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Edited Transcript of POT.TO earnings conference call or presentation 27-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Potash Corporation of Saskatchewan Inc Earnings Call

SASKATOON May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Potash Corporation of Saskatchewan Inc earnings conference call or presentation Thursday, April 27, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denita C. Stann

Potash Corporation of Saskatchewan Inc. - SVP of Investor and Public Relations

* Jochen E. Tilk

Potash Corporation of Saskatchewan Inc. - CEO, President and Director

* Raef M. Sully

Potash Corporation of Saskatchewan Inc. - President of PCS Nitrogen and PCS Phosphate

* Stephen Francis Dowdle

Potash Corporation of Saskatchewan Inc. - President of PCS Sales

* Wayne R. Brownlee

Potash Corporation of Saskatchewan Inc. - CFO, EVP and Treasurer

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Lead Analyst

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Benjamin Allen Richardson

Susquehanna Financial Group, LLLP, Research Division - Associate

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Jacob Bout

CIBC World Markets Inc., Research Division - Research Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Michael Piken

Cleveland Research Company - Equity Analyst

* Oliver Rowe

Scotiabank Global Banking and Markets, Research Division - Associate

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Sandy H. Klugman

Vertical Research Partners, LLC - VP

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the PotashCorp First Quarter 2017 Earnings Conference Call. (Operator Instructions) I'd like to remind everyone that this conference call is being recorded on Thursday, April 27, 2017 at 1:00 p.m. Eastern.

I will now turn the conference over to Denita Stann, Senior Vice President, Investor and Public Relations. Please go ahead.

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Denita C. Stann, Potash Corporation of Saskatchewan Inc. - SVP of Investor and Public Relations [2]

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Thank you, Joe. Good afternoon, everyone, and thank you for joining us. Welcome to our first quarter earnings call. In the room today, we have Jochen Tilk, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; Stephen Dowdle, President of PCS Sales; Mark Fracchia, President of PCS Potash; Raef Sully, President of PCS Nitrogen and Phosphate; and Joe Podwika, Senior Vice President and General Counsel.

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 10-K. Also, today's news release, which is posted on our website, includes a reconciliation of certain non-IFRS financial measures to their most directly comparable IFRS measures.

I'll turn the call over now to Jochen for questions -- comments, and then we'll go to questions.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [3]

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Thank you very much, Denita. Good afternoon, everybody. Thank you for joining our call. We appreciate the opportunity to discuss our performance and what we see ahead for our company.

With strong potash demand in all key markets, the positive momentum that emerged in the second half of 2016 carried into the first quarter of 2017. Improved customer engagement, particular in offshore markets, supported a 22% increase in our sales volumes compared to first quarter last year. Our potash results also benefited from improved cost following the shift of production to our lower-cost mines in the absence of last year's New Brunswick closure-related costs. Impact of these optimization efforts, combined with higher sales volumes, were primary contributors to gross margin of $160 million, surpassing last year's total. Our nitrogen earnings for the quarter were $97 million, slightly below last year's total as modestly lower prices and sales volumes more than offset reduced natural cost -- natural gas cost. In phosphate, gross margin of $11 million fell short of the 2016 comparable as the challenging price environment more than offset lower cost. With improved potash performance and the absence of certain notable charges, our earnings for the first quarter of $0.18 per share exceeded the last year's total. Additionally, we generated cash from operating activities of $223 million, well above the same period of last year.

Looking at the balance of 2017. We continue to expect a supportive potash environment. In North America, we expect fertilizer affordability and the need to replenish soil nutrients following several highly productive crop years will contribute to healthy potash demand at the farm level and support total shipments similar to last year. In Latin America, despite a recent decline in prices for soybeans and corn, robust demand is supported by favorable barter ratios, substantial economic need and attractive economics for other key crops such as sugarcane, coffee and oil palm. This dynamic has underpinned a continued recovery in prices, and we expect it to result in increased shipments in 2017. In other Asian countries, palm oil prices have declined in recent months but remain at supportive levels, and we're seeing plantation owners make a concerted effort to improve yields by increasing potash application rates after last year's challenging growing environment. Combined with an expectation for improved moisture conditions, we anticipate deliveries to this region will exceed last year's levels. In India, the recently announced subsidy change to potash is expected to lead to modestly high retail prices to farmers, although the new levels are expect to remain well below the 5-year average. Recognizing that this may hinder a meaningful improvement in near-term consumption, we have reduced our estimate for 2017 shipments and now expect deliveries to be flat to slightly higher than last year.

