Potash Corporation of Saskatchewan Inc. (NYSE:POT)
Q4 2015 Earnings Conference Call
January 28, 2016 01:00 PM ET
Denita Stann - VP, Investor and Public Relations
Jochen Tilk - President and CEO
Wayne Brownlee - EVP and CFO
Stephen Dowdle - President of PCS Sales
Ben Isaacson - Scotia bank
Jeff Zekauskas - JPMorgan
Mark Connelly - CLSA
Andrew Wong - RBC Capital Markets
Chris Parkinson - Credit Suisse
Jacob Bout - CIBC
Adam Samuelson - Goldman Sachs
Michael Piken - Cleveland Research Company
Jonas Oxgaard - Bernstein
Joel Jackson - BMO
Don Carson - Susquehanna Financial
Matthew Korn - Barclays
Steve Hansen - Raymond James
John Roberts - UBS
Steve Byrne - Bank of America
Sandy Klugman - Vertical Research Partners
PJ Juvekar - Citi
Charles Neivert - Cowen and Co.
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the PotashCorp Fourth Quarter Earnings Conference Call. [Operator Instructions].
I would like to remind everyone this call is being recorded on Thursday, January 28, 2016 at 1 PM Eastern. I will now turn the conference over to Denita Stann, Vice President, Investor and Public Relations. Please go ahead.
Thank you, Anastasia. Good afternoon, everyone, and thank you for joining us. Welcome to our fourth quarter and year-end earnings call. In the room with us 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 that 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 now turn the call over to Jochen Tilk for some comments and then we'll go to questions.
Thank you very much, Denita. Good afternoon and thank you for joining our call. We appreciate the opportunity to discuss our fourth quarter and annual performance and what we see ahead for our company.
Let me just talk about our results. Weaker fertilizer prices characterized 2015 and contributed to lower quarterly and full year earnings of $0.24 and $1.52 per share. Declining ammonia, urea and UAN prices had the largest impact. Importantly and perhaps to a degree unnoticed, global potash demand remained relatively strong in the face of broader uncertainty. Global shipments of approximately 60 million tonnes were the second highest total on record, a reminder that even with less than ideal economic conditions, food production and soil fertility remain a priority for farmers.
While demand was strong, prices were less resilient. The decline was most visible in granular markets with prices declining more than 30% over the course of the year. Though softening occurred throughout 2015, the decline was most evident later in the year as we entered a seasonally slower period. As we saw this impact and consistent with our strategy, we advanced the closure of Penobsquis and took inventory shutdowns at our Saskatchewan mines during the fourth quarter, which contributed lower sales volumes.
In potash gross margin of $183 million for the quarter and $1.3 billion for the year declined on lower sales volume and realized prices. The weaker Canadian dollar benefited our cost position, but the accelerated closure of Penobsquis and the inventory related shutdowns late in 2015 pushed fourth quarter cost of goods sold higher than the same quarter last year.
In nitrogen, lower energy prices and increased global supply resulted in weaker realizations for Mark Connelly of CLSA most products compared to 2015. As a result, our gross margin for both the fourth quarter and the year declined significantly from last year's robust totals.
In phosphate, gross margin for the quarter was down slightly from 2014, but improved on annual basis, a stronger pricing especially for liquid fertilizer products more than offset reduced sales volumes and slightly higher costs.
Now, I’d like to talk about our earnings outlook. We enter 2016 amidst a subdued environment. That said we do not expect to repeat of the uncertainty and erosion that occurred last year. Even with more modest expectations for global economic growth, our outlook for potash remains positive and we anticipate global potash shipments will be in the range of 59 million to 62 million tonnes.
We expect North American shipments will increase this year with supported farm economics and distributors looking to replenish low inventories. While engagement with customers has been modest so far, we also know that the season for fertilizer application is right around the corner.
Crop economics also expected to improve demand in Latin America, although persistent challenges like credit availability in Brazil are expected to keep growth relatively modest.
The market that garners most attention this time of the year is China. While current inventory levels are expected to reduce annual shipments from 2015’s record levels, we continue to see strong consumption trends and the need for contract settlements to meet spring planting requirements. Assuming a more normal monsoon season in India this year, we see growth from 2015 shipment levels that declined due to last year's week monsoon. We believe growth in this market will continue even without meaningful subsidy change as farmers benefit from improved fertilizer affordability and continue to adopt compound fertilizers with high potassium content.
