust demand environment and strategies to mitigate down risk in a more challenging environment. In our nitrogen and phosphate businesses, we expect the market dynamics of the second quarter to persist through the balance of 2015 and have maintained our annual combined gross margin guidance range. To reflect a slightly more cautious view on Potash through the final six months, we have lowered the upper end of our previous guidance range with our expectations for 2015 now at $1.75 to $1.95 per share. Before we turn the call over to questions, I'd like to make a few comments about our proposal we made to K+S. Our proposed business combination will provide enhanced diversification, offering a spectrum of products including potash, specialty products like SOP, salt, phosphate, and nitrogen from geographically diverse production locations. The combined company would be well positioned to serve marketplaces throughout the world and further expand into emerging markets like Africa. We believe the combination would enhance the breadth of each company's respective portfolio, improve cash flow capabilities and provide a more stable and secure operating environment. Our two companies bring together complementary assets with minimal overlap of operations and markets. With respect to legacy, we would be committed to completing the current capital buildout in making it operational. Production from this operation would be managed as part of our Saskatchewan portfolio consistent with our current strategy. While we would have to discuss the matter with Canpotex's other members, we would expect to export legacy product offshore through Canpotex and capitalize on its world class global distribution platform of railcars, warehouses and port facilities. Further, with Potash Corp's own infrastructure already available within North America, we offer an important and readily available distribution network in the domestic market. In short, this combination would create a more efficient integrated company able to prosper in an increasingly competitive global marketplace with expanding global capacity. There are three stakeholder groups that I would like to address specifically in the context of this proposal. First, our shareholders. You can be assured this proposal or any other business opportunity we consider that we will remain financially disciplined. Importantly, we are confident that our transaction would not be at the expense of either our dividend or our investment credit rating. Second, K+S's shareholders. We are fair. We believe our EUR41 per share proposal which is subject to due diligence provides full and fair value. It represents a 57% premium relative to the 12-month average stock price prior to the proposal and a premium significantly above other comparable transactions. Finally, K+S's employees and communities, we're confident our combination will create benefits for these stakeholders as well. In fact, we believe a combination provides greater stability and more opportunities for career growth, just as it would for our own employees. Because of the compelling strategic benefits, our proposal is not predicated on job cuts, mine closures or selling a salt business. Our plan would be to operate the German potash mines and salt business in the same manner as K+S, uphold existing environmental obligations, preserve the K+S brand and maintain K+S's headquarters in European headquarters. To that regard, we are prepared to make binding commitments that provide these assurances. We are continuing to seek a constructive dialogue with K+S to pursue a friendly transaction. As I mentioned earlier, we do not intend to comment further on our proposal for K+S at this time. We ask that our question session be focused on our earnings and business conditions, and we will be happy to take any questions now. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Our first question today comes from Andrew Wong of RBC Capital Markets. -------------------------------------------------------------------------------- Andrew Wong, RBC Capital Markets - Analyst [2] -------------------------------------------------------------------------------- Hi, thanks for taking my question. I will just start off actually with China. It seems like we're pretty strong this year in terms of shipments. Year over year a slight growth based on your projections. Can you talk about how the macro environment in China is affecting real farm level demand? And are we seeing any inventory build or maybe as we exit this year if you see any inventory build? And what the impact of subsidies have on the ag environment in China, thanks. -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thanks very much. Let me start with just a couple points to your question, and then of course we've got the team lined up to get into more detail. And China remains strong, in fact to the point where we do anticipate a record year of imports and shipments. I think one of the things that is paying off now for us is really the Canpotex strategy of affiliating with other producers of NPK fertilizers,. There is growing demand as I said in my remarks on compounds and specialty fertilizers. And that's really fueling a true demand in China, and we're seeing that. Our macro environment has an impact. There's no question in general on the economy, but we have not seen that specifically in the fertilizer business or in the demand for fertilizer. So we really think it is true demand for consumptions. To your points on anything more specific with inventory, really to the extent we have visibility, we don't see a particular build up in inventory. So we do attribute the demand currently to consumption. Your question on the impact of subsidies on fertilizers, I will turn it over to Steve and any further flavor to the question or on that specific point. -------------------------------------------------------------------------------- Stephen Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [4] -------------------------------------------------------------------------------- Good morning. I believe one of the drivers that we're seeing in China as we note, we do expect demand to continue to expand this year in China. There's really a drive for improved efficiencies there, and we see this, the economy is still expanding albeit at a slower rate. And we're seeing cash, high-value cash crops in demand and that's part of the growth behind the NPKs and the bulk blends. And we're also in terms of efficiencies seeing that these