This presentation has notes beside the slides but no embedded audio. It contains two charts, one showing data for categories 1-4 by three series, and another line chart with data for three series over time. The presentation concludes with a thank you.
Wayne Brownlee — Potash Corporation of Saskatchewan, Inc. — EVP & CFOThanks, Lindsay. It’s a pleasure to be here everybody. I didn’t get my practice time in here, so we’ll see how this works.So, there’s my lawyers telling you not to believe anything I say.
So, PotashCorp, a global company. We have potash operations in Saskatchewan and in New Brunswick. We have potash investments in Israel and Jordan and Chile and an investment in Sinofert in China, which is the biggest potash distributor in China. And of course, we have nitrogen operations in the United States and Trinidad, and we have phosphate operations in the United States as well. So, well positioned globally and especially well positioned in the potash sector, which historically has been the most stable and has been a very attractive sector in terms of earnings growth.If you look at the next graph — and I didn’t keep up with myself, sorry — why do we keep on putting most of our investment dollars in potash? Well, historically, prices are more stable. Historically, the margins as a percentage of revenue are much greater. And we like the industry structure characteristics. You can see in this graph that we had great gross margin in 2011, and we hope to be in a position where our 2012 gross margin actually becomes our all-time high compared — which would compare to 2008.We had some pretty good numbers in 2011. Obviously, the whole sector did well, and it’s true that you — it’s difficult to do well unless your whole sector does well, and it was the case with us. But, we had an 80% increase in earnings per share over 2010, a 59% increase in gross margin, and our gross margin as a percentage of sales went up from 41% to 49%. And more importantly, our cash flow before working capital adjustments went up 48%, and the main reason for this is our depreciation charges and our deferred tax charges as part of our income stream were higher. And if it were not for that, we would have actually had higher EPS than 2008. And in fact, our cash flow per share, which I’m not supposed to share with you because we’re not supposed to report on it, believe it or not — our cash flow per share was higher and it was an all-time record for us in 2011.
So, I’m sure that by now those of you who have been sitting in, you have this Ag story down pat. Suffice it to say — and I know that there is always some concern whether or not this story is running out of gas. The truth is, in about three-quarters of the last 10 years that, in the grain sector, consumption has outpaced production on an annual basis, and that story remains to be the case. It remains to be the case that you need 2 or 3 good years of consecutive production at higher rates than consumption to actually start increasing the stocks that are out there in the grain sector. And it’s for this reason why we think that the Ag sector story still has several years to run here in terms of being a very constructive environment for the fertilizer sector.You can see the world crop prices in this slide, and this basically shows you — compares what the prices have been in the last 2 years compared to the 10-year average in corn, soybeans and wheat. But, as you know, it’s not just a grain story; it basically is hitting all the other Ag commodities. And these graphs show you palm oil, sugar and coffee that are all doing amazingly well. They’re all starting to turn back up. And once again, in most of the cases, the farm economics have never been better. And certainly we’re in the top quartile and continue to be in the top quartile, which is leaving a very favorable environment for fertilizer consumption on a go-forward basis.
This next graph just shows you the fertilizer cost as a percentage of crop revenue, and we compare it to — in palm oil, we compare it in Brazil soybeans, US corn, China rice, and India wheat. And with the exception of India wheat, which is really a problem caused by currency exchange rates flipping on India, in all the other cases fertilizer prices have moderated as a percentage of the total revenue. And so, for instance in corn in the United States, fertilizer input costs as a percentage of corn revenue is about 14%. The 10-year average is 18%. The 2008 high was 22%. So, you can see that fertilizer prices input costs are — have moderated against these agriculture commodity prices making fertilizer a very good investment for farmers.When we brought out our results for the end of the year in January and we talked about our outlook for the marketplace, we talked about the market for potash being between 55 million and 58 million tons of potash. And we broke that out and gave estimates between North America, Latin America, China, and India; and suffice it to say that in every market, with the exception of one, we believe that you’re going to see a consumption increase because of these favorable Ag economics.
The one sector that is going sideways right now is the Indian market, partly induced by the exchange rate which has increased prices in India and by political decisions in India to reduce subsidies for potash by about 10% and by phosphate for about 20%. Our general view is this is a reasonably shortsighted political decision that’s being made, and the real decision that will have to be made in India over time for sustaining increase in yield will be to increase potash application rates to increase phosphate application rates relative to nitrogen application rates. And we believe that at the end of the day, will be the end result; it’s just a question of — it’s a little bit like the Greek debt crisis. It’s a question of how long does it take to get resolved and how ugly does it get.But, we may find in the short term that the India market goes sideways, but otherwise the economics in the Ag sector are going to be very beneficial for most of these crops in most of these jurisdictions, which is going to feed for fertilizer price increases. Overall, we think this is going to generate that 55 million to 58 million tons of consumption for the world.