Lastly, demand in Southeast Asia is expected to grow modestly in 2016 as improved palm oil economics and substantial agronomic needs underpin consumption. While demand has been quite during the recent seasonal lull, we know that field applications coincide with a number of our key markets, including the US, China and Brazil, so we fully expect traction in the months to come.
For 2016, we forecast our potash sales volumes will be between 8.3 and 9.1 million tonnes. But we anticipate a more stable environment for prices, the sharp declines in the second half of 2015 will weigh on our average realizations as we enter the year. As a result of gross margin is forecast in the range of $0.8 to $ 1.1 billion.
In nitrogen, lower energy cost and increased global supply are expected to surpass prices. Improved operating rates at our US facilities and our recently completed Lima expansion are expected to increase our sales volumes in 2016. Despite an improved cost position from lower natural gas prices and higher sales volumes, we expect that weaker price environment will translate to lower gross margin.
Our focus on more stable feed, industrial and liquid fertilizer markets is expected to mitigate some of the impact of a weaker phosphate environment in 2016. We remain committed to improving reliability at our facilities and expect to improve production and lower cost to support gross margin at levels similar to 2015. Combined with forecast nitrogen and phosphate gross margin of $0.7 billion to $0.9 billion.
Taking these expectations together, we see the earnings of $0.90 to $1.20 per share in 2016 with first quarter earnings of $0.10 to $0.20 per share, which includes severance and transition cost related to the subsequent suspension of production at Piccadilly as well as some potash demand been deferred to the second quarter.
Let me talk a little bit about our strategy. 2015 reaffirmed that we must be mindful of the impact of global factors we cannot control at such as exchange rates and access to credit. Yet, it also reaffirmed that the things we do control like enhancing our competitive position, adhering to time tested potash strategy and maintaining a sound balance sheet, not only help us weather the storm, but strengthen us for the future.
We already have some of the highest quality, most efficient assets in the industry and we’re focused on enhancing our competitive position. We shift the production to our lower cost facilities as an important step in optimizing our portfolio. Recently took the difficult, but necessary step of the accelerating our Penobsquis mine closure and suspending our Piccadilly potash operations in New Brunswick.
Shifting production to Saskatchewan will lower our cost of goods sold by about $40 million to $50 million per year and reduce our capital expenditures to $185 million over the next 24 months. Importantly, it also aligns with our long-held strategy of matching supply to demand.
Rocanville is also an integral part of our optimization plan. We advance the final phase of expansion plans in 2015 and will be completing the head-frame conversion and expect to ramp up to full capability later this year. As our largest and most efficient operation, Rocanville is expected to further reduce our per tonne operating cost in 2017. For context, we estimate our per tonne cash cost of goods sold at Rocanville to be $40 to $45 US per tonne at today's exchange rate. It also signifies the completion of our expansion program. Going forward, our total annual sustaining capital expenditures are expected to be between $600 million and $800 million per year.
In the context of the current market environment, our board and management team have completed a spot for analysis of market and earnings expectations relative to our capital allocation priorities. While we remain confident in our proven business model and believe that current market uncertainty will subside given the reality of rising global crop demand and precise timing of improve conditions, and the precise timing from improved conditions is never easy to predict. In this environment, we believe a prudent approach one that balances competing interest of our many stakeholders, including equity and debt holders is the right one.
We are committed to a strong balance sheet and investment-grade credit rating and also believe in retaining a competitive dividend. In balancing these objectives, we have decided to reduce our quarterly dividend by 34%. We believe this level, which represents a payout ratio of close to 100% of 2016 earnings remains highly competitive, but also protecting the long-term financial health and financial flexibility of the company.
Looking forward, it can be difficult to look beyond near-term headwinds that may continue in 2016, but our long-term confidence is underpinned by food demand, the quality of our assets and strong market position. This global mandate will largely be met in the coming years by improvements in crop productivity, a challenge to that can’t be achieved without the products we produce. We believe that we’re uniquely positioned to respond in any market conditions. Our focus has been navigating recent challenges, but more important to strengthen our company for the future, by a) supporting our potash business model, b) enhancing our best in class assets and c) protecting our long-term financial health and flexibility to capture future opportunities.
We believe the steps we have taken, including the difficult decisions to suspend our New Brunswick operations and realign our dividend are consistent with these objectives, and would best position the company and its many stakeholders for the future.
Thank you for your time, and we look forward to taking your questions.
Thank you. [Operator Instructions] Our first question comes from Ben Isaacson of Scotia bank. Please go ahead.
