Potash Falls on Lower Profit, Earnings Miss

Potash Corp of Saskatchewan Inc. (POT) logged lower profit in fourth-quarter 2013 and its earnings missed expectations, hit by challenging fertilizer market conditions. The fertilizer company’s shares fell as much as 5.5% in the trading session following the earnings announcement.

Potash Corp.’s profit for the reported quarter slid roughly 45% year over year to $230 million or 26 cents per share from $421 million or 48 cents per share a year ago. Charges related to headcount reductions and weaker prices for all three nutrients – potash, nitrogen and phosphate – dragged down the bottom line.

Potash Corp., in Dec 2013, said that it will cut roughly 18% of its workforce across Canada, the U.S. and Trinidad (affecting more than 1,000 positions) and execute other operational changes including plant closures and capacity cuts.

Barring severance-related charges associated with workforce reductions, earnings of 31 cents per share fell short of the Zacks Consensus Estimate by a couple of cents.

Revenues for the quarter fell roughly 6% year over year to $1,541 million, yet topped the Zacks Consensus Estimate of $1,388 million. Sales fell as higher sales volume was more than neutralized by lower pricing.

Gross margin fell 22% to $460 million in the quarter from $586 million recorded in the same period last year. A weak fertilizer market hurt gross margin in the quarter.

For full-year 2013, profit fell 14% year over year to $1,785 million or $2.04 per share. Adjusted earnings of $2.09 missed the Zacks Consensus Estimate of $2.12.

Revenues for the year fell roughly 8% year over year to $7,305 million, but beat the Zacks Consensus Estimate of $6,880 million.

Segment Review

Potash: Sales volumes jumped roughly 34% year over year to around 1.77 million tons in the reported quarter. Sales volumes rose both in North America and offshore in the reported quarter. Average realized potash price was $282 per ton, down 27% from the prior-year quarter, impacted by competitive pressure across all markets.

Nitrogen: Sales volume rose 37% to 1.5 million tons from 1.1 million tons a year ago, benefiting from expanded capacity. Average realized prices for nitrogen products decreased 29% to $326 per ton due to decline in prices for all major product categories.

Phosphate: Sales volume of 0.9 million tons was up 11% year over year. Average realized phosphate price was down 21% year over year to $455 per ton, attributable to decline in prices for fertilizer products as well as feed and industrial products. The phosphate market was hit by weak Indian imports during 2013.

Financials

Potash Corp. exited 2013 with cash and cash equivalents of $628 million, up 12% year over year. Total debt fell roughly 4% year over year to $3,937 million.

Capital-related spending was $0.4 billion during the reported quarter, bringing the company’s total expenditure for the full year to $1.6 billion. Potash Corp. repurchased 7.8 million shares during the fourth quarter and completed around 33% of its expected total repurchases under the program at the end of 2013.

Outlook

Potash Corp., which is among the prominent players in the fertilizer industry along with Agrium (AGU), Mosaic (MOS) and CF Industries (CF), expects fundamental drivers of fertilizer demand to remain in place in 2014 amid a weak pricing environment.

For potash, the company anticipates global demand to improve in 2014 and expects shipments in the range of 55-57 million tons for the full year, up roughly 5% year over year.

Potash Corp. expects earnings for first-quarter 2014 to be in the range of 30 cents to 35 cents per share. For 2014, earnings are expected in the band of $1.40 to $1.80 per share.

Potash Corp. expects sales volume for 2014 in the range of 8.2-8.6 million tons factoring in the benefit from an expected increase in global shipments, partly masked by lower sales from its New Brunswick facility.

In nitrogen, the company expects sales volumes to surpass 2013 levels on the back of full-year production from its Geismar, La., facility and expected lower natural gas curtailments at Trinidad operations.

For phosphate, Potash Corp. sees stable margins in 2014 vis-à-vis 2013 as anticipated weak pricing will be neutralized by better efficiencies and a shift to a more favorable product mix. While closure of a chemical plant at White Springs is expected to modestly reduce production during second-half 2014, the impact is not expected to lead to significant sales volume reductions for the full year.

Gross margin for potash is expected in the range of $1-$1.3 billion, while for nitrogen and phosphate it has been forecast in the band of $1-$1.2 billion for 2014. Capital spending for 2014 is expected to be roughly $1.1 billion.

While Potash Corp. is well placed to achieve its potash cost reduction goal of $15-$20 per tons from 2013 levels, it expects a $16 million increase in non-cash costs in 2014 due to higher depreciation at its Penobsquis mine in New Brunswick and transition costs of roughly $54 million associated with the ramp-up at Picadilly and Rocanville.

Potash Corp. is a Zacks Rank #3 (Hold) stock.

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