Potash consumption in selected regions of Northeast China has been weaker in 2017 due to lower corn plantings. However, growing consumption in other regions, driven by strong affordability and increased acreage of potassium-intensive crops is expected to support higher shipments this year. With these factors in mind, our estimate for global potash shipments remains at 61 million to 64 million tonnes for the year. This environment has resulted in Canpotex being fully committed through May. As a result, we have raised the bottom end of our potash sales volume guidance to a range of 8.9 million to 9.4 million tonnes. Factoring in lower cost of goods sold related to our Rocanville ramp-up and recent potash price improvements, we anticipate potash gross margins in the range of $600 million to $800 million. In nitrogen, despite better-than-expected ammonia prices, for the first quarter, outlook remains cautious, given urea price weakness and the likely impact of new capacity on prices for all products following a spring planting season. But importantly, global fundamentals look more constructive in the medium term as do our limited capacity additions planned beyond 2017. In phosphate, despite a lower cost profile, we maintain our view that a subdued pricing environment will limit our profitability in 2017. Combined, we forecast nitrogen and phosphate gross margin of $150 million to $400 million. Based on these factors and the other guidance -- items noted in our news release, we have increased our 2017 earnings projection to $0.45 to $0.65 per share, including an estimated $0.05 per share in merger-related costs.

While market conditions, primarily in potash, have improved in recent months, our aim is to position the company to be successful in any environment. In last year's first quarter, we made a very difficult decision to suspend our New Brunswick potash operations. And just last quarter, we initiated operational changes at Cory, switching to only white product. These were difficult decisions. But as a company, we're now benefiting from an improved cost position and will continue to do so in the future. Our Rocanville mine is a focal point of the strategy. The new Canpotex capacity audit is underway right now, and we expect our 14-day test run to commence in May. With the completion of this process, we anticipate an increase to our Canpotex sales entitlement beginning July 1.

With operational capability aligned to market demand and production optimized to our lowest-cost mines, we're on track to reduce potash costs of goods sold this year by $10 per tonne from the 2016 levels. For context, we have reduced our cash cost of goods sold by nearly $50 per tonne or 40% since 2013. With spending on our potash expansions now complete, our capital requirements this year will be approximately half of what they were only 2 years ago. While we remain focused on best positioning the company for long-term success, a common question we receive is, "What will be the impact of new potash greenfield mines over the next 3 years?" It is well documented that new competitive supply will begin ramping up later this year and over the next 3 years, but what people often underappreciate is the demand side. Slide 10 in our presentation highlights this point very well. Despite some inconsistency in buying patterns in recent years, particular in the contract markets, the long-term consumption trend has been around 2.7% per year and is closely tied to increases in global crop production. If you assume the historical growth rate in potash continues, on average, approximately 1.5 million or 2 million additional tonnes or, on average, one potash mine per year will be needed to meet demand growth. We think this bodes well for the long-term outlook for the potash business.

I'd like to finish with a few words related to our merger with Agrium. We're excited about the tremendous value that can be created for our many shareholders by bringing together 2 world-class complementary companies. We believe our new company will occupy a very unique position within the agricultural space. Integration teams from both companies are working hard on analyzing business processes, best practices and evaluating synergies for the new company. As this work progresses, we remain highly confident in our ability to deliver in our synergy target within 24 months. From a regulatory standpoint, we continue to cooperate with the various enforcement agencies in their reviews and maintain our view that the transaction will close mid-2017.