Q - Ben Isaacson
Great, thank you very much. My question is on your dividend. You talked about in your press release the dividend going to approximately 100% payout ratio for 2016. Jochen, can you talk a little bit about whether or not that limits your flexibility in terms of being opportunistic with respect to buy backs or consolidation opportunities, at least without the use of debt and/or non-core asset sales?
Yes, I mean as you correctly you repeated payout ratio would be approximately 100% in 2016 this year. And to you question whether that limits our flexibility, the answer is not really because that's exactly the way we looked at it. We looked at everything from ensuring that our balance sheet remains healthy in terms of credit rating. We looked at it certainly from a sustainability of of that payout ratio, not dividend and we looked at it from a point of remaining flexible enough that we can contemplate other opportunities. And we still have a fair amount of room because we remain confident in the upside of our business. So as we’re mindful of the current economic conditions, we certainly remain confidence that there will be traction and that we can see the upside opportunity down the road.
Our next question is from Jeff Zekauskas of JPMorgan. Please go ahead.
Thanks very much. In your materials, you said that you expect potash demand next year to be 59 million to 62 million tonnes. What about the first quarter demand for the industry? Do you expect it to be above 15 million tonnes or below? Do you expect it to be a relatively strong quarter or a weak quarter or can't you tell?
Yes, so I will give you the general review, Jeff, and then the my colleague Stephen is well armed with the level of detail that we can probably follow-up on. But we essentially look at relatively flat carry forward from 2015 and 2016, so the difference really is, we expect a little stronger US and a little more modest demand in China because of our inventories and then South America. The rest of it is relatively flat. First quarter obviously is very, very seasonal and the traction depends on when the weather is ready for planting in US and that wouldn’t be fundamentally different in other parts of the world. So the timing of that is not predictable and you will have noticed that in the Q1 guidance for 2016, we say 10 to 20 would qualify that with some deferred sales, which is really the seasonal impact. So that's the high-level picture. And Stephen, if you can put some resolution on that please.
Yes, I think one of the factors that determine the volumes in the first quarter, China always plays a role on that, because typically it’s during a time when a new contract is being negotiated. And this year, what we expect to happen is that that negotiation will be concluded in a relatively later period compared to other years. The main reason for that being that Chinese New Year is quite early this year and it was clear, I think to the Chinese that with the market being the way it is that this negotiation would not be a quick negotiation. And to make sure that they had enough potash in place for the start of the spring planting season, they continue do import product very heavy during the fourth quarter. In fact, we just got data here this morning that China imported 1.3 million tonnes in December, bringing their 2015 net imports to exceed 9 million tonnes for the first time. In our estimate, shipments in China are over 15.5 million tonnes during 2015. So it speaks to quite robust demand growth in China. And yes, some of that certainly was in anticipation of a settlement after Chinese New Year, which is certainly what we expect. But I think that the comments that Jochen made with regards to our underlying optimism about demand in 2016, is quite strong in 2015, looks like it was the second best year for potash demand. And we expect basically in all markets, and China might be one of the markets with a question mark because a lot of the ultimate demand in 2016 in China will be determined by the timing of a settlement. But we expect in almost -- in most other major markets that we will see improved demand in 2016 compared to 2015, but the first quarter will be a slower quarter and that largely will be influenced by the timing of a China settlement.
Thank you very much. It’s a very thorough answer.
Our next question is from Mark Connelly of CLSA. Please go ahead.
Thank you. Jochen, there isn’t a lot of evidence that lower prices helped demand much this year. It just seems like there is always something else offsetting whatever elasticity benefit, so do your estimates for the coming year assume that there is any significant benefit from elasticity?
Good morning, Mark. Not really. I think it is really a carryover from this year and what we had experienced and as you say correctly, we look at fertilizer price certainly potash price toward Q4 of 2015 and affordability is obvious and you look at some expectation of elasticity, but then the headwinds that we saw in Brazil exchange rate and other parts of the world, credit and seen to offset some of that. But our assumption right now is that there is a carry-forward of the same or similar demand with some of the nuances that Stephen described. And that fertilizers are very affordable, but demand would be fairly consistent with what we saw.
Okay, that’s helpful. Thank you.
Our next question is from Andrew Wong of RBC Capital Markets. Please go ahead.
Hi, thanks for taking my question. I just wanted to ask about the dividend again. So regarding dividend payout ratio, it’s close to 100% this year. CapEx drops off next year a little bit, so that gives you a little bit more breathing room, but the payout ratio is still quite high. Could you talk about your confidence around the dividend sustainability longer-term and does this reflect your view that maybe your nutrient prices are at least flat-lining and potentially improving in the future from this point forward? Thank you.
