Potash's (POT) CEO Jochen Tilk on Q4 2014 Results - Earnings Call Transcript

Jan. 29, 2015 7:45 PM ETNutrien Ltd. (NTR), NTR:CA1 Comment
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Potash Corp./Saskatchewan (USA) (POT) Q4 2014 Earnings Conference Call January 29, 2015 1:00 PM ET

Executives

Denita Stann - VP, IR

Jochen Tilk - President and CEO

Stephen Dowdle - President, PCS Sales

Wayne Brownlee - EVP and CFO

David Delaney - EVP and COO

Analysts

Ben Isaacson - Scotiabank

Mark Connelly - CLSA

PJ Juvekar - Citigroup

Vincent Andrews - Morgan Stanley

Joel Jackson - BMO Capital Markets

Adam Samuelson - Goldman Sachs

Jacob Bout - CIBC

Chris Parkinson - Credit Suisse

Kevin McCarthy - Bank of America Merrill Lynch

Michael Picken - Cleveland Research Company

Yonah Weisz - HSBC

Tim Tiberio - Miller Tabak

Operator

Good afternoon, ladies and gentlemen and thank you for standing-by. Welcome to the Potash Corp Fourth Quarter Earnings Conference Call. At this time all call-in participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would like to remind everyone this conference call is being recorded on Thursday, January 29, 2015, at 1:00 p.m. Eastern Time.

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

Denita Stann

Thank you, Brock. 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; David Delaney, Executive Vice President and Chief Operating Officer; Stephen Dowdle, President of PCS Sales, Joe Podwika Senior Vice President and General Counsel, Mark Sakia, President of PCS Potash; Grace Scully, President of PCS Nitrogen and Paul De Kock, President of PCS Phosphate. I’d like to welcome all those who have joined us today. 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 Web site, 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 for comments and then we’ll go to questions.

Jochen Tilk

Thank you, Denita. Good afternoon and thank you for joining our call. Before I begin, I would like to acknowledge with great sadness the passing of an employee and colleague, Keith Stormant as the result of Monday’s incident at our Swift Creek phosphate mine. I speak for the entire Company in extending our deepest condolences to the Keith family, and I want to reinforce that the safety of our employees remains our foremost priority.

Today’s discussion closes out 2014 from a financial standpoint and provides us with the opportunity to look ahead at what the New Year could bring for our markets and our Company. I would start with our performance. When it came to earnings, we ended the year on a positive note. In the fourth quarter we delivered $0.49 per share, exceeding the midpoint of our guidance range and raising our annual total to $1.82. Supported by stronger market fundamental, we saw improved contributions from all three new trends. Contrasting the challenging conditions in late 2013, our quarter potash earnings reflected a stronger market environment. In fact, our gross margin for the quarter was the high watermark for 2014. On a comparative basis, we had improved volumes, higher realizations and significantly lower production costs.

Sales volumes topped our expectations. Canpotex achieved both, a strong quarter and a new annual shipment record. Our full year North American shipments also reached an all-time high, as we worked to meet robust customer demand for the final three months of the year. Our price realizations also reflected a continuation of the recovery that unfolded throughout 2014. From a cost standpoint, the year ended with our Potash team delivering on the first milestone of our multiyear reduction target. Our per ton cash cost decline by approximately $17 compared to 2013 after removing the favorable impact of a weaker Canadian dollar and Potash royalties.

In nitrogen another healthy quarter pushed our gross margin for the year above the 1 billion mark for the first time in our Company’s history. The biggest driver was the robust pricing backdrop, but our sales and operations teams also played a significant role. In 2014, both our production and sales volumes climbed markedly higher. Even with our Lima operation impacted by an extended maintenance shutdown late in the year, we produced more nitrogen tons in 2014 than in the year before.

In phosphate, while we still have opportunities to improve, performance of fourth quarter gross margin represented the third successive quarterly increase in 2014. Once again, our results reinforce the value of our specialty products as they contributed the majority of our gross margin during both the quarter and full year.

When we look ahead and consider what 2015 might bring, we believe part of the answer lies in how 2014 unfolded, especially in potash. Global shipments were much better than expected. Strong consumption and replenishment of distributor inventories helped raise demand to more than 61 million tons, a significant increase from the previous record. This year highlighted that demand can sometimes catch you by surprise and it's important to be ready.

Estimating what portion of that increase is consumption growth versus inventory replenishment is unfortunately not a perfect sign. We know some distributor restocking took place. An important part of that was out of necessity, given many buyers began the year with very low levels. But we also believe that meaningful growth in underlying consumption occurred.

