Fertilizer International 496 May-Jun 2020
31 May 2020
Fertilizer financial scorecard
Nutrien: stable in a challenging year
Nutrien is the world’s largest crop nutrient company with a market capitalisation of almost $20 billion (Figure 1). This fertilizer industry giant produces and distributes over 25 million tonnes of potash, nitrogen and phosphate products for agricultural, industrial and feed customers globally. The company’s agriculture retail business also serves over 500,000 growers worldwide through a network of international outlets.
Nutrien summed up its 2019 trading performance with the headline “delivery of stable earnings in a challenging year”. The overall picture was certainly solid with the Canadian fertilizer giant reporting slight year-on-year (y-o-y) increases in sales and earnings (adjusted EBITDA) – both up by two percent to $20.0 billion and $4.0 billion, respectively (Figures 2 and 3).
The year didn’t end so well, though. Nutrien’s potash earnings (EBITDA) fell by more than 60 percent in the fourth-quarter due to lower sales volumes, lower realised selling prices and production curtailments – factors all linked to a global slowdown in potash demand. Similarly, fourth-quarter Nitrogen earnings (EBITDA) were down by almost 20 percent y-o-y. As a consequence, Nutrien posted a net loss of $48 million for the fourth-quarter, despite a strong retail performance.
Rising above these challenges, Nutrien nevertheless generated $2.2 billion in free cash flow – a good measure of overall company profitability – last year, up by almost 10 percent on 2018 (Figure 5).
“Nutrien’s earnings held up well in 2019 and we generated strong free cash flow in a very tough agriculture market,” commented Chuck Magro, Nutrien’s president and CEO. “Our business is designed to provide stability in times of market weakness. We remain focused on… allocating capital to grow our retail business and leading our industry in returning capital to shareholders.”
Strong earnings growth at Yara
Norway’s Yara International managed to strongly grow its earnings to $2.1 billion in 2019, up almost two-fifths y-o-y (Figure 3). Margins improved on lower European gas costs, a more profitable product mix and currency effects.
Impressively, Yara’s earnings improvement in 2019 was achieved during a year when annual revenues fell slightly – albeit by less than one percent – to $12.9 billion (Figure 2), linked to lower realised fertilizer prices. 2019 results were achieved against a back drop of:
- Five percent lower total sales and deliveries y-o-y, primarily reflecting a nine percent reduction in European deliveries
- Lower fixed costs and six percent higher commercial margins
- A two percent fall in new business deliveries
- A four percent and two percent fall-back in fertilizer and ammonia production, respectively, y-o-y.
Yara reported an “unsatisfactory production performance overall” in the fourth-quarter. Unplanned outages in several ammonia plants (Ferrara, Le Havre, Pilbara) and fertilizer production plants (Porsgrunn, Ferrara, Le Havre) resulted in the loss of 130,000 tonnes of ammonia production and a 220,000 tonne loss in finished fertilizer products. To some extent, this was offset by improved annual production volumes at other production sites in 2019, notably Tertre, Freeport and Belle Plaine, the latter having a record year.
Encouragingly, Yara’s free cash flow also emerged from the red during 2019, improving over four successive quarters to reach $863 million by the year’s end (Figure 5).
“I’m pleased to see our strategy delivering results and that our free cash flow continues to increase,” said Svein Tore Holsether, Yara’s president and CEO. “Our free cash flow continues to increase, enabling us to deliver on our capital allocation policy with a substantial dividend increase.”
Mosaic takes action
North America experienced its wettest 12 months in almost 50 years in 2019. This negatively affected spring and fall applications and fertilizer sales volumes in the region. This, in turn, pressured prices.
The Mosaic Company, in particular, bore the brunt of these difficult trading conditions. Sales revenues last year fell by seven percent y-o-y to $8.9 billion (Figure 2), while earnings were hit even harder – tumbling by 36 percent to $1.3 billion (Figure 3).
Mosaic ended up reporting a net loss of $1.1 billion for 2019 – reflecting non-cash charges of $1.46 billion. These were incurred from the company’s permanent closure of its Plant City phosphates production site, the acceleration of potash production at its Esterhazy K3 mine and extended idling of the Colonsay potash mine.
Such decisive and “aggressive decisions” were entirely necessary, according to Joc O’Rourke, Mosaic’s president and CEO.
“In this challenging environment we acted decisively, executed well and strengthened the company’s operations for the future, all while delivering record safety results,” said O’Rourke. “Our actions to manage our portfolio of assets, lower our cost structure, [and] our reduced inventories… leave us with a tremendous opportunity to capitalize on the improving trends we’ve seen early this year.”
This strategy seems to be paying off for the Florida-headquartered company. Mosaic recently returned its phosphate operations to full production, after good North American demand levels in December and January depleted the company’s phosphate inventories. In addition, concerns about product availability have changed market sentiment, in Mosaic’s view, driving strong global demand for phosphates.