To sum it up, potash market conditions remain supportive, and we expect this to continue through the balance of the year. Ammonia markets have had it better through the early part of the year than our previous expectations, but urea has been more challenged, particularly in recent months. We still hold our view that 2017 will be a transition year in nitrogen as new capacity comes online and higher cost production is rationalized. Importantly, we continue to take positive steps in areas that we control. This includes following a market-responsive approach as well as a focus on optimizing our world-class potash assets while maintaining flexibility. It's an approach that we believe puts us on the path to be successful in any market conditions and best positions us for future growth opportunities.

Thank you for your time. We look forward to taking your questions on our performance for the quarter and the outlook for our business.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Andrew Wong with RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [2]

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This is actually regarding the Trinidad nitrogen operations and the gas supply. Can you provide an update on the situation there? And then just longer term, if, say, ammonia prices don't really rebound significantly and the index linked to nat gas prices stay low, is there a chance that the Trinidad government maybe just decides to curtail supply to nitrogen producers or maybe change the pricing formula there?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [3]

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Yes, thanks for the question. We've got Raef here to respond. I'll give an introduction, and then we can actually walk you through a little bit what's happening. I mean the government of Trinidad -- Tobago actually has taken significant steps recognizing the challenge. So that's the first positive step. They have spoken to major gas suppliers and exploration companies, development companies and have made good progress on a number of projects. There are projects that have been in the press for a while where there was little progress but, in recent months that really stepped up. There's the Junior -- Juniper project. There's the Dragon project with the country of Venezuela. They have signed several contracts and marched forward with that. That gives us certain hope and expectation that additional gas supply will come online and that curtailment, not necessarily in the next year or 2 but down the road, will be less than what it was in the past. So I'll stop right there and I'll turn it over to Raef for some additional flavor on those projects in Trinidad.

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Raef M. Sully, Potash Corporation of Saskatchewan Inc. - President of PCS Nitrogen and PCS Phosphate [4]

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Thanks, Jochen. Just to add to what Jochen said, there are a number of smaller projects that have either come online already or will come online through the remainder of '17. They are ramping up at the moment. The major one for '17 is the Juniper project. It's due into production in quarter 4, and it's currently slightly ahead of schedule. So we're expecting to see curtailments decrease as we get through the back end of '17. Now on a medium-term basis, as Jochen mentioned that I have signed a deal with the Government of Venezuela to develop the Dragon field. That's a field that sits within Venezuelan borders but will be brought online in Trinidad. The other that I need to mention is the Angeline Field. The Government of Trinidad and BP recently announced the sanctioning of this project, it's quite a large project, and it should be coming online sort of the same time frame as the Dragon field. So expect to see some good replenishment of supplies over that 3- to 5-year horizon. On other fronts, we know that the government is close to negotiations -- we believe they're close to finalizing negotiations with the upstream suppliers, and we hope to engage with them through the next couple of months ourselves. We're quietly optimistic that we will see that situation turn around and get to a point that will benefit both the Government of Trinidad, the people of Trinidad and ourselves.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [5]

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Thanks, Raef, a lot of good flavor. And maybe the final point, you specifically asked a question whether or not the Trinidadian government would negotiate these contracts or through more curtailment. I mean, the bottom line is that there has to be more gas supply. That is the #1 step the government has to take. And if there's additional gas supply, it would reduce curtailment. The second part is that the Trinidadian government recognizes that its gas supply has to be competitive. I mean, they're well aware of the global situation. And those contracts -- and we're not alone in that. There are other companies will be negotiating in the future. And the government has come out and said that it understands the situation. So we're hopeful, as Raef said. And we'll see how that goes in the next year or 2.

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Operator [6]

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The next question is from Ben Isaacson with Scotiabank.

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Oliver Rowe, Scotiabank Global Banking and Markets, Research Division - Associate [7]

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It's Oliver on for Ben. Given the recent capacity additions in urea in the United States, how do you see the inland premiums for UAN and urea developing in the corn belt, specifically, in both the on and off seasons?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [8]

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Yes, Ben, a really good question and, certainly, your question depends, obviously, how some of the urea will move globally, how much of it from the U.S. will be exported versus staying in corn belt. As -- I'll leave the question open, to turn it to Stephen, see if you have any more thoughts on that.