For 2015 we see global potash shipments more closely reflecting consumption of 58 million to 60 million tons. As we’re looking on our specific markets, we believe conditions remain supportive. Our North American order book is in good shape and provides reasonable visibility for the spring season. We’re now shipping against our winter fill commitments and are encouraged of what we believe is good movement of product to the farm level.

In Latin America, we ended 2014 on a quieter note as the region’s key planting season came to a close. That said, the Safrina crop is just around the corner and buyers are beginning to reengage. We have a good order book in front of us for both Canpotex and New Brunswick product that we’re now shipping against. For 2015, we see shipment slowing from the record selling pace but we still expect imports to remain at elevated levels.

Not surprisingly, the next contract with China is receiving a great deal of attention. Negotiations are ongoing but specifying settlement timing or terms would be presumptions on our part. What we can say is that our current read for 2014 suggest a step change occurred in Chinese consumptions. This coupled with an upcoming planting season leads us to believe that having product in place will be top of mind.

In January, Canpotex signed a new MOU with Sinofert. While the new agreement will see Sinofert remain central in our distribution platform for red standard [ph] grade product, Canpotex is also looking to grow and diversified customer base for other potash products. This includes to grow on [NPK, well] [ph] planned and industrial markets.

In India 2014 marked a reversal of the downward shipment trend of recent years. Total imports for the year estimated to have reached 4.4 million tons surpassing the upper end of our expectations. While we have yet to see meaningful policy changes we believe growth in demand is slowing occurring as stick of stock eases [ph] after the abrupt change of India’s potash subsidy in 2010. With virtually all of Canpotex’s contracted volumes now shipped we’re now working towards a new agreement to meet customer’s need in this key region.

And finally Southeast Asia, this is a market where inventory levels may slow shipments early in the year. But given new [ph] and intensive crops and supportive crop prices, we remain confident that demand will improve as the year progresses. This demand outlook is one part of how we see the market unfolding in the coming year. But the supply side of the equation is also important. 2014 was a reminder that operating challenges can come in many forms, from poor conditions to major equipment failures, water inflows and weather related issues.

And while it is difficult to predict and could impact any of the producers, we see the potential for 2015 to bring some of these same challenges. Coupled with extremely low producer inventories, we therefore believe these conditions could present opportunities for the few producers that have capability to respond. With nearly 11 million tons of capability available in 2015, we believe PotashCorp is well positioned should opportunities emerge. At the same time, we will continue to carefully manage our operations to respond to whatever market conditions we encounter.

For 2015 we forecast our sales volumes will range between 9.2 million and 9.7 million tons. We believe the combination of strong volumes, higher average price realizations and slightly lower cost will result in 1.5 billion to 1.8 billion of gross margin from our potash business. Following an especially buoyant nitrogen market in 2014, we could see a slight pull back this year. We see our volumes largely unchanged with Trinidad gas curtailments unlikely to improve and additional tonnage from our Lima expansions not online until late 2015. But we expect to benefit from lower gas cost in both the United States and Trinidad. Market headwinds are likely to prevent repeating the record gross margin levels of 2014.

In phosphate we expect stronger gross margin results. The curtailment of some capacity at our at our White Spring’s operation in 2014 will result in lower sales volumes, but a shift in sales mix and lower costs should benefit our bottom line. Additionally, accelerated depreciation and other closure related cost incurred in 2014 are now behind us. Combined these variables in our nitrogen and phosphate segments are expected to result in gross margins of $1.1 billion to $1.3 billion, relatively flat with 2014.

When we bring these expectations together, we see a stronger earnings environment for 2015. For the full year we forecast a range of $1.90 to $2.20 per share with first quarter guidance set between $0.45 and $0.55 per share. We're encouraged by the growth potential we see. Yet we're also mindful of some of the challenges within the broader macro environment. Despite a strong U.S recovery, weakening growth in other regions continues to hamper the global outlook. This backlog [ph] has weakened major currencies relative to the U.S dollars and subdued commodity markets.

While crop prices have moderated, they have generally weathered these storms well, but we know that conditions can change. It is the reason why we must take a thoughtful and measured approach to our business, seeking to understand and influence those things that are within our control. Over the coming months our team will continue to review and evolve the Company's strategic objectives. While this is an ongoing exercise, in 2014 we completed a review of our potash and nitrogen businesses.

In Potash, it reaffirmed that our long-term success is contingent of being able to capture growth opportunities while also positioning ourselves as a low cost producer to succeed any market scenario. Having the capacity is the first step for growth which is largely in place. Our focus also includes managing our operational flexibility and further enhancing our cost position. We're already seeing these benefits in our lower cost profile and enhanced operating capability for 2015.