Sales growth in a milestone year for EuroChem
Higher sales volumes together with more favourable pricing in the first six months of the year lifted annual sales at Swiss-headquartered EuroChem Group to $6.2 billion in 2019, an 11 percent y-o-y rise (Figure 2).
EuroChem’s 2019 earnings at $1.6 billion, although lower than originally expected, were also up two percent on 2018 (Figure 3). This improvement was driven primarily by sales growth and the positive effects of the rouble/dollar exchange rate on the company’s rouble-denominated costs – the company’s production assets being mainly Russian-based. The average rouble/dollar exchange rate rose to 64.7 in 2019 versus a 62.7 average in 2018.
EuroChem’s capital expenditure last year reached $950 million, 15 percent lower than in 2018. Overall investment requirements have eased, according to the company, following the opening of the EuroChem Northwest ammonia plant in June last year and the continuing ramp-up of the Usolskiy potash mine over the last 18 months.
EuroChem’s net debt-to-earnings ratio increased to 2.8 at the end of 2019 – up from 2.3 a year previously – but remains within industry norms (Figure 4). The company also generated a healthy free positive free cash flow of $297 million last year (Figure 5).
“We have delivered strong full-year results despite the subdued pricing in global fertilizer markets. The beauty of our business model is that it can deliver strong results at almost any point of the commodity industry cycle and that is clearly shown here,” said Petter Ostbo, EuroChem’s CEO. “2019 was a busy year with a number of major milestones, including the opening of our ammonia plant at Kingisepp, the launch of our updated business strategy, and the continued development and expansion of our distribution platform and new logistics infrastructure. We face the future with great confidence.”
Lower potash production and sales at ICL
Israel’s ICL Group is a leading speciality chemicals and fertilizer producer with a market capitalisation of around $4.1 billion (Figure 1). The company’s annual revenues declined by five percent to $5.3 billion in 2019 (Figure 2). Despite this, full-year earnings rose by three percent y-o-y to $1.2 billion (Figure 3).
Lower potash production – together with the absence of a potash supply contract to China and general commodity market weakness – had a significant impact on ICL’s results. The successful completion of a planned potash capacity upgrade at ICL’s Dead Sea site, in particular, reduced fourth-quarter production.
Potash contributed to only one-quarter of ICL’s sales and one-quarter of adjusted operating income during the fourth-quarter of 2019. In comparison, potash accounted for one-third of sales and almost two-thirds of adjusted operating income over the same period in 2018.
ICL’s potash production in 2019 was 721 thousand tonnes lower year-on-year. This was due to lower production at ICL’s Dead Sea plant, the shift to polyhalite (Polysulphate® ) production at ICL’s UK Boulby mine, and lower production at ICL Iberia. The quantity of potash sold by ICL in 2019 was also 765 thousand tonnes lower than in 2018. This was primarily due to a decrease in potash sales to Brazil, China and India.
Nevertheless, strong cash generation during 2019 resulted in a 60 percent annual increase in ICL’s operating cash flow to $992 million (Figure 5). ICL attributed improvements to both its operating cash flow and earnings in 2019 to its concentration on value-added speciality products, which offer a premium over standard commodities, and the company’s focus on cost controls and operational efficiency.
“ICL achieved several important milestones in 2019, the most recent of which was the upgrade of our Dead Sea facilities,” said Raviv Zoller, ICL’s president and CEO. “While ICL’s results for the fourth quarter were impacted by disruptions associated with the upgrade, a weak environment for commodity fertilizers and the unfavourable impact of exchange rates, we believe that the actions we have taken throughout 2019 have significantly strengthened ICL’s position and prospects to create value for our shareholders for years to come.”
Zoller added: “We also completed the construction of our new food grade phosphoric acid plant in China. That will allow us to shift from commodity phosphates to specialty products.”
CF strengthens its balance sheet
North American nitrogen producer CF Industries increased its full-year earnings to $1.6 billion in 2019, up by 15 percent y-o-y (Figure 3). Higher average selling prices across its major products – except in the fourth-quarter – also prompted a four percent rise in 2019 net sales to $4.6 billion (Figure 2).
CF achieved higher average selling prices across most of its nitrogen products in 2019. This was due to a tighter global supply/demand balance, in general, and limited supply at some North American inland locations during the spring application season. At the same time, its cost of sales decreased in 2019, primarily because of lower realized natural gas costs, although this was partially offset by higher maintenance costs.
The Illinois-headquartered company produced a total of 10.2 million tons of ammonia in 2019, setting a quarterly production record of 2.7 million tons in the year’s final quarter. Overall, product sales volumes last year were comparable to those in 2018 and 2017, according to CF. Higher fourth-quarter ammonia and ammonium nitrate sales were partially offset by lower granular urea sales.
CF also redeemed $750 million in debt during 2019, lowering its long-term debt to $4.0 billion (Figure 4). The company’s free cash flow fell slightly to $915 million in 2019 (Figure 5), down two percent y-o-y.