Thanks. Thanks of the question. Let me just add two parts to that response. One is process and then why we think that was the right decision. In the process, we spend a fair amount of time as I implied in my speech and led by our team here with the board in reflecting and our objective was as I said before to protect our balance sheet but also ensuring that the decision taken reach to a sustainable dividend and clearly one that we can carry through over the years. And that is supported by just where our balance sheet is right now.
As you said capital is coming off. I think we have taken some very constructive steps toward reducing our cost, consolidating our production portfolio in potash. But it also - and that's important and also reflects our confidence in the business, We took a conservative look at the next couple of months and took that decision, but we also wanted to be sure that we don’t erode our confidence in the business. So it's a combination of I think a very prudent and very consistent step that gives us a fair amount of breathing room, but also maintaining a payout ratio that produces a sustainable dividend and is underpinned by the confidence in the business.
Okay, thank you.
Our next question is from Yonah Weisz of HSBC. Please go ahead. Mr. Weisz your line is open. Our next question is from Chris Parkinson of Credit Suisse. Please go ahead.
Perfect. Thank you very much. How should we think about your respective production rates of your mines post Rocanville’s Campotex run during the second half of ’16? Is it safe to say that you will continue to run that mine all out while calibrating Allan Cory around that in order to minimize per unit costs? Thank you.
Thank you, Chris. Good afternoon. Yes, that would be the correct assumption. We will run our Rocanville mine to the extent that we can maximize the benefit. As I said, we expect our cost to be at $45 a tonne, that’d be our most efficient operation and then we would balance the others in Saskatchewan according to our sales predictions.
Perfect. Thank you.
Thank you, Chris.
Our next question is from Jacob Bout of CIBC. Please go ahead.
Maybe just a follow-on on that question, and a question about your operating cost for the potash division. So in an environment of 8.3 to 9 million tonnes of potash sales volumes, is it possible to get your potash operations down to $80 a ton and then how should we think about costs ramping down as Rocanville ramps up?
Yeah, thank you very much, Jacob. We are actually looking at the number, and I am not going say it because we haven’t stated one. So I will only refer it to that directionally. The one that we did share was the $40 to $45 and our costs that we published, it's a little impacted this quarter because of the inventory shutdowns we took and some of the costs related to the Penobsquis closure. But going forward it will be merged obviously with the - and this would be post Rocanville ramp up with the benefit of the lower costs of Rocanville and then the Saskatchewan portfolio. So directionally, we are going toward that run, but we are not going to give a fixed number at this point in time.
Thank you, Jacob.
The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
Thanks, good afternoon. Maybe try and take the dividend question a little bit differently. In the past, Jochen, the company has articulated a $200 FOB mine Saskatchewan potash price on 10 million tonnes, sales of 10 million tonnes of potash and 1.2 billion of nitrogen and phosphate gross profit as kind of where the dividend payout at the prior level was sustainable. We would like to get a better sense of where you think those sensitivities lie today. And specifically on the nitrogen side and may be comment on how your nitrogen market outlook has evolved in the last 90 days given some very sharp falls in ammonia, urea and UAN prices. Thank you.
Thanks very much. Really a good question. I think you answered it actually because you pointed out that nitrogen has definitely has come off and really the biggest difference I can say in some of the previous assessment where we put out the sensitivity toward the dividend is nitrogen and we have looked at that and realized that in our 2016 guidance and that led us to look at that obviously in aggregate together. So that's whether the difference lies.
In terms of the outlook at nitrogen very broadly before I turn it over to Stephen, we've seen obviously a much more input cost and more competitive environment as more production coming on. And it is really prolific pipeline internationally and that certainly differentiates the year on particularly in ammonia. So that has an impact and we don't see big changes happening and so we took that into consideration. Stephen?
I think the only other comment I would add is we’ve seen this happen in the markets on numerous occasions that when you have a bit of a step change and this year we are going to seeing a bit of step change in nitrogen and that's with North American capacity coming on. In anticipation, the market kind of reacts even before the reality because what will happen is that there is going to be a disruption in trade flows and trade patterns. They are going to have be realigned and the market is anticipating this. And this is part of the weakness that we see. Of course it is being supported by lower energy costs and that definitely contributes to it. But also there is a market psychology that is already starting to adjust to changing trade flows and trade patterns.
Thanks very much.
Our next question is from Michael Piken of the Cleveland Research Company. Please go ahead.