In nitrogen we expect U.S will remain in an advantaged cost position over the coming years. With a well-positioned portfolio of assets we believe nitrogen is core and will remain a key contributor to PotashCorp's long-term earnings. Our priorities are improving our operational reliability and bringing our Lima expansions online and working to minimize the impact of natural gas related production curtailments in Trinidad.

We will also look at growth. Now our team is continuing to explore lower cost quick payback U.S bond fill [ph] opportunities that can deliver high rates of return. After a challenging year in phosphate, our focus is on continuous improvement. We have identified a number of initiatives designed to improve the reliability of our operations and help define our path forward. We're encouraged by the initial results and expect better cost and margins in 2015.

Given our potential to grow earnings, coupled with declining expansion spending, our Board and management team are continuing to review our cash flow potential and opportunities to generate superior shareholder returns. While this process is ongoing, our announcement yesterday to increase our dividend is a sign both, the confidence we have in our business and the importance we place on returning capital to our shareholders.

With that, you have our views on what we believe lies ahead for both the broader fertilizer market and our company in 2015. Thank you for your time and attention today. I'm joined by the rest of PotashCorp's management team and we'll be happy to address any question that you may have.

Question-And-Answer Session

Operator

Thank you. [Operator Instructions]. The first question today comes from Jeff Zekauskas of JPMorgan. Please go ahead.

Unidentified Analyst

It's [indiscernible] for Jeff. I was wondering whether -- on Slide 11 you provided your outlook for 2015 global potash demand, and I was wondering whether you -- how to view this -- like what demand efforts were like in 2014 by region so one can gauge what -- where the growth in 2014 came from. And secondly I was wondering whether you think your Canpotex allocation will change in 2015, given that two other potash suppliers are going through approving runs. Thanks very much?

Jochen Tilk

Thank you, we can give you those by region. And you question was that you wanted us to break it down?

Unidentified Analyst

I was wondering if you had to view like what demand was like in India in 2014, what your shipment levels were in Latin America and North America, so that one can do like a year-over-year comparison?

Jochen Tilk

Yes, I'll walk you right through that. So what we see so far, and just based on where the numbers have come in and what we can reconcile; in China we look at shipments, approximately 13.5 million tons, and that's really where we've seen growth and as many people have asked a question of how much of that was inventory and that would be included. India we see shipments of approximately 4.5 million tons and the number is 4.4. The rest of Asia it's 8.8 million tons, North America 10.7 million tons. That's the United States and Canada, that obviously have seen a very strong year. Latin America mostly driven by Brazil, 11.5 million tons and in other 12.8 million tons for combined worldwide of approximately 61.5 million tons, just about that.

So those are numbers that we reconcile and keep in mind that some of those figures are still estimates as they come in and the regions that have supplies, and as I said in my statements, that give us some opportunity. For next year it's China obviously. I've referred to a bit of an inflection point in consumption of China, particularly in the NPK market. India, reversal of the trends over the past years. Even though it's not a fundamental step change yet it's an encouraging sign that there is a reversal, and Brazil with a very strong year and the potential for modest, but some going forward. So that’s the reconciliation.

In terms of the Canpotex allocation going forward for next year, as you know, when an operation runs through an improvement, any of the members of Canpotex has done over 90 days and then it’s audited, and then it's submitted and then that’s the recalibration of the numbers. And this year for 2015, there'll be a slight recalibration because Mosaic has proved up its Colombian [ph] mine and the expansion and those numbers will go in. The final adjustment of those numbers Stephen, do we have them?

Stephen Dowdle

Its 52.16, I believe for…

Jochen Tilk

Yes, so our lot minus 52.16 after that adjustment and we expect that to be in place for 2015.

Unidentified Analyst

And what was it in ’14?

Jochen Tilk

It was, sorry -- I’ll give you the exact number. Yes, 52%, just slightly over 52%.

Operator

The next question comes from Ben Isaacson of Scotiabank. Please go ahead.

Ben Isaacson

Thank you very much. Just a two part question on market-share, your guidance of increased sales volumes of I think 92 to 97 in an environment where you see global shipments going lower suggests that your market-share is going to increase. Is that a tweak in strategy and can you talk about what potential impact that may have on pricing? And my kind of second part to that question is really focused on the U.S. market. We’re seeing some increased shipments from guys like SQM and ICL and now Belarus is coming in and Agrium has another million tons this year. What is that going to do to the North American market-share as well as the pricing premium that we see over international prices?

