Nutrien Ltd. (NTR) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the PotashCorp third quarter Earnings Conference Call. [Operator Instructions]. I would like to remind everyone this call is being recorded on Thursday, October 29, at 1 PM Eastern Time. I will now turn the conference over to Denita Stann, Vice President, Investor and Public Relations. Please go ahead.

Thank you, Brock. Good afternoon, everyone, and thank you for joining us today. Welcome to our third quarter earnings call. In the room with me is 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 Fracchia, President of PCS Potash; Raef Sully, President of PCS Nitrogen; and Paul DeKok, President of PCS Phosphate. I'd like to welcome 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 for some comments then we'll go to questions.

Thank you, Denita. Good afternoon and thank you for joining us call. We appreciate the opportunity to discuss our third quarter performance and what we see ahead for our Company. Our third quarter earnings of $0.34 per share, which included $0.03 per share in notable non-cash charges, were modestly below our guidance range in the prior year, primarily due to the lack of weaker pricing environment. Earnings for the first nine months of $1.28 per share were also slightly below the same period in 2014. In potash, we generated gross margins of $294 million, in line with last year's third quarter. Weaker prices, particularly in North America, were largely offset by higher volumes and lower cost of goods sold. In our nitrogen business, lower volumes at our Lima operation and a weaker pricing environment caused gross margin of $161 million in the third quarter to trail results for the same period last year. At Lima, we entered an extended shutdown in August to complete the final phase of our nitrogen expansion project. I am pleased to say that in October, we successfully completed this final step and brought production back online. This project will see us add approximately 100,000 tonnes of ammonia capacity in 2016, as well as additional downstream production capacity. In phosphate, despite market fundamentals softening during the quarter, our realized prices remained above last year's third quarter, primarily reflecting high net-backs for our liquid fertilizer products. However, increased maintenance expenditures and a negative adjustment to our asset retirement obligations led to higher costs and reduced gross margin. Looking ahead, macroeconomic headwinds, including lower GDP growth in emerging markets and the erosion of many currencies relative to the US dollar, contributed to a weaker commodity environment in 2015 that affected our sector as well. In light of these broader factors, we have lowered our expectation for 2015 global potash shipments to approximately 59 million tonnes and our sales volumes to a range of 9 million to 9.2 million tonnes. While potash demand held up relatively well in the face of emerging market uncertainty, prices have been less resilient. Cautious buying patterns and a competitive landscape weakened pricing over recent months, but signs of greater stability are beginning to emerge. Potash gross margin is now expected in the range of $1.4 billion to $1.5 billion for 2015. Weaker nitrogen pricing and reduced volumes for the first three quarters have more than offset improved performance in our phosphate business compared to 2014. As such, we have revised our 2015 combined nitrogen and phosphate gross margin range to $1 billion to $1.1 billion. Accordingly, we have adjusted our 2015 annual earnings guidance to $1.55 to $1.65 per share. I would now like to leave you with a few key messages on our potash strategy. First, our focus is on striking the right balance between flexibility and cost. We have some of the best, most efficient potash assets in the world and we continue to take steps to even further improve efficiencies and lower our costs. We began with operation workforce reductions in 2013 when we reduced our potash operating capability by approximately 3.5 million tonnes or 30%. This was central to marrying our capability with expected market conditions. Today, at New Brunswick, underground development at Piccadilly continues and we remain focused on projection ramp up at this facility, which will lower the cost compared to our Penobsquis operation. The Penobsquis shutdown will also allow our operations team to focus entirely on the Piccadilly ramp-up. At Rocanville, work continues on the conversion of service headframe to a production headframe, along with the addition of new hoisting equipment. Once complete, our attention will shift to readying for ramp up in 2016. With cash costs of goods sold at Rocanville expected to be in the range of CAD60 to CAD67 per tonne or $40 to $45 per tonne at today's exchange rate, our overall costs in potash are expected to decline further. We believe these steps enable us to run at more efficient levels, while maintaining our volume optionality as demand increases. Second, and consistent with our approach in the past, we will match supply to demand. Because of slower demand in the second half of 2015, we decided to move forward the permanent closure of our Penobsquis mine in New Brunswick to the end of November, as we transition to our new mine at Piccadilly. While this will reduce available production levels in New Brunswick by approximately 800,000 tonnes annually, until we have Piccadilly fully ramped up, it aligns with market conditions, as we expect it will help improve our overall cost profile. We will also take three-week shutdowns in December at our Allan, Cory and Lanigan facilities to manage inventories. The combination of inventory shutdowns and the accelerated closure of Penobsquis is expected to reduce production in the fourth quarter by nearly 500,000 tonnes. Now a few words on capital allocation. As spending on our major expansion projects winds down, our capital allocation priorities begin to garner greater attention, so we wanted to share some thoughts on this with you today. We always look for ways to grow our business in a disciplined manner and maximize long-term shareholder value. There are a number of ways to create value, including share buybacks, mergers, acquisition and marketing or operating arrangements. The important thing is that we're thinking creatively and actively exploring opportunities that can best position the Company over the long-term. Having said this, maintaining a strong balance sheet is our priority. We defined balance sheet strength to retention of an investment-grade credit rating and we believe our track record in this regard speaks for itself. Furthermore, our objective is to maintain our dividend. When we raise the dividend over recent years, we did this both thoughtfully and cautiously. The value of the dividend, $1.2 billion annually, was stress tested in a number of downside scenarios and we remain comfortable that even amidst a more challenging macro environment, it is very well-supported and can be sustained at current payout level. Looking forward, looking into 2016, despite a more modest outlook on GDP growth and currency challenges in recent months, we remain positive on the outlook for potash. Our confidence stems from the underlying strength of the two drivers of potash consumption, nutrient requirements to sustain increased global crop production and farmer economics continuing to support future growth in demand. These drivers bode well for potash over the medium to long-term and we remain focused on protecting and growing the value of our potash enterprise. We believe that the operation steps we have taken are in support of those objectives. Thank you for your time and we look forward to taking your questions now.