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [9]

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Yes, Ben. When we look at urea additions in 2016 and in 2017, the ones in 2017 just coming on, we're looking at a total of 3.3 million, 3.4 million tonnes of new urea capacity. And if you see the imports last year, we imported into the U.S. 7.3 million tonnes. So you just look at those 2 volumes, and we know that the market is going to have to make some adjustments. And the expectation would be that the imports into the U.S. would decline as this domestic production gets placed into the market. As far as looking at specific geographies to estimate inland premiums versus what you see closer to the river, it's, I think, maybe too early to make any clear statement about that. But I do think it's safe to assume, as we look into the second half of '17 and even into '18, that the market will need to make adjustments for this new capacity.

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Operator [10]

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The next question is from Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [11]

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Can you talk a little more about your cost reductions in potash from both the mine optimization perspective as well as any general controls you've been targeting over the last several quarters? And just broadly, how much upside per unit cost do you think there is in '18 and '19 on how directly correlated do you believe this is on volumes? In other words, even if your volumes were flat, how much mix upside based on your mines at Rocanville do you believe there is?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [12]

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Yes. Thanks very much, Chris, for the question. So to put that into context, as I said, since 2013, we've reduced our cost, and this is cash cost I'm referring to now, by about $50 or over 40%. When you compare just to last quarter of -- the same quarter of last year, I think we were at $138, and we're at $90 this quarter now. Last year, we suspended New Brunswick, and we saw that impact in our cost. But now we see the benefit at $90. We expect that, as Rocanville ramps up -- continues to ramp up and, as I mentioned, we're in the middle of the Canpotex audit, we're expecting a 14-run -- 14-day run soon, that throughout the year we can reduce our cash cost by another $10. Specifically to your question, "What happens if production is flat?" We will get that cost reduction because it's a shift to Rocanville in lower-cost production, and it's not related to incremental volumes. So we fully expect to see that $10 reduction coming through this year and then staying for next year.

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Operator [13]

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The next question is from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [14]

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A couple of questions on taxes. Can you give a little more color on why you do expect a near-zero tax rate for the next few quarters? And then would that tax rate stay in 2018? Or any color there you can give? And on Saskatchewan royalties, it seems like you're expecting a step-down in the royalty rates the next few quarters. Is that related to Rocanville CapEx yields or lower price assumptions? Maybe you can help on that.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [15]

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Yes, Joel, I'll turn it over to Wayne, our CFO, and he can shed some light on that.

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Wayne R. Brownlee, Potash Corporation of Saskatchewan Inc. - CFO, EVP and Treasurer [16]

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Joel, the quarter 1 reduction was really a question of where earnings are derived from. And when you have lower earnings in some jurisdictions, when you have some fixed deductions, that actually reduces the tax rate. And that certainly happened in the United States, so that has an impact on the quarter. The reduction for the year really is a result of the corporate income tax reduction that was announced by the Saskatchewan government. It's a 1% reduction, going from 12% to 11% over the course of the next 2 years. As you know, from an accounting perspective, we have a deferred tax provision booked on our balance sheet. And the largest majority of this reduction on the tax rate is really that reduced deferred tax rate because it would reflect the most current tax rate that's in place. So it's a noncash item, and it really is adjusting the balance sheet. The royalty rate is primarily a function of -- the biggest issue is the price. And of course, those are down a little bit, so that would have an impact, offset somewhat by the volume, but it's not substantially different, to tell you the truth.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [17]

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And for 2018, the tax rate -- the corporate tax rate?

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Wayne R. Brownlee, Potash Corporation of Saskatchewan Inc. - CFO, EVP and Treasurer [18]

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Tax rate, I would say that the ongoing tax rate probably is in the range of 16% to 20%.