Jochen Tilk

Thanks for the two part question, and let me respond to the first part and then we’ll talk little bit about what we see in the North American market. When we looked at next year, we took all the factors into consideration and I think the starting point I like to mention is really bit of a surprise and where the year ended and a reconciliation of number showing over 61 million tons in total shipments. That was a bit of a surprise I think for most of us. So, we take that as a -- just as an indicator of that the markets move sometimes into an unanticipated direction and we like to prepared for that. The things that give us hope and support in a fairly tempered outlook for the economy is that we’ve seen good growth in China. We’ve seeing some opportunity in India. We think that Brazil is still a growing market. And so that’s where we see opportunity on the demand side on consumption.

On the supply side, we saw a fair amount of challenges this year and whether or not they materialize we don’t know, but what we’ve seen last year was an impact and there is a possibility as well that, that might happen. And we like to be ready to step in because we have capacity of the 11 million tons of capability. We have identified a low cost subset that we can -- we think we can deliver and that kind of defines our estimate of 9.2 billion to 9.6 billion tons for next year.

If you got that all wrong, in other words, if the market isn’t there, then we can react as well, because the impact on our operating cost would be minimal as we've prepared for that. And if you -- in aggregate that’s not a change in our price philosophy or price strategy. So that’s not what that implies. We'll respond to demand in a market. It's is really a reflection of our flexibility that we have and our abilities to deliver and what we saw in 2014 and what we carry forward in 2015. So that’s to your first question.

And in terms of incremental supply into the North American market, there is a number of factors and we’re obviously well aware of the shipments, the ones you referred to -- the Belarusian tons, ICL, but there is more than just bringing the tons in U.S. There is logistics, there is a network and over the years or many years, we’ve built a very dense network of hubs, delivery systems. We’ve got a 166 facilities that we can move product through and we think we’ve got a fairly strong position in the North America market. Obviously we’ve got great relationship with our customers been established over the years. So that gives us an opportunity to secure that position and be competitive from a point of logistical and relationship advantages. So that’s a general comment. Stephen, anything you'd like to add to that?

Stephen Dowdle

From a competitive point of view in the North American market we don’t really see any significant difference. It’s always been and will be a competitive environment. And ultimately the volume of imports that come in will really be a reflection of how well the importers can place those tons. And as you heard Jochen describing, we have a terrific distribution network that will enable us to serve our customer’s needs.

Operator

The next question comes from Mark Connelly of CLSA. Please go ahead.

Mark Connelly

Thanks. I wonder if we could talk about the phosphate business. In some ways it’s the more complex business you have and some would argue it has the fewest barriers to entry globally. You've had a couple of descent years but it doesn’t look like it’s kept up with the other businesses in capital returns. I wonder if you could just talk about strategically where that fits in your portfolio and where it sits in terms of your priorities.

Jochen Tilk

Thanks Mark and you’re quite right. We’ve had couple of difficult years for a number of reasons. Our costs have gone up. We’ve had to deal with a number of environmental issues. So we have some very difficult mining conditions. And that resulted in a lower bottom line or gross margin than in prior years. And the phosphate market, the prices have been, until recently depressed, not a very engaged market. When we looked at it in terms of a priority, we said that the first and utmost part of it is to really improve the business and get it up. And those improvement initiatives are getting our costs down, dealing with environmental matters, really looking at our market portfolio from a point of where are the best margins, what’s the fraction of the business we like to be and we like to go along.

And we’ve identified a number of improvement initiatives and it’s a fairly straight forward and clear path to follow. And the first step -- first order of business in phosphate really is to follow those initiatives, put them in place and improve the cost profile, deal with all these environmental matters to the extent that we can resolve them, improve our mining conditions which they already have by virtue of where we’re mining and then get the bottom line up and optimize our product portfolio and get the bottom line up. And then beyond that it’s another step but that’s our first priority.

Mark Connelly

How long? How long will that take, do you think?

Jochen Tilk

It’s a plan that’s measured in months to be followed and I don’t want to predict an endpoint. That’s really hard to do. But I’d put it in the context of years versus whatever months. I’d say we’re looking at the years' initiative to carry that out, about 12 months and then we’ll see where we are.

Operator

The next question comes from PJ Juvekar of Citi. Please go ahead.

PJ Juvekar

Just couple of questions on potash. It just seems to me from your comments that the producer inventories are down when the dealer inventories are up. Did we just have a transfer of inventories maybe that drove earnings this year? And just secondly related to that is, you also mentioned about U.S. dollar strength. How does that change your affordability of growers around the world? Thanks you.