[Operator Instructions]. Mark Connelly, CLSA.

Thank you. Jochen, what is your current expectation for the new potash capacity coming on in 2016 and 2017? I'm wondering how that's playing into your decision here to close Brunswick early and the other shuts, which I assume are going to leave with pretty tight inventory by, say, February?

Yes, good afternoon, Mark. Thanks for the question. To the inventory question, it'll leave us with a manageable inventory. So, certainly consistent with what we've had in the past, but a little tighter and that's intentional. So the question on our expectation of supply and demand going forward in next year and the year thereafter, we continue to believe that supply/demand is actually relatively tight and we think we understand new production coming online. We certainly expect the demand scope production now to come online. It is ramping up. Beyond that, there really isn't all that much. So we're comfortable that steps that we've taken are consistent with the supply/demand balance as we see it.

Very helpful, thank you.

Steve Hanson, Raymond James.

Good morning, guys. Just curious about how you're feeling about the competitive environment these days? The actions you're taking now certainly are in response to the pricing environment I think we're seeing, but certainly the environment does see more competitive and has the past, particularly in some of the key markets. Just wanted to get a sense on how you're thinking about that competitive landscape and your ability to either go after or protect market share in certain key markets versus maybe in the past?

Yes, thanks and good afternoon. Let me say a few words and my dear colleague Stephen is here and we can speak more about the environment. The fundamental assumption that one has to make in order to evaluate whether the decision we've taken is relevant, functional, sensible, however you qualify, is your view on the supply/demand. As I mentioned in response to Mark's question, we think it's fundamentally, it's relatively tight. We seem, we think we understand what's coming online in the next coming months and years and we also understand what the operating capacity and the maximum capacity appears to be by our competitors. And while it is a very competitive environment and it was particularly competitive this year, there's no question, with imports to the US and Brazil, it was also driven by macroeconomic factors and we had a challenging year in the US. We had a difficult year in Brazil and continues to be difficult in Brazil for broader issues. But when you believe, as we do, that S&D is relatively tight and we think that is effective. How that environment plays out next year, in our view, will be greatly dependent on the macro economic factors. Steve, do you want to add a few words to that?