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Operator [19]

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The next question is from Jonas Oxgaard with Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [20]

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I am trying to reconcile the guidance you gave in January with the guidance you're giving today and the appreciation in potash prices because our potash price is 15% higher today than it was 3 months ago, and you took up your volume. And yet, your gross margin guidance is basically unchanged. So how should I interpret that?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [21]

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I think it's our expectation in terms of what we see in the markets. And when you compare year-over-year, our average -- our realized potash price is actually lower. It has come up in the U.S., which is very positive. It's come up in some jurisdictions. But standard -- in Asian markets where we self-standard, prices have been lower. And so on average, our realized price is somewhat lower than what it was a year ago. We're very optimistic as we see prices strengthening in Brazil. And we have seen that essentially month over month, and that's giving us some pretty positive outlook for that. But overall, our guidance really reflects that. That's where we see how this evolves in the next couple of months.

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Operator [22]

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The next question is from Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [23]

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Just a question on the contract markets. On China, I think we all thought that contract would have been settled by now, and it hasn't. So what's keeping the 2 parties from reaching an agreement at this point? And then on India, why are you -- why is 400,000 tonnes sort of reduction year-over-year that volume there will be flat year-over-year? What gives you confidence in that just given you're looking for a higher price and their subsidy is going to be lower?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [24]

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Yes. To your first question, China, I think, in its simplicity, I'd say that suppliers are expecting an increase in the price over last year. And China, obviously, has a different view on that and, therefore, negotiations are prolonged. I do think there's a reason to expect that contract price in China should be higher because of what is happening in other jurisdictions, in those spot markets, Brazil as an example in Latin America, or the United States. We're not too nervous about timing. As I mentioned, Canpotex is sold out through May. Our volumes have been good. So it's a very different situation than what we experienced a year ago when there was a certain anxiety about moving material and our supply chain. We've seen really good demand in markets outside of China. And then Canpotex has diversified its customer base, so it has to deliver under last year's contract 2016 in the first couple of months. So we'll see where it goes. But the simple answer to your question is that suppliers expect an increase in the contract settlement with China. To your second point, in India, we -- we've obviously adjusted our volumes given the increase -- sorry, given the decrease in the subsidy and the changes therefore. And we think it will slow it down, but we also have seen reasonable demand to offset that. And when you compare that with a 5-year average, it's still a very affordable proposition to apply potash. So that's essentially the equation that we apply to come up with that reduction. Stephen, is there anything more you want to add? Well, I'll turn it over to Stephen, he may have a bit more detail on that.

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [25]

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Yes. Just a comment on India. Yes, the subsidy for potash was reduced by $27.50. And we do expect that there will be a corresponding increase in the farm gate price, but we don't think that, that's really going to be too high of a hurdle to get over. We expect the farm gate price to rise to about INR 13,000. And I would note that, in 2014 and 2015, the farm gate price was INR 16,000, and we had potash demand in India of over 4 million tonnes. So we may be a bit conservative right now in what we expect for Indian demand. But at the end of the day, I think, when we look back, what's really going to be more important than the subsidy or even the farm gate price in India is what kind of monsoon that India is expecting. And the Indian meteorological institute just came out a few days ago and was forecasting a normal and good monsoon. And also, the rupee, if it remains stable, then I think a timely settlement of the contract should bode well for demand in India this year.

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Operator [26]

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The next question is from P.J. Juvekar with Citigroup.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [27]

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There was a new shareholder agreement at SQM, where you have a 32% stake. And I think Potash gets more of the board control compared to Mr. Ponce. So what does that mean for you and the dividends you get there? Could we expect higher dividend for you in the future?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [28]

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Yes. So just to be factually correct, we do not have more control than other -- another shareholder. So we have 3 positions on the board, and that does not give us control. So just to be clear on that one. Now I'm not quite sure how that would relate to dividends. There's a pretty clear structure in how dividends are paid out, and it's actually formulaic, so I'm not sure why that would put us in a different position. Wayne, I don't know if you want to add something to that.

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Wayne R. Brownlee, Potash Corporation of Saskatchewan Inc. - CFO, EVP and Treasurer [29]

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It's very simple. Every shareholder gets the same dividend whether they hold Series A or Series B shares, period. So there's no change in that.