Yeah, Good morning. Just wanted to touch base a little bit more in terms of the trade flows to Brazil and specifically with the shutdown of Piccadilly what that might mean for your agreement with Heringer and whether those tonnes would then go through Campotex or if there is still unique to yours and how that work from a transportation and cost perspective. Thanks.
Thank you, Mike, and good morning. The answer is yes. Those tonnes would go through Campotex and last year some of those tonnes have come through Campotex so that’s not a new set up which is that they will come exclusively from Campotex with that change. In terms of pattern whether the tonnes are shipped to the West or the East port, the Port of St. John in the east is a port that is now available to Campotex and depending on I think availability and what’s most beneficial, they will make that choice, but it can go either direction.
Our next question is from Jonas Oxgaard of Bernstein. Please go ahead.
Hey, good morning. So when I am looking at your guided gross margin in potash and your volumes, I back into a price of about 250 for the year. So first question is that about where you are, but the follow up questions why 250? Can you talk a little bit about the assumption that goes into that and how you see the evolution over the year?
Yeah, maybe you can just - so I get the reference correctly. If you could just repeat the question a little bit in terms of how you - what number are you back calculated.
Well, you guided to your margin in the potash segment, you guided to how much volume you intend - you are thinking you are going to shift and we know your cost structure roughly, we can back into what price you need to realize to get that gross margin. We end up with about $250 per tonne realized to you.
Thanks for the question, Jonas. So we can’t reconcile the math and we don’t disclose the price that we’ve used. So that’s where the discrepancy and we normally don’t say that. So we can’t confirm that, but we also don’t say the number that of the potash price that we use.
Okay. Can you talk about how you think the price evolution will look over the year?
We would like to know that, we don’t - obviously we don’t have a crystal, but let’s talk about how we think the year will play out and then directionally. So the first big milestone I think we all agree is the contact negations in China, the settlement and it’s a question of timing and the number. We don’t know when the timing is. We expect it to be after the Chinese New Year which is early February. So somewhere after middle of February and then we don’t know. In terms of price, we don’t know that either, but you can imagine what the discussion might be given on where spots are in Southeast Asia and that’s a known figure. So what we see is that there will be traction throughout the year and the traction that we foresee is really when the season kicks in, because it is a seasonal business and on the volumes that we predict. And what happens at that point we can’t, we don't know, but that's where we have our confidence in the business. I'll let Stephen add a few more words to timing.
Obviously the market and prices are impossible to predict, but what we can see is that we’ve went through a period of disengagement and really that happened during the fourth quarter and we will continue at some point into the first quarter, but we are going to get into a period of engagement here and there is a scenario unfolding here that the catalyst that is going to bring people to engage the market will be a combination of seasonality that you can’t wait any longer. And also getting some price clarity and certainly China contract will provide some price clarity to the market. But underline all this is strong demand. So we are very confident that we are going to get good engagement in the market, it is just a matter of time. And there certainly is the scenario unfolding that that engagement could occur in all major markets at the same time.
Okay, very good. Thank you. Jochen, I don’t know if you knew this, but if you take a big lump of potash and you put enough pressure on it, it will actually turn into a crystal ball.
We’ll try that right away, we’ve got lots of potash here. So that’s for sure. Thank you, Jonas.
Glad to hear. Thank you guys.
Our next question is from Joel Jackson of BMO. Please go ahead.
Okay, I guess I am going to follow on. Okay, I am going to ask you question you have been asked a lot repeatedly last year and a half and it’s one of your latest thoughts. So if potash demand globally sort of maintains this oscillating, restocking, destocking, restocking, destocking kind of flattish range, with the new supply coming on from competitors, I mean, are you willing as a company here to get to sell lower and lower potash volumes to balance the market and at what utilization rate does that not make sense anymore, because you are seeing, but you reset your dividend here to the certain level of a dollar share based on the idea that you expect a rebound from here.
Thanks, Joel and good afternoon. So clearly on the strategy and I think we are specific that we will continue in the - our long-term and improving strategy to match demand - to match supply to demand. So we feel that is the right position going forward. In terms of new production coming on online, we think there is - it will take some time. We don't think that's imminent and we believe that growth that we fully expect in the years to come will balance that. So we actually think that we are in a good position. We’ve made consolidations, optimizations from a cost and from a production perspective. We think that supply that is slated to come on will come in time and that growth will actually balance that. And we have the right strategy for that. So the answer to your questions is, yes.
Our next question is from Don Carson of Susquehanna Financial. Please go ahead.