“The CF team executed exceptionally well in 2019… delivering a 15 percent increase in adjusted EBITDA,” said Tony Will, CF Industries president and CEO. “Our 2019 performance and our position on the low-end of the global nitrogen cost curve enabled us to generate more than $900 million in free cash flow [and] strengthen our balance sheet. As a result, we delivered a one-year total shareholder return of 13 percent, which was the top performance in our fertilizer peer group.”
K+S achieves earnings growth and positive free cash flow
Germany’s K+S increased its 2019 earnings by six percent y-o-y to e640 million (Figure 2), while revenues for the year were stable at e4.1 billion (Figure 3).
The potash and salt producer’s 2019 earnings benefitted from higher average prices for potash fertilizers – especially in the year’s first-half – compared to the previous year. These gains were, however, partially offset by production cutbacks and higher operating costs.
K+S notably achieved a free cash flow of e140 million in 2019 (Figure 5) – the first time this has moved into the black since 2013 – despite what the company called “cloudy [trading] conditions” affecting the year’s second-half.
K+S also paid down debt last year. Its earnings-to-debt ratio decreased to 4.9 at the end of 2019 (Figure 4), down from 5.3 a year previously.
“2019 was another very challenging year for us. Following a good start in the first half of the year, the weakening of the potash market as well as the mild winter in Europe impacted our business development over the further course of the year,” said Burkhard Lohr, chairman of K+S. “Despite these adverse circumstances, we nevertheless succeeded in increasing our earnings in 2019 and, as promised, generated positive free cash flow for the first time in six years.”
Alongside the release of 2019 annual results, K+S also announced the divestment of its North and South American salt business to pay down debt. The move means K+S will now focus instead on producing and selling fertilizers and speciality products in future,
K+S expects the sale to be agreed by the end of 2020. However, neither the potential buyer for its American salt business or the value of the divestment have yet been disclosed.
“The sale of our strong Americas salt business is a decisive step in setting the course for the future development of K+S. After intensive examination, it is the best option to achieve the urgently required reduction of the company’s debt,” commented Burkhard Lohr.
The divestment is part of the company’s plans to reduce its debt by more than e2 billion by the end of 2021. The decision to exit the salt market in the Americas will also be accompanied by what K+S called a “comprehensive realignment and restructuring” of the company.
“Following the completion of the transaction, K+S will be further developed into a supplier of fertilizers and specialties. No sale of shares in the new Bethune potash plant in Canada is planned,” K+S said in a statement.
All business activities and sites retained by K+S will be expected to generate positive free cash flow in future.
“Following the repositioning of K+S, we will be focusing on the expansion of the highly profitable fertilizer specialties business in the subsequent growth phase,” Burkhard Lohr signalled.
PhosAgro – revenue and sales growth in challenging times
Russia’s PhosAgro is one of the world’s leading integrated phosphate fertilizer producers with a market capitalisation of around $4.5 billion.
The company’s full-year revenues for 2019 grew by six percent y-o-y to RUB 248.1 billion ($3.8 billion, Figure 2), while earnings for the year were stable at RUB 75.6 billion ($1.2 billion, Figure 3).
Similar to many of its industry peers, PhosAgro’s 2019 results were badly affected by fourth-quarter trading conditions. This period saw revenues fall back 11 percent year-on-year to RUB 53.1 billion ($0.8 billion). Earnings took an even greater hit, decreasing by almost 40 percent y-o-y to RUB 11.2 billion ($176 million) during 2019’s final quarter.
Despite this, PhosAgro’s free cash flow was up 38 percent in 2019, rising to RUB 28.3 billion ($437 million, Figure 5). This improvement was driven by a seven percent y-o-y increase in sales volumes to 9.5 million tonnes, and by more efficient management of working capital.
PhosAgro’s financial performance last year enabled the company to fully self-finance its capex programme and improve its debt position. Net debt stood at RUB 131.6 billion ($2.1 billion) at the end of 2019, while its net debt-to-earnings ratio improved slightly to 1.7 (Figure 4), the latter reflecting improved earnings and the rouble’s appreciation against the US dollar during the year.
Although a challenging year for the fertilizer industry in general, 2019 was a record year for PhosAgro, according to its CEO Andrey Guryev – when measured by free cash flow, earnings and earnings margin (31 percent).
“Prices for our products came under pressure throughout the year due to adverse weather conditions in key sales markets, as well as increased global supply amid stable demand,” Andrey Guryev said. “As a result, prices for phosphate-based fertilizers reached near record lows at the end of the year.”
He continued: “Despite the unfavourable pricing environment… PhosAgro was able to increase sales volumes to 9.5 million tonnes. Our strong revenue growth was the result of a balanced approach to investment and maintenance, high levels of self-sufficiency in key inputs, a flexible sales policy and the exceptional quality of our raw materials.”
Author’s note
In the weeks since fourth-quarter 2019 company results were published in February and early March, the impacts of the Covid-19 pandemic have deeply affected the outlook for the whole world economy including the global fertilizer industry. For more information, please see our article on Covid-19 impacts on page 18.
Fertilizer International will continue to monitor market developments during the current crisis period, as we have done throughout our 50-year history.