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Operator [30]

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The next question is from Steve Byrne with Bank of America Merrill Lynch.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [31]

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I wanted to ask about your gross margin guidance for nitrogen and phosphate combined. It's -- if you think about the low end of that range and taking into consideration the gross profit you generated in the first quarter, that bottom end is pretty lean. Is that basically assuming profitability from where you are at spot pricing right now? Or is that an assumption that things get worse from here?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [32]

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Yes, we -- I think, it's -- to be honest, it's more a bit of a wait-and-see how the markets develop. I mean, this is the guidance we provided. We did have a better quarter that perhaps than we thought at the beginning because of ammonia. But we have urea. We saw urea coming off now. And we'd just like to see how the second quarter is going. We already talked about our somewhat conservative view perhaps for the second half given the incremental demand. And then we'll see. So for now, we'll leave that spread. Your point is well taken. It is a reflection of our conservative view or cautious view for the second half of the year more than anything.

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Operator [33]

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The next question is from Adam Samuelson with Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Lead Analyst [34]

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Maybe continuing in that kind of realm. In phosphates, your feed and industrial pricing took another leg lower this quarter. Maybe you can talk about some of the competitive dynamics in that business. Do you think we're near a bottom from the offshore import competition? And maybe some of the cost actions you're taking in phosphates to manage through what's been a pretty tough market environment for yourself.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [35]

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Yes -- no question. It's been a difficult market in phosphate and liquids. And 2 factors there. One is it's been a wet year so far, and the rain or the wet beginning of the season certainly impacted application in phosphate liquids, no question. The other one is imports. We've seen a fair amount of imports in the U.S. That had an impact on pricing. And Stephen, if you want to add more to that? We can talk a little bit more about what we do on the cost side.

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [36]

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The main pressure in the feed markets is definitely -- we've seen imports coming into this market more aggressively, and we kind of expect that to continue. And the industrial markets, they -- there's no particular single reason pressuring all of those markets. It's just a competitive environment right now. Your comment, which we would concur with, particularly on the industrial side, is we do think that we are at -- near a bottom of a pricing cycle. And we do -- looking forward, particularly in the second half and into next year, we expect to see some price recovery in those markets. But I think our main defense against that right now is to make some initiatives on our costs.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [37]

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Yes, Raef, why don't you -- if you would talk a bit about the initiatives that we've taken in phosphate.

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Raef M. Sully, Potash Corporation of Saskatchewan Inc. - President of PCS Nitrogen and PCS Phosphate [38]

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So I think in the last 12 months, we've started quite a comprehensive look at our operations. Our intent is to try and improve our cost position, also improve the operating rates of the various components, mine and mill. We have made some good progress. I think fixed costs reductions were well over $40 million in the year, last year. We hoped to make some continued progress this year. The cost reduction we'll be making, of course, have been outweighed by some of the pricing reductions, unfortunately. But we continue to make a good progress there. And I think we'll continue to see that provide some support.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [39]

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And maybe a final comment because your question is so very relevant. Obviously, one of the opportunities that we see in the merger with Agrium is really -- is to combine our phosphate assets. And we've identified significant synergies by doing so. And that would be a further opportunity post closing for us to materialize some significant cost savings or synergies.

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Operator [40]

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The next question is from Michael Piken with Cleveland Research Company.

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Michael Piken, Cleveland Research Company - Equity Analyst [41]

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I had a question about India kind of longer term. There's a proposal that's been bandied about by some government officials that India might have up to $9 billion in spending to become self-sufficient in nitrogen. What do you think is the likelihood that actually moves forward? And what does that mean for the long-term competitiveness of your Trinidad assets? And then similarly, if India does make this investment in nitrogen, what does that mean for the potash subsidy longer term?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [42]

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Yes. Good long-term questions. Stephen, I'll let you talk to that.

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [43]

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I know India has been talking about growing their nitrogen capabilities for decades. And it's really -- the biggest challenge is feedstock, natural gas. And their industry was built on naphtha. They've been getting away from that. To what extent the government will really make that plunge into developing sufficient natural gas capacity for that kind of growth that you referred to? I think it's everybody's guess, and we'll just have to watch. But regardless, it's probably many years into the future.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [44]

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You had a second component to your question. What does that mean for Potash? I'm not sure I fully understood that. Are you suggesting maybe if India becomes self-sufficient in nitrogen, it has an impact on Potash? Or what impact...