Yes, Jochen, just wanted to clarify a few things, so when Rocanville is up and running, would you anticipate that you would do a permanent closure of some of the smaller Saskatchewan mines similar to what you'd done in New Brunswick? And then secondly just on price, I am not sure I heard your answer, but do you think that the current spot prices whether it’s granular in North America or Brazil or spot in Southeast Asia have stabilized and that contract pricing will be based off of those stabilized spot prices?
Good morning, Don. No, we do not anticipate the closure of one of our Saskatchewan operations. In fact, when we look at our mid to long-term run rates, we think we can very well balance how they work together and so the answer to that is, no, we do not anticipate it. The answer to your second question is whether or not potash prices have found its floor and there is traction. Again, it goes back to the crystal, but we certainly hope so, because the whole matter of traction by the demand is something that we feel confident about and Stephen described the slow engagement today in some of the countries.
And I said that in my remarks, but when you look at the three countries that combined use more than 50% of the world's potash, China, Brazil and US, all three of them, as I said, represent more than 50%, all three of them in pretty slow for various reasons. And but yet there is a coinciding peak of application that happens. And on the expectation of similar demand compared to last year, that traction will kick in and that’s the moment that will define direction where prices will go.
Our next question is from Matthew Korn of Barclays. Please go ahead.
Hello, everyone, thanks for taking my call. So I will change lanes a little bit here. Looking at the USDA’s projections, they are expecting corn stockpiles in the US to pick up slightly. It would appear though there might be some risk based on slower pace of experts, same FX in emerging markets phenomenon that you are seeing also in the nutrients base. Global corn stocks appear to be trending up from levels that are as high as we’ve seen for years and most whom I speak to on the input side think we are going to see corn acres this year. So I just wanted to know are you concerned at all about any crack in grain and oilseed prices if weather turns out to be somewhat normal until the spring and how much of a risk is that that could create an additional knockdown effect on NPK prices. Thanks.
Thank you, Matthew. Really good question. We talk about that quite a bit and as Stephen will point out and he will take over in a second on this. We have three bumper crops in a row, three years, so exceptional, and when you look back historically, that is in operation, I mean not suggesting anything going forward, but we did see and we’re seeing an impact on the weather pattern more perhaps than we have in last years. We agree on your assessment on corn acreage and then certainly exchange rates and so on, but at the end of the day, much of that depends really on the quality and volume of the crop and the impact on prices.
So with that, Stephen if you want to add more color to that?
Well, in the US, which of course is -- the core crop is very important to fertilizer our consumption in North America, the stocks-to-use ratio is at a level around 13% and certainly the support of corn prices that do incent growers to use inputs and as you point out, as USDA points out, even a slight expansion in expected corn acres this year. So, the underlying economics of corn right now are, they’re pretty healthy.
We have had -- as Jochen just mentioned, three very strong corn crops here and we also know that we’re in a different kind of a season right now with El Niño weather patterns having a strong influence in many parts of the world and whether this portends a fourth record crop in a row or whether this breaks that streak or not, that’s something that people are wondering about as well. We know that we don’t produce record crops year-after-year-after-year-after-year and it doesn't take, right now, a significant impact one way or the other way that would have an influence on that stock- to-use ratio.
Globally, it's pretty steady. Well, we’ve seen about a 1% increase in the stocks-to-use ratio year-over-year for corn. So we're not really anticipating from just that supply side and one thing that we have seen and we’ve seen this something that does occur year-after-year-after-year is that there is growth in consumption and that’s something growth in consumption of these grains and that’s something that we expect to continue this year.
Our next question is from Steve Hansen of Raymond James. Please go ahead.
Yes. Good morning. Just as a follow-up to the discussion on the Saint John terminal being folded in Canpotex’s capabilities, and I suppose the clear willingness to make some hard decisions about your operating capability and optimization, just curious whether you guys are contemplating any larger strategic shifts in the markets that you service globally with the objective really optimizing your logistical and distribution costs and/or perhaps even just intensifying the efforts on the end markets that you deem most critical going forward?
Yeah. Thanks for the question, Steve. Not sure if I understood all the components, but I think your question is whether or not we will optimize logistics and internationally obviously this is really a question for Canpotex but I’ll speak on behalf. The addition of an east port for Canpotex is really a question whether or not it’s more economic to shift -- to ship to the west through Vancouver or Oregon Port or whether it's more economic to shift to the East and that depends on destinations, so there are parts of the world that would certainly suggest you should go through the east and there are parts that would suggest to go through the West.
And that is a function not only of distance, but also of oil prices and the cost of rail, cost of shipping and so on and that’s all being worked out and obviously with the objective to optimize end get the greatest possible benefit of making those choices.