Sure. There's no question that 2015 has been a very, very difficult year. And as the year evolved, some of the conditions became more difficult. The one thing that, even in spite of these difficult conditions, potash demand, globally, has remained pretty resilient. Our estimate for this calendar year on global demand in that 58 million to 60 million tonnes will represent the second best year of potash demand globally and that doesn't go unnoticed by us. When you look in the first half of 2015, domestic potash deliveries globally were up by 8%, even though total deliveries globally were down 2% in the first half. As we got into the second half, it did become a more unstable environment and of course, it was most evident in August with the disruption in China, particularly the devaluation of the yen, and the stock market collapse and also many of the foreign-exchange rates, particularly in the emerging markets, were under a great deal of pressure. That put a lot of pressure on potash in the second half and we saw a very competitive environment, which you just referred to. But we see the signs now, Jochen mentioned it in his remarks, a little more stabilizing environment. We see that commodity prices are stable. We see corn prices year-over-year, they're up about 8%. We've seen CPO prices have rebounded and are now higher year-over-year. We've seen many of these foreign-exchange currencies in emerging markets, they've bounced off their lows. So the environment seems to have a little more stable tone to it and as we go into 2016, what we do expect to see in this more stable environment that we'll have an opportunity to really understand the price elasticity of potash demand. We think that global demand, as it has held up quite well under a very challenging environment in 2015, we expect that global demand should do quite well for potash in 2016.

That's great, appreciate the color.

Jacob Bout, CIBC.

Good afternoon. I hope to get a little bit more detail on how you're looking at Rocanville, specifically looking out into 2016 and as you think about managing your potash portfolio, how hard are you willing to run Rocanville? Could we see shutdowns of mine altogether like Cory or Allan or something like that?

Good afternoon, Jacob. Thanks. So, there's to get parts of the question, whether or not we are prepared to run Rocanville out. I think I'm stating the obvious, but when you look at Rocanville, expect that cost profile and $40 to $45 a tonne that we have an incentive and reason and an objective to run Rocanville at full capacity. Having said that, we also developed long-term operating models that include all mines, because the second pillar, as you may recall, is maintaining operational flexibility. So we think we can mine it. In fact, we are convinced that we can mine it. That we run the most efficient, cost efficient portfolio subset of our assets at certain capacities where Rocanville will play, no question, the most significant role, i.e, the highest capacity. Therefore, we maintain that operational flexibility at the same time and as I said, the third component is that we'll match demand by our supply.

But could you see a step change here drop in operating costs as Rocanville ramps this current model?

Yes, it depends, Jacob, what you define as step change. When you look at our cost of production, it's come down quite a bit compared to last year even. I think we're $106 now for the nine months in 2015. We expect it to come down further next year and the ramp up of Piccadilly is another factor. That is a higher cost mine, just by geology and definition, and the fact that we can now focus on that entirely and get its production up, which will lower our per cost tonne again.

All right, thank you.

Yonah Weisz, HSBC.

Hello and good afternoon. Would you be able to discuss inventory levels in key markets, say, China and Brazil and even in the distributors in the United States and Canada and how the current price environment is influencing the desire to take on inventory over the next two or three quarters? Thank you.

Thanks, Yonah, That's a perfect question for Stephen.

Thank you. Of course, this is always probably one of the most difficult metrics to understand because it's really not very visible to us. I guess a few comments, in North America, we had a very strong year last year in potash shipments and we're going to be down considerably this year, in 2015, by about 2 million tonnes. Our expectation and, of course, the behavior that we're seeing right now of distributors not wanting to carry inventory and wanting to go out of the year with very, very low inventories, our expectation is that we will see very low inventories in the North American market as we go into 2016. It's a similar situation in Brazil. We have seen the potash imports right now, what we're expecting in Brazil, coming off last year of importing a little over 9 million tonnes. Our expectation this year is going to be somewhere between 8 million and 8.3 million tonnes of total imports, yet we're expecting to see higher soybean acres, we're expecting to see corn acres about flat. So the demand is there and what we believe is we will go out of this calendar year in Brazil, also, with lower inventories than we entered the year. China seems to be about flat in terms of an inventory condition, going out of 2015 compared to last year and India also seems to be about flat. We have seen inventories built here in India in the last couple months. More delay or more related to the delayed monsoon, but coming out of the end of the year, there probably will be about flat to where they were last year.

May I just have the number you estimate for inventories in China?

I don't have that number right now. The port inventory is kind of the most visible number, but really the most meaningful number is throughout the distribution system and that is the number that we just don't have visibility to.

I don't think anybody does other than local sources in China.

Ben Isaacson, Scotiabank.

