Potash Corp. POT saw lower profits in second-quarter 2015, dragged down by weak nitrogen pricing. The fertilizer giant posted a profit of $417 million or 50 cents per share in the quarter, a roughly 12% fall from $472 million or 56 cents per share earned a year ago. Earnings per share missed the Zacks Consensus Estimate of 52 cents.
Revenues for the quarter slipped 8.5% year over year to $1,731 million, but came ahead of the Zacks Consensus Estimate of $1,721 million.
Gross margin fell around 5% year over year to $711 million as lower nitrogen prices offset higher contributions from potash and phosphate businesses. Nitrogen prices fell as market fundamentals softened on higher global supply and record urea exports from China.
Potash Corp. cut the top end of its earnings guidance range for 2015. Its shares closed roughly 0.8% higher at $27.06 yesterday.
Segment Review
Potash: Sales volumes remained essentially flat year over year at 2.5 million tons in the reported quarter. Sales volumes in North America slid 31% in the quarter. Shipments to offshore markets increased 18% as improved rail logistics and distribution capabilities led to record Canpotex shipments.
Average realized potash price was $273 per ton, up from $263 per ton from the year ago quarter as prices improved in most markets. Per-ton costs rose narrowly year over year as operational efficiencies and a positive impact from a weakened Canadian dollar was more than offset by reduced tons sourced from the company’s lower-cost mines.
Nitrogen: Sales volumes were flat year over year at 1.6 million tons. Mechanical challenges at the company’s Lima facility and curtailments in Trinidad related to natural gas supply led to an 11% reduction in volumes during the first half of 2015.
Average realized prices for nitrogen products fell to $334 per ton from $393 per ton a year ago as increased supply across major producing regions put pressure on benchmark prices and realizations for all of the company’s products. Per-ton cost of goods sold fell on lower natural gas costs across the U.S. and Trinidad.
Phosphate: Sales volumes skid 20% year over year to 0.7 million tons as absence of production from Suwannee River led to reduced tons available for sale in the quarter. Average realized phosphate price, however, rose to $553 per ton from $509 per ton on higher proportion of sales volumes from higher-netback feed, industrial and liquid fertilizer products.
Financials
Potash Corp. ended the quarter with cash and cash equivalents of $449 million, a more than four-fold year over year increase. Long-term debt was flat year over year at $3,710 million. Operating cash flow went up 6% year over year to $836 million in the quarter. Capital-related cash expenditures were $294 million for the quarter.
Guidance
Potash Corp., which is among the top players in the fertilizer industry along with Agrium AGU, Mosaic MOS and CF Industries CF, said that it remains encouraged by the strength in global potash demand, particularly in offshore markets. The company reaffirmed its expectations of global potash demand and continues to see shipments of roughly 60 million tons for 2015.
Potash Corp., however, trimmed the top end of its full-year 2015 earnings guidance range factoring in a decline in specific spot market prices for potash and expectations of a more subdued nitrogen market along with weaker pricing. The company narrowed its full-year sales volume expectations for potash to 9.3-9.6 million (from 9.2-9.7 million tons) and the top end of its potash gross margin guidance range to $1.5-$1.7 billion (from $1.5-$1.8 billion).
Potash Corp. backed its combined nitrogen and phosphate gross margin expectations for 2015 in the range of $1-$1.2 billion. For nitrogen, higher supply is expected to keep markets subdued this year compared with 2014. For phosphate, a shift to a more profitable product mix and supportive market fundamentals are expected to keep realizations higher in 2015.
As a results of these expectations, the company revised its 2015 earnings guidance to $1.75-$1.95 per share from $1.75-$2.05 per share expected earlier. For the third quarter, it expects earnings to be in the range of 35 cents to 45 cents per share.
Potash Corp. increased its estimate of income from offshore equity investments to a range of $190-$210 million from $180-$200 million.
Potash Corp., in June, made a private proposal to buy Germany-based K+S Aktiengesellschaft for €41 per share. While K+S rejected the offer earlier this month, Potash Corp. remains focused on engaging with and having constructive talks with the management of K+S. However, Potash Corp. has not decided to make a formal offer yet. It believes that the proposal to buy K+S balances the interests of investors and other stakeholders.
K+S is one of the biggest potash producers in the world with annual sales of around €3.8 billion (roughly $4.3 billion). The company has a global distribution network and production facilities across Europe, North America and South America. The acquisition, if eventually takes place, will allow Potash Corp. to further bolster its presence in the global potash market.
Potash Corp. is a Zacks Rank #3 (Hold) stock.
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