In terms of beyond of a major strategic shift, I would say, no, I think we have a very proven model, one that Potash Corp and Canpotex has demonstrated over there years, so there is opportunity, there is always opportunity to improve, but I wouldn't qualify it as a major shift.
Our next question is from John Roberts of UBS. Please go ahead.
Thanks for taking my call. Jochen, you recently made a comment that you would be interested in increasing your position in your JVs, was that comment made in the context of something nearer term, or do you think that current industry conditions might move things near term?
Thanks, John. I'd say this was a generic question and the question are you interested in M&A, I think the answer tends to be not just biased, but yes, of course we are always interested but it depends and it really is in the context of that. If an opportunity arises, we’ll always look at it and we’re not specific on any of them. And it wasn't meant to suggest any timing on it.
And then the comment just made about corn profitability being relatively good, could you extent that comment to the emerging markets like Latin America, where I think the cash crop margins have improved significantly with the depreciated currencies, but is the financing issues, the ability of the farmer to access working capital still a major issue there?
Well, in Brazil, it definitely was, but things have improved, so the – and this is mostly for the distributors and the fluctuation in currency and the shifting valuation of inventory really was one of the biggest issues and distributors have adjusted to that, whether there is just some hedging or pegging fertilizer prices on a more frequent basis on a daily basis. Stephen, any further comments on –
When you look at what happened in Brazil last year, it was a second best year in terms of just looking at, let's say from potash imports and if you look at all the turmoil that that country was going through and the agricultural sector was really a bit of a shining light in the country and but needless to say, credit issues were really top of mind and it's one of the reasons why shipments fall down towards the end of the year in the fourth quarter and have started off the year on a slow pace as part of the kind of disengagement of the market that we spoke to earlier.
But looking forward, what we see and what we expect in Brazil and this is some of the other Latin American countries as well that are also producing crops for export is that we do expect that that underlying demand is still going to be very strong and we’re not calling for significant growth in Brazil this year because we don’t know exactly how all these headwinds are going to play out, but we do expect it's going to be right now, in a worst-case scenario flat to this year, and most likely we will see some growth in 2016.
Our next question is from Steve Byrne of Bank of America. Please go ahead.
Yes. Thank you. Stephen, I believe I heard you earlier in your remarks increased your estimate of total Chinese imports and domestic production of potash, up to 15.5 million tonnes, if I heard you right, is that roughly 5 million tonnes up from where it was just a few years ago, and if so, is that reflective of increased application rates or what's your confidence that that’s sustainable versus just a big inventory build?
Actually, the number -- our estimate is really 15.8 million tonnes for 2015, that's net imports of 9.1 million tonnes and then with the domestic production. The growth is, I mean, it's coming from a combination of things, but when you consider that over half of the potash has been used in China, it's been used in higher value crops like vegetables and fruits, that's really been one of the drivers of the growth in consumption. We've had a long-held view that China was going to be a 20 million tonne potash market and that would be something that would be consistent with the agronomic needs. And what we would say today is that China will be a 20+ million tonne market to satisfy the agronomic needs.
And those cash crops largely have been -- the growth in those crops, the growth in demand for those crops has been largely a function of the growth in the Chinese economy and the growth of the middle-class and greater disposable income, but we are also seeing in the rest of -- the broader agricultural and particularly for the grains, whether it be rice, corn, soy beans, wheat, we are seeing in the Chinese place a greater emphasis on balanced fertilization and the way that they are doing that is they’ve seen the compound fertilizer sector grow tremendously just in the last five, six, seven years and that has really fuelled growth in potash demand because you don't build a compound plan and just make N&P, you make NPKs and you need the potash for that, and that's really been a big supporter of potash demand growth in China.
Thank you, that's very helpful and can you just comment on how close you see pricing right now in various markets to marginal cost of production for some of the marginal players?
Well, we don't know everyone's marginal cost, in particular given that most competitors have multiple asset multiple operations, multiple minds so and so we can't really answer that. In terms of how close it is, not sure if, we can talk about the markets and some of the cost environments there and then you would have to reconcile that against your assumption of where other producers are.
Our next question is from Sandy Klugman of Vertical Research Partners. Please go ahead.
Good afternoon. So you're projecting that global potash shipments would be flat to slightly higher in 2016, but the low end of your company guidance reflects of 5% year-over-year decline. I’m interpreting that correctly in that dynamic does play out, where do you see some of this lost share potentially going?
In terms of geography or…
I guess geography or producer. I mean, in the event that you are down 5%, do you see global shipments coming in below the 59 million to 62 million metric tonne range?