Jochen Tilk

Thank you. So just repeating your first question, so your point is the producer inventories are down, the dealer inventories are down in some places. And your question is what is that, what’s the impact of that going forward? And I’ll let Stephen comment on that.

StephenDowdle

PJ, in terms of -- where we have the greatest visibility is on the producer inventories, and they are down significantly. We know, and our own inventories are at historic low levels. As far as in the distribution chain and the distributors, that is much less visible and really we’ll back into that number once we have more visibility on the actual consumption numbers for 2014. But in general from what we see that I think the statement is true that there was some inventory build. It was necessary, given the very low levels that we started the year with. Is there an inventory overhang right now that is dampening the demand? I would say in general the answer is no.

What we do see is concern and that’s to your second question about the strength of the dollar and the currencies and the purchasing power of some of our customers, particularly in markets where currencies have devalued quite a bit. And what really that has caused is caused people to be a little cautious at the beginning of the year and the engagement is reserved right now because these currencies are fluctuating daily and people just are kind of waiting for some stability, and really waiting until later when they actually need to make the purchases to do so.

So that has an impact. But also in a lot of these countries, they do have a bit of a natural hedge because they’re exporting some of their products and receiving dollars in return. So, you really have to look at country-by-country to see how big of an impact these currency fluctuations are having.

Operator

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Vincent Andrews

Could you just sort of asses where the logistics bottlenecks are this year versus this time last year, just starting to have all the bad weather and all the rail tie-ups and everything and so if they're better, how is that going to change dynamics this year in North America. If they are still the same, when will they get better?

Jochen Tilk

Yes, Vincent, the logistic conditions are materially better than they were a year ago and part of that is climate has been -- the winter has been so far a lot easier on equipment, on the rail road. So we've seen significant improvement there. And then out of that comes a number of consequences. For example the barge traffic is less because the logistic leading to it has improved. So for the time being and conditions so far, we've seen a significant improvement over the last year over a year ago.

Vincent Andrews

And just is a follow-up, are you expecting to see any reduction in your freight expense between the various continents with lower oil prices?

Jochen Tilk

Well there would be some. The impact on overall is somewhat marginal. We can quantify -- can do the math, but overall it's -- it has a modest impact.

Operator

The next question is from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson

I thought I'd follow-up on a prior question. So historically when global demand for potash has decreased, Canpotex's market share has decreased as well. This year you're calling for of course your share to increase while the global demand is down. So why is that? Why would Canpotex gain share this year or if Canpotex not going to share, why would PotashCorp gain share over Mosaic and Agrium in declining demand environment?

Jochen Tilk

I think it's the same question and I appreciate that. I think we've already talked to -- when you look at 9.2 to 9.6 in the overall market, I think Canpotex makes this prediction and our share of that is by virtue of the number and 50 - 51 point odd percent, we're part of it. We look at it in a broader context, so the sum in aggregate. And as I've said earlier there are some factors that we think give us opportunity. New Brunswick is a player and New Brunswick production was ramping up [indiscernible] is ramping up. So we anticipate shipping some of the tons into the U.S and Brazil. So you have to look at that in context. And really the factors that define it are exactly the same that I mentioned before. The opportunity on the demand side in currencies that I mentioned and that's certainly where Canpotex delivered into China, India and then the opportunity that we have somewhere in Brazil and then on the supplier side whether or not there are any constraints going forward, but we would like to have that flexibility.

Joel Jackson

Does that mean Canpotex would keep share and New Brunswick would gain? Is that something you are saying?

Jochen Tilk

Well New Brunswick is a growing operation. So it has to sell -- it will sell its ton. So from that perspective we anticipate a larger sale coming out of New Brunswick. That's correct.

Operator

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson

Maybe a question on cap allocation and really in two parts. In the slides you discussed kind of Board and management reviewing cap allocation strategy. I'm just trying to understand what that would mean? You've already increased the dividend. You're paying out functionally 100% of your free cash flow this year and I understand there is some tailwinds over time from lower CapEx, but nonetheless your free cash flow payout allocated to the dividend is already at a very high level. Help me think through kind of what else would you be looking at? Is it a view at the Board and management level that the capital structure on leverage is sub-optimal? Is it business level capital allocation? Help us think through some of the pieces there?