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Michael Piken, Cleveland Research Company - Equity Analyst [45]

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Yes. Just in terms of the subsidy spending. Would it have any impact at all if India won't import as much nitrogen?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [46]

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Yes. Good point. I mean, longer term, we obviously look at that from an agronomic perspective and say that the country can't -- cannot skip potash applications in the long term or not replenish soil nutrients for potassium. So our view would be that it may have an impact on our short term in terms of subsidies and how people are trying to shift to and from different nutrients. In the long term, it would have to be really a proposition for replenishment of nutrient deficiency. And for that, we think it should not have an impact on potash. In fact, we think it should bode well for potash in the long term.

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Operator [47]

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The next question is from Sandy Klugman with Vertical Research Partners.

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Sandy H. Klugman, Vertical Research Partners, LLC - VP [48]

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In phosphate, what's the correlation between industrial and feed prices and the prices you see in the granulated phosphate market? And then in the past, a portion of your industrial phosphate contracts have been tied to the prior year's raw material costs. Is that still the case?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [49]

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Yes. Stephen?

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [50]

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The -- our feed prices, they are a function of really supply and demand of the feed products, so they don't really -- they're not really tied to, let's say, fertilizer DAP or MAP prices. They have their own distinct market. And that's similar case for the industrial phosphate products. And yes, we do have some contracts that are tied to prior year cost of raw materials, and they are still in effect. However, I would point out that these contracts are nearing their termination and, upon termination, will be renegotiated.

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Operator [51]

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The next question is from Don Carson with Susquehanna Financial.

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Benjamin Allen Richardson, Susquehanna Financial Group, LLLP, Research Division - Associate [52]

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This is Ben Richardson sitting in for Don. So India potash markets heading into the second half with your ramping Rocanville and competitors bringing on capacity. Are you adjusting your approach to the marketing of potash or adjusting from an inventory standpoint?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [53]

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Yes. I think if -- you have to put that in the context of our overall shipments and then -- and look at our portion. I mean, India is not a -- I mean, it's obviously an important market for us, but it's not a huge market. So when you look at the adjustment we made and the impact it has really on our sales, it's quite marginal actually, so it does not have a huge impact. So I wouldn't call it a shift in approach at all. In fact, our approach is pretty consistent. It's more a response to the adjustments that were made by the government on subsidy reduction.

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Benjamin Allen Richardson, Susquehanna Financial Group, LLLP, Research Division - Associate [54]

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Okay. And in North America into the back half, I guess, would you expect -- any fill season pressure on prices, specifically in the domestic market?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [55]

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Yes, Stephen, do you want to comment on the domestic market?

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [56]

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Yes, the domestic market, as you know, right now, in our season, and we are seeing -- the season is a little bit slow to take off. We're just slightly behind in the planting progress. But I would say that where we have seen -- we're in the geographies where the weather has allowed us to really begin planting and getting into the ground there. We've seen potash demand being quite good. So that's encouraging. That's all about the value proposition that we talk about with potash prices being where they're at, commodity prices being where they're at. So I think that's a good thing. And as we go through the next several weeks here as weather allows us, I think we'll really begin to see what the season is going to be like. As we go into the second half, one change that I think you were alluding to is we do expect to see the Legacy Project come on during the second half. We're not expecting huge volumes coming out. We think, from what we hear, the ramp up will be rather slow. So we're not really anticipating a huge disruptive impact. I think, when you look at the balances in the market, there will always be a balance between that new supply and also the offshore supply that comes in through imports. And we'll just have to wait and see if there is any impact there. In other words, does the legacy volume become additive to normal import volumes, or will import volumes be low -- be lower and, therefore, the total of these 2 sources will be unchanged? So these are things that we're looking at. But I think, overall, we don't really anticipate that there'll be anything unusual in the second half that would cloud our vision on demand.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [57]

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Yes. And I think several suppliers have indicated, including Canpotex, they're committed through May, and some even beyond that which, I think is, again, different than a year ago. And we'll see how that impacts imports in U.S. But I think your question will probably come up again next quarter, and then we'll have probably -- maybe a better or a more detailed answer then.