compound fertilizers are more efficient in their application across all of China, and that's helping fuel the Potash growth story this year. As far as the subsidies are concerned, there's been a lot of talk about revamping the corn, particularly corn has been an expectation there's going to be a change in policy. Right now it's only at the rumor stage, but what could happen if subsidies were changed and the policies were changed that we would see corn imports grow into China. And it would also further support the need for whatever corn and soybean acres are being cultivated that the drive to improve yields on those acres will be accelerated which will also be positive for Potash growth. -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [5] -------------------------------------------------------------------------------- Maybe one more point really is the impact of the policy to keep nitrogen phosphate applications flat by 2020. And it's good news for Potash because it does call for more sophisticated application and we see that as a benefit as well. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question comes from Jeff Zekauskas of JPMorgan. -------------------------------------------------------------------------------- Jeff Zekauskas, JPMorgan - Analyst [7] -------------------------------------------------------------------------------- Thanks very much. In your commentary, you talked about weaker volumes in Potash domestically for North American suppliers due to greater availability of product from offshore suppliers. Can you quantify how the offshore participants did or what they were trying to do in the quarter? -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [8] -------------------------------------------------------------------------------- Yes, I will just give you a couple of numbers. And then again, my colleague Stephen can get into more. So the general estimate on past imports has been approximately 0.8 million or 800,000 tonnes, and I think the current estimates for imports for the year is 1.3 million. So about half a million more than what the average would be but still below record years. And the points of entry would be New Orleans barges, it would be to some extent tamper, so those would be the entry points for offshore. And the amount of imports as it has increased provides greater availability and a more competitive environment in the United States, so dynamic is not surprising. It did have an impact. On the other hand, I mean we think as I said as well that we were able to compete with that because what's missing is you still have to get it from the barge to the customer. You still have to get it from Tampa to the customers. So there's distribution networks, there's warehouses and all these things involved, and we have seen perhaps more than ever in the last six months that provides competitive advantage in this specific environment. Stephen, any further on that? -------------------------------------------------------------------------------- Stephen Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [9] -------------------------------------------------------------------------------- Yes for the calendar year last year, it was a very strong year about 1.3 million tonnes. And we saw those shipments come in very strong in the second half and in the first quarter of this calendar year. What we've seen in the second quarter is we've seen that level off a bit back to let's say more traditional volumes coming in. And so I think as we look in the second half, it would be our expectation that we would see a slowdown in the second half of this year compared to the second half of last year. -------------------------------------------------------------------------------- Jeff Zekauskas, JPMorgan - Analyst [10] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- The next question comes from Vincent Andrews of Morgan Stanley. -------------------------------------------------------------------------------- Vincent Andrews, Morgan Stanley - Analyst [12] -------------------------------------------------------------------------------- Thank you and good afternoon everyone. I know your single point target for the year for Potash shipments is 60 million tonnes, but I'm wondering if you can give us the parameters above and below that and if it's better, what markets are better, and if it's worse, what markets are worse than the 60 million, thanks. -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [13] -------------------------------------------------------------------------------- Yes, absolutely. In a nutshell, the markets that are more challenging this year are US and Brazil and the markets that are supportive of China and India and Asia in general has been very strong. And that explains as well that there's a shift from granular and standard compared to last year because Brazil and US are granular markets and China and some of Asia are stand up markets. So that's why that premium has changed. And that's it in a nutshell. Record shipments in China as we talked about it, good movement in India. And we just talked about US and Brazil has had the tough start with 20% below in the first half compared to last year, but we see a pick up now and of course we look forward to a stronger second half. -------------------------------------------------------------------------------- Vincent Andrews, Morgan Stanley - Analyst [14] -------------------------------------------------------------------------------- Do you have a range on either side of the 60 millions, or is it 58 million to 62 million, is it 59 million to 61 million? How should we be thinking about it? -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [15] -------------------------------------------------------------------------------- Beyond the resolution that we can probably provide, but our range was 58 million to 60 million, so that was the original guidance. So we are on the upper end offer our original guidance. So we are a little more encouraged than what we thought at the beginning to put it into words. -------------------------------------------------------------------------------- Vincent Andrews, Morgan Stanley - Analyst [16] -------------------------------------------------------------------------------- Thanks very much. -------------------------------------------------------------------------------- Jochen Tilk, Potash Corporation of Saskatchewan Inc. - President and CEO [17] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [18] |