Jochen Tilk

Thank for the question. Well there's two sides to looking at capital allocation. One side is we're looking at the available cash flow and how we assess that, and obviously the level of comfort in the long-term and the two components is the cash that we generate and then the capital that we put into, whether it's sustaining capital or improvement capital, opportunity capital in our operations. Once we've established confidence in those numbers, then we know what we have available. And then the second question obviously is what do we do that? How do we allocate it? How do we return that? The step that you've seen in the 8%, 8.5%, 9% increase in dividend we've announced is a reflection that we've gained some confidence going forward. It's mostly a reflection that our capital has come down. When you compare that to 2013 it was 1.6 billion coming down to 1.2 billion. So that's a reflection of more and more cash available, but also some confidence. But it's also a bit of reservation, to be sure that we are in a volatile business, we're in a commodity business and we'd like to see how things unfold.

In terms of any further capital that would be available to allocate, it's really on the basis of the best return. When I talked about nitrogen, I mentioned that we look at opportunities, bond fill [ph] opportunities that provide superior return to shareholders and we’ve looked at a number of those opportunities. So some of them have been implemented. Lima is an example. But we have others. They're relatively small by capital, they have good returns and that’s one of the opportunity. And there are others in our business that we look at.

We always look at the possibility of share buybacks. It's a comparative, pretty much for all possible allocations that we have because it's one return that can provide a benchmark. So when you ask what has to happen or what should happen, it's really level of confidence going forward that we have in cash flow and of capital and then secondly, finding the best opportunities to provide return by allocation of that capital.

Adam Samuelson

And maybe just a quick follow-up on that point, is there a target leverage going forward that you're guiding to that you would consider issuing additional debt to repurchase stock or is a discussion on thought process not along those lines?

Jochen Tilk

I’ll make a quick comment and then Wayne is here, our CFO can expand on that. So the answer is we’re comfortable with the ratio that we have right now, the 1.5. Again we’re in the commodity business. But it gives us option. It's an optionality and there has to be good reason to leverage that beyond where we are right now. And if there is such reason, than that’s a different story. Wayne anything you'd like to add to that?

Wayne Brownlee

Well, I'll just say, subject to some large transaction or large CapEx project, the EBITDA ratio that we’re targeting two, one and a half and two times.

Operator

The next question is from Jacob Bout of CIBC. Please go ahead.

Jacob Bout

Just a question on the CapEx guidance that you gave for 2015, the $1.2 billion, I think it's up a little bit from your thoughts on 2015 previously and maybe talk a little bit about what happened with that EPA ruling? And then as we think about 2016, is your -- should we be thinking about a higher rate as a result in 2016 and forward?

Jochen Tilk

So the - our capital is comprised of sustaining capital and then we also look at opportunity capital which is what we justify on a return on that particular investment and there is -- we also have a component of safety health and environment which is capital allocated to ensuring that our workplace are safe and that the environment is protected. So those are three categories and sustaining capital, we provided you with guidance on a long-term. It's about $600 million in the long-term and that’s appropriate. The opportunity capital we evaluate on a case by case basis based on the return that’s provided on that investment. The change that you may see in terms of 1.2 versus 1.1, some of it is carry over, some of it is projects that we identified and some of it is still finalizing some of the investments of the expansion. They have come now to an end, but there is still a table [ph] on. So it's a combination of that, that led to the estimates of 2015.

Jacob Bout

So specifically what happen with that recent EPA ruling? I'm just talking about the commentary that you had in your MD&A.

Jochen Tilk

So the EPA ruling specifically refers to an assessment, a settlement on our sulfuric acid plans in the United States and we operate a number of them. I think total of eight, and we have collectively reviewed them with the EPA and out of that came a consent decree arrangement that would stipulate certain numbers, certain commitments and they resulted in incremental capital and we’ve assessed that, and that’s the allocation that we’ve met, which is really is a compliance program to the consent decree that we have achieved with the EPA and operation of our sulfuric acid place in U.S.

Jacob Bout

That’s just a one-off for 2015 then?

Jochen Tilk

That’s correct, that’s one-off. That’s one-time investment to bring them up to that compliance point.

Operator

The next question comes from Chris Parkinson of Credit Suisse. Please go ahead.

Chris Parkinson

You mentioned you expect further nat gas curtailments in Trinidad will affect volumes and this should be roughly in line with 2014. Can you just give a little more color on how you expect this to progress throughout the year? And then also what you're personally looking for if things potentially change for better over the intermediate or long-term?

