PotashCorp Earnings: 3 Things You Need to Watch Closely

Image source: PotashCorp.Image source: PotashCorp.

PotashCorp will report its first-quarter numbers on April 28.

Investors need to look beyond the headlines and keep an eye on three key updates in the earnings report to understand where the fertilizer

giant is headed.

Updates from China and India

Why the two markets matter

Data source: Fertecon, CRU, IFA, PotashCorp. Chart source: PotashCorp’s TFI World Fertilizer Conference report, September 2015

China and India are among the top potash consumers in the world.

China and India fix annual potash import contracts at the beginning of the year. There have been no talks for 2016 yet.

As the largest potash consumer, China sets the benchmark prices that potash producers can fetch from their worldwide contracts. BMO Capital Markets predicts China to settle for 25% lower prices this year.

Any further delay in contracts could compel PotashCorp to lower its full-year guidance.

The concerns

Outlook about the nitrogen markets

Why nitrogen matters Nitrogen is a major contributor to PotashCorp’s profits.

Source: Company presentation at the BAML Global Agriculture Conference, February 2015

How nitrogen hurt in 2015Lower nitrogen prices sent PotashCorp’s gross profit

plummeting 14% in 2015.

Source: Company’s Q4 2015 earnings presentation

The concernsPrices of urea, a key nitrogen fertilizer, are down

20% year to date. Prices of Diammonium phosphate have also lost

about 8% since the beginning of the year. PotashCorp last projected its combined nitrogen and

phosphate gross profit to be $0.7 billion-$0.9 billion in 2016.

Lower price realizations could compel PotashCorp to lower its gross profit guidance for 2016.

Cost of goods sold

Why it matters

PotashCorp’s cost of goods for potash jumped 26% year over year in Q4 on lower production volumes.

As a result, its potash gross profits slumped 69% and 12% in Q4 and 2015, respectively.

Potash COGS guidance

Data source: PotashCorp’s 2015 Annual Report

What to watchTarget savings: Reduce potash cost of goods sold

by $40 million-$50 million per year beginning 2016.

Outlook for 2016: $0.8 billion-$1.1 billion in potash gross profit after accounting for potential cost savings. That would mean 21% lower profit from 2014 at the higher end.

The concern: Lower potash sales could hurt POT’s gross profits further.

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