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Operator [58]

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The next question is from Jacob Bout with CIBC.

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Jacob Bout, CIBC World Markets Inc., Research Division - Research Analyst [59]

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Given the ramp at Rocanville, can you talk a bit about your ability or appetite to further manage your potash portfolio? Maybe just walk us through the ability to shut down other mines and what type of cost savings would be associated with that.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [60]

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Yes, Jacob, thanks. So just for clarity, we do not anticipate any further material changes to those that we have already communicated. And the biggest change really is the ramp-up of Rocanville to its capacity, the Canpotex audit and then running Rocanville at a steady state. We've made adjustments, obviously, through suspension of New Brunswick to the switch of Cory to all white. And then we've talked about some inventory and maintenance shutdowns in our operations. We believe that will address any of the issues in terms of optimizing our portfolio and running it at the lowest cost that we can see. So beyond that point, we haven't really looked into anything. And we don't think that's necessary because we do think that as we get our cost to the point that we have suggested, we've really reached a steady state. So significant steps that we took, no question about it. But we see the benefit now, and we'll be very optimistic as the Rocanville ramp-up is going quite well that come the middle of the year, we'll reach that steady state.

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Operator [61]

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The next question is from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [62]

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On Slide 12, I think the U.S. capacity is largely up for ammonia. Is Iran also largely up? And how does this slide look going forward from here -- from midyear?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [63]

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So we're just flipping pages here to reconcile. Can you perhaps...

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [64]

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This is Slide 12 on the nitrogen market. So I think, again, the biggest slug of new additions is in the U.S., but I think that's largely up already at this point.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [65]

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Stephen, any...

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [66]

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And John, what is your question exactly?

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [67]

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So is it -- on balance, obviously, looking at the first half of the year where the U.S. have the large expansions come up, how does it look going forward from here?

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [68]

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You mean for new capacity? Or...

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [69]

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Right. I think it's much more balanced, isn't it, as we go forward?

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Stephen Francis Dowdle, Potash Corporation of Saskatchewan Inc. - President of PCS Sales [70]

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Yes. I mean, there's no question. We're seeing the bulk of the new capacity, I think is already either very, very close to being online or already online. So on a go-forward basis, we're not expecting significant new capacity. The one big development that we will see, and we expect that here at the end of the quarter -- fourth quarter in 2017 is the Yara-BASF in Freeport. That's probably 750,000 tonnes, a very large capacity. But we have factored that into our plans. That demand had been supplied from Trinidad, and we have made -- and we've talked about this before. As this new capacity comes on, it is going to result in shifting trade patterns. And this is, in fact, what is happening now. We're seeing ammonia being traded in different trade patterns than it was before. And we are certainly part of that as we look into our 2018 deepwater ammonia plan, it's going to look quite different than what we had been doing in previous years. So we're adjusting, and I think other producers will be adjusting well. And as you look forward into 2018 or even 2019, certainly, in North America, we don't see anything with respect to new ammonia capacity coming on. And so that certainly will give the market time to adjust to these new trading patterns.

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [71]

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And to add -- sorry, to add to Stephen's point and for clarity, John, I mean, our outlook is quite positive and constructive post 2017. So we share your view, your comment that -- you said in the first half we'll look at that in 2017 throughout the year. But we think that there's very little capacity coming on past that point. The market will absorb that. As Stephen said, trade patterns will adjust. And our outlook is actually quite constructive post 2017, looking into 2018.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [72]

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And then as a quick follow-up, do you think you'll report another quarter as a stand-alone company?

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Jochen E. Tilk, Potash Corporation of Saskatchewan Inc. - CEO, President and Director [73]

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I can't answer that question. I don't know.

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Operator [74]

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Ms. Stann, there are no further questions at this time.

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Denita C. Stann, Potash Corporation of Saskatchewan Inc. - SVP of Investor and Public Relations [75]

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Thank you, everyone. If you have any questions, please don't hesitate to give us a call back at the office. Thanks, and have a great day.

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Operator [76]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.