Jochen Tilk

Absolutely, and I’ve got both David and Rafe you can just -- just when you look at -- most of the curtailments actually happen in the second half of 2014. So in the first-half they were modest and then they picked up. And we don’t see a material improvement in 2015. Hence we extrapolate the number for that. There are a number of activities in place that we are engaged in, some of them that we're proactively engaged in and others where we observe and predominantly the development of new gas fields in Trinidad, one in particular -- two in particular I should say. One of them has already developed its first well. And the combination of our activities and how additional gas will come online will tell us whether or not those curtailments going forward will change. David if you want to add more to the -- some of the particulars there?

David Delaney

The only change Chris in 2015 is the Starfish field came on in late ’14. That's about 200 Mcf a year. It should take annual production from 3.8 - 3.9 to 4.1. I think they’re about halfway there right now from what we’re being told. So that’s something we’ll have to watch. And we’ll also have to watch well depletions and where that transpires throughout the year. We are still planning for I think total reductions of around 230,000 tons for 2015. Going forward we’re hoping more development as Mr. Tilk indicated, more toward 2017 and getting it back to hopefully more normalized production levels in two or three years.

Operator

The next question comes from Kevin McCarthy of Bank of America Merrill Lynch. Please go ahead.

Kevin McCarthy

Good afternoon. Jochen, I think you’ve been engaged in a review of the Company’s various equity investments around the world. Just wondering if you could provide an update on the status of that, and do you view divestitures any more likely or less likely than say last quarter?

Jochen Tilk

Thanks. Yes I have and it’s a bit of a longer term process, because it involves a review. We’ll look at that and quite frankly, I’d like to go and visit them as well and get a firsthand look. And most importantly is really understand whether they provide opportunities, how they can evolve. And we did set criteria that we’ve established and trying to extrapolate what the future might be.

And we have not made decisions. I just want to be clear on that one. But we'll look at it from a point, can we advance and is there potential of further involvement, what’s the return on the investment, what other risks of any country and which those investments are located. Those are all criteria that we look at. And after we pull that all together, we’ll make some decisions. And again none have been made and I can’t even suggest the direction. But it’s the process that’s ongoing.

Operator

The next question comes from Michael Picken of Cleveland Research Company. Please go ahead.

Michael Picken

I just wanted to circle back with respect to some of the potash contract negotiations and just wanted to get your feel for kind of where China is from an inventory standpoint, and then also if you think India is definitely going to wait for China this year? Thanks.

Jochen Tilk

In terms of -- you ask -- I think there were three questions; the question on the status of the China contract, the inventory in China and whether India will wait for China contract to settle. On the first one I’ll jump in and Stephen can give you much more color on that. But in China contract we really can’t comment on timing and status. There are multiple players. We’re only one of them and we really don’t know when the contract will come to fruition.

We’re encouraged by the uptick in consumption in China. We think that’s an important factor. And we’re also well positioned. As you know we’ve settled -- Canpotex settled its MOU with Sinofert and it still has an exclusivity on red standard but we also broadened our relationships and see some opportunity to deliver ground level [ph] product to NPK manufacturers in China. So we’re well set up under any circumstances. As to the timing of the contract we really don’t know.

Stephen Dowdle

And as far as India is concerned, one of the -- probably the major factor right now in India -- we saw some good demand recovery in India in 2014 and we have every expectation to believe that’s going to continue in 2015. But there is one very important development that will take place and this will be the first fiscal year budget that begins April 1 from the new Modi government and there has been a lot of chatter in India, a lot of discussion about revising some of the subsidy programs. Whatever revisions are made, they will certainly have an impact on the whole fertilizer sector.

And the industry right now, even though that shipments have been largely completed against the old contract and they would like to see shipments continue, but everyone is waiting for the new subsidy policy to be announced. And our expectation is after that policy is announced that we will see India be very interested to engage the market.

Operator

The next question comes from Yonah Weisz of HSBC. Please go ahead.

Yonah Weisz

Question again on China. Jochen you mentioned step change in demand for the potash in China. Maybe you can give a bit more detail as to what is driving that change in 2014? And why you think, I guess maybe forecast it’s more or less going to continue into 2015? In addition as you mentioned there are multiple players in China. And recent reports state that Belorussia had very heavy volume delivery into China during the last part of 2014, which may have driven the number or the volume very high for that country in 2014. How do you see those dynamics -- or compared dynamic evolving in 2015, especially because you look for, if not mistaken [ph], a jump of 1 million to 1.5 million tons in imports in China in 2015?

