Why poor potash performance hurt Intrepid Potash’s revenues in 4Q

Market Realist

Why did Intrepid Potash stock sink 9% after its earnings release? (Part 2 of 4)

(Continued from Part 1)

Poor performance

For the fourth quarter ended December 31, 2013, IPI reported sales of $73.8 million—33.5% less compared to the same period in 2012, and a loss of $5.7 million compared to the 2012 profits of 14.5 million. From a yearly perspective, sales declined 25.5% and earnings fell 74.5%.

For the fourth quarter of 2013, potash’s bad performance caused IPI to lose $0.08 per share, missing estimates by $0.12. The large difference caused disappointment among investors, which in turn caused the share price to fall 9%. IPI missed total estimated revenue by 11.9%, and the cost of revenue was 5.1% higher than expected.

Potash dragged IPI down

The share price of IPI before earnings were released already reflected concerns regarding decreasing profits, but the estimates were notably higher than reality.

Margins for potash tend to be particularly high. Profit margins are what’s left over after expenses have been deducted from sales. For the quarter ended December 31, 2012, IPI’s potash had a 40.5% margin. For the same period in 2013, potash margins decreased to 6.8%. Lower sales prices and volumes combined with higher potash costs caused profits to sink.

For the quarter ended December 31, 2013, average potash net realized sales price (sale price minus freight costs) was $338 per ton—22% lower compared to the same quarter in 2012. Plus, sales volume decreased 18% compared to the fourth quarter in 2012, decreasing earnings even more.

Potash’s cost of goods sold, the cost of producing potash, went up by 23%, to $290 per ton. Part of this large increase was due to an unusual production failure. Management estimated that this irregular production slowdown increased potash costs per ton by $10, which increased costs by an extra 4.2%. This extra expense—along with higher-than-expected maintenance costs, employee benefits, and higher property taxes—was the main reason for IPI’s higher-than-expected costs of revenue.

The surprising 10%: Langbeinite

Langbeinite represents only 10% of IPI’s profits, but the product performed much better than virtually all other fertilizers. Langbeinite was able to sustain a relatively constant average net realized sales price (only 0.6% less compared to 4Q2012) and yearly sales volume (only 1.6% less compared to 2012).

Continue to Part 3

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