No, I mean, not really. I think when we look around at the markets, we have seen, for example, we saw Brazil decline in 2015 from a record year in 2014. We saw North America off approximately 2 million tonnes in 2015. We saw growth in China, as we talked about. When we look at these large markets and we're projecting into this year, we see that we are going to have a recovery here in North America, we think that Brazil as I say, at worst, might be flattish, but we do think that we are going to see growth in Brazil.
And when we look at Southeast Asia and of course it’s the oil palm industry that drives that market and CPL prices that remain very strong, that's been an area that was significantly impacted by El Nino, the USDA's projected flat CPL production in Indonesia and that's the first time that that's happened in a decade. So we expect 2016 to be -- demand in 2016 to be supported by CPL prices, which is what we see right now.
We know that India had a substandard monsoon in 2015 and given the expectation that you would have a normal monsoon in 2016, we expect to see some recovery in Brazil. So our outlook overall is not for a decrease in demand in 2016, but we think the conditions are going to be supportive for even growth in demand this year.
Okay. And then, just as a follow-up, if 2016 earnings exceed your expectations, where might we expect to see some of the excess capital that would have gone to the prior higher dividend allocated?
Well, it's 100% payout ratio in 2016. So we obviously balanced it and it's really the adjustment as we've looked at our projections for 2016, and most of the difference is nitrogen, so it really is an adjustment to market conditions for 2016.
Okay, I guess the question was really if your earnings exceed your expectations. If the environment improves materially in 2016, and you have excess cash flow that would've gone to a higher dividend, how should we think about the capital allocation priorities, would it just increase your liquidity buffer or are there other users?
I think John, that would be a great problem to have, and we’ll most certainly look at the best way to do that. I fully get the question, but if that happens, I think we will all be very content and find a good way of allocating the capital in a way that creates the best value for our shareholders.
Okay. I think it's a high-quality problem to have. That's the fair answer. Thank you.
Our next question is from PJ Juvekar of Citi. Please go ahead.
Yes, hi, good afternoon. Jochen, you’re choosing to stick with price or volume strategy and given that your mining background, why not run like a miner to the full extent and I'm sure you talked about it, so maybe you can explain that strategy, just related to that, there is -- can you talk about Russian ruble devaluation and given that Russians are running full out to maximize their production? Thank you.
Thanks, PJ and good afternoon. Just I'll start with the back and, we don’t talk about our competitors and it wouldn't be appropriate to talk about them or even suggest what they do. So, I will clearly stay away from that. The question on our own assessment is we have a very, very cost competitive, high quality set of asset of mines that we consider best in class and we believe the ability to balance supply and demand, which we can is and has been the best strategy and we will look at that from a SNB supply and demand perspective, how we project growth project, how we project what we think supply in the future will be. Then on that basis we determine that to be the best strategy for us.
Our next question is from [indiscernible].
Thanks. Jochen, one could argue the board should have cut the dividend by more than 34%, placed a greater emphasis on share buybacks, just given the current share price, your positive long-term outlook and the 6.5% yield still seems very generous in the context of what other companies are paying out, could you elaborate on why this didn’t happen?
Yes. Thanks for the question. I don't want to get into all the detail of the discussion, but I can tell you that it was a very, very thorough analysis and we've looked at all options, we’ve assessed ups and downs and risk, and on that basis, we concluded that was the best outcome, and we've done it on a balanced approach because we still want to be sure that we have a sustainable dividend that's consistent with the current market conditions, but also our expectations and we believe that was the best for our stakeholders and I include shareholders, debt holders and certainly employees as well. So, on balance, on that balanced approach, we found that to be the right level of alignment.
Stacia, we have time for just one more question.
Our last question comes from Charles Neivert of Cowen and Co. Please go ahead.
Afternoon guys. Thanks. This is sort of a long-range thinking, but legacy is not that awful lot away. Are you guys thinking about how you are going to handle that one as it comes around, I'd be surprised if you are developing some strategy around that, new addition when it shows up? I'm assuming late ‘17 early ‘18, but it's never too early to prepare.
Charlie, thanks. We are obviously aware of it, we don't know what the timing is exactly. I think that's what is in the public domain. Again by then, markets will have grown and we think that our current strategy takes that into account that we have time to see that come through and by then markets will have grown and at the balance still within the range of what we think is supportive of our strategy.
Thanks, Charlie and thank you everybody today for joining us. If you have any further questions, please don't hesitate to give us a call at the office this afternoon. Thank you.
This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!