Jochen Tilk

Both good questions. Let me start with the second one, the second component, which is your question on the impact of tons from Belorussia coming in China, and you mentioned the import levels in recent times and your projections. Obviously we have the same numbers. We can't speak for Belorussia. We can't really project what they're going to do. So we prefer not going there. What we can do and what we are doing is positioning ourselves and Canpotex is positioning itself I should say and that's our main objective, to be well positioned and we've done that as I mentioned through the contact, through the MOU with Sinofert and some further relationships that go beyond Sinofert. So that's on Belorussia.

And on the second question related to really what has changed -- the big change that we saw is the NPK production and NPK production there for demand. Domestic production China has increased. I think of the 13.5 million tons shipped there is -- domestic production was about 6.5 million tons and that's gone up. So we see that there is an increase in demand in China on NPK and that goes directly from what we know to the farm level and to farm consumption. And so for us developing those relationships with NPK producers is another leg, another strategic leg in China that gives us an opportunity to benefit from that growth. Stephen any more color on that.

Stephen Dowdle

And just to give a little context on why NPKs and really they come in two forms, the NPK compounds and the bulk blends. And what's really driving the growth and demand in both of these sectors is just the overall economic growth in China. It's world's second largest economy. It's growing at approximately 7%. And this really does have implications and especially for potash, because when over half of the potash that's consumed in China is consumed in fruits and vegetables, that GDP growth and the implications of more middle class, more wealth creation, really impacts peoples diets and choices that people make. And also with that growth, and with more and more population living in urban areas, the efficiencies of agricultural labor is a concern and certainly applying compounds or bulk blends is very labor efficient. And so we see that sector growing and we believe that it's going to continue to grow.

And part of the step change that we've seen over the last several years, we know that China has been very concentrated on growing their domestic production and we believe that they have pretty much come close to what that domestic consumption will be. And so on a go forward basis the growth in China is really going to be coming from offshore producers or producers from outside of China, and that's where we do see that Canpotex has certainly a lot of opportunity in China going forward.

Yonah Weisz

If I just may rephrase [indiscernible] of imports into China in 2014 were 8 million tons and you are looking for 6.5 million to 7 million tons next year. That seems to me not an opportunity. That seems to me a more crowded and competitive market?

Jochen Tilk

Well our -- first of all our estimate of -- we're pretty confident with the 2014 numbers -- the import numbers that have been reported. There were some strong shipments in the fourth quarter. Some of that -- we've talked about the strategic inventory. So some of that was by design. But also some of that was necessary to get product in place here at the beginning of the year because this year is the lunar New Year. It is rather late. It begins on February 19th. And by tradition as soon as that festival season is over, spring season will be in full force and starting in Southern China and then moving north. So that product needs to be there and that product that was shipped in the fourth quarter is going to be used very quickly. And so -- and then our estimate for 2015 may be conservative because we -- right now, as I said before, we're going to need to back into what the actual consumption number was in China. And I think as time goes on and we're able to get a little better visibility on what the consumption was in 2014, I believe that we are going to be upward revising what we believe was actually consumed in China, and we do see and expect that this step change, and this momentum and demand growth in China is going to continue in 2015. And therefore, the numbers that we have put forward right now as our estimates for 2015 may well turn out to be conservative.

Denita Stann

Brock, we have time for just one more question.

Operator

Thank you. Our last question today comes from Tim Tiberio of Miller Tabak. Please go ahead.

Tim Tiberio

Going back to India, in the business press, there has also been talk about them potentially liberalizing the soybean or oilseed import tariffs. Is that factored into your 2015 outlook? I know it's very difficult to handicap both the fertilizer subsidy or import tariff actions, but just wanted to get a sense of whether you see that as potentially impacting your demand forecast for 2015?

Jochen Tilk

Yes, Tim. The short answer that would not be considered in our forecast at that level. So that’s the short answer. Stephen any?

Stephen Dowdle

Well, if there was an opening up of the India oilseed market and particularly it could have a very positive impact on palm oil imports into India. And right now there is a tariff in India on palm oil. If they reduce that, that could have an impact and of course could have an impact on soybeans. But no, we have not factored in any change in policy into our models.

Tim Tiberio

Just my quick follow-up was, so you would potentially see potash shipments potentially shifting maybe from India to Southeast Asia in that’s scenario? So it's still a neutral net effect?

Stephen Dowdle

No, I mean in terms of and I think your question is could that potentially impact potash demand in India. And we don’t believe that to be the case. The way we analyze India potash demand, it has been so strongly influenced by the fertilizer subsidy policy that any change in the oilseed tariff would be minimal compared to what the potential impact could be on a change in fertilizer subsidy policy.

Denita Stann

Thank you everyone for joining us today. If you have any further questions, please don’t hesitate to give us a call at the office. Have a great day.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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