Thank you very much. I have a question on potash prices or maybe potash price spreads between various regions. If we look at what's happened in Brazil and in the US over the last kind of six or nine months or so, we've also seen in Europe, prices haven't really moved lower meaningfully, weather you look at euros or US dollars. I guess my question is, why is that? Do you see marginal tonnes kind of chasing that higher net-back market? Maybe as a kind of second part of that question, why haven't we seen the standard grade market in Southeast Asia moving meaningfully lower as well? They're facing the same macroeconomic headwinds and kind of currency issues as well. Thank you.

Thank you, Ben, two very good questions. On the first one, Europe is a pretty insular market and the premium or the prices there have been relatively stable. To the question whether or not that would attract people to move in to a premium market or higher margin market, I think that's -- I would think almost Economics 101 that sooner or later that would happen. It happened in the US, it happened in Brazil, and so I can't imagine that would be permanently -- if, when, and who would do that, I really don't know. To your second part of your question, Stephen?

The second part, with regards to standard grade prices, when you think of the big standard grade markets, China and India, they're both contract markets. So the prices in those markets are pretty stable and set by the contracts. The two large spot markets for standard grade in Malaysia and Indonesia, what we've seen here in the second half of this year is like we've seen in many markets of people slowing down, not wanting to accumulate inventory in this environment. So we've actually seen a little hesitancy to engage the market. I think because of that, the standard price really hasn't deteriorated to the point that one might have thought if you're just looking at some of the spot granular markets, which have been very, very competitive.

Thank you.

Steve Byrne, Bank of America.

What's been the historical split between US P&K applications between the late fall and the spring application time slots? Do you expect that to shift more towards the spring for this next crop?

Well, the split is really highly influenced and dependent upon the season. When you think of it that growers really have two application seasons in the fall and the spring and there's no guarantee that either one of those seasons are going to be open and available. When you have a good, open fall season you will see heavy application of P&K because, as I say, there's no guarantee any season will be available to you. So when you have it, you use it. So that split is really going to be influenced strongly by weather and I would say that, right now, we're in that fall application season right now and what we're seeing here today, we've had exceptional good weather and the harvest is, for all intents and purposes, finished. Where people have been -- where it is finished and people have been in the fields doing their fall application, we have seen and been surprised, our customers have been surprised, at the level of demand that they're seeing right now for fall application.

Okay, thank you.

Sandy Klugman, Vertical Research Partners.

Thank you. So for nitrogen, I was wondering if you can disclose what your expectations are for gas availability for Trinidad in 2016? And then how we should think about what your mix of domestic versus offshore nitrogen production will be going forward?

Yes, thanks. We'll turn it over to David and Raef. They've been in Trinidad not too long ago. I just wanted to point out at this stage, for those who don't know, the government has changed, so we've had a bit more accessibility to at least discuss that. Overall, I'll sum it up. We don't anticipate any significant change in the near term, because it's dependent on gas availability, which is dependent on gas exploration. But we do have, we had some contact with government to discuss it. David you want to -- Raef -- add anything to it?

Sure. Raef Sully, and I were both were in Trinidad just recently and we met with the new Prime Minister Rowley and the Energy Minister Oliver and the NGC Chairman and they're committed to work with the upstream gas producers for further exploration and production to get that annual number back up to 4.1 Bcf. We anticipate curtailments this year of around 200,000 tonnes, similar to last year. I would say the next two or three years are probably in that same volume range. From a production standpoint, the Starfish field did come on this year. It hasn't been producing as well as they had anticipated, but that's to be determined as we go forward. And then in 2017, there's the BP Juniper field coming on and that's really to replace some depleting oilfields, gas fields, but we're hoping there is some incremental supply in the Juniper field, so we're hoping for that. Then Angostura comes on a 2017, that's BHP. There's the Shell BG in 2019, they've got a couple blocks coming on. Then with the regime change in Trinidad, the Loran-Manatee field in Venezuela, in between Venezuela and Trinidad, there for the first time have been more discussion between the two countries to monetize that gas. That's about 10 Tcf; 30% of that goes to Trinidad. So those discussions are going on, so we're hoping within five years, we start to see some of that gas hitting the market for us in Trinidad as well.

Okay, thank you. A question on phosphate, there's been some speculation in the past that you had explored divestiture in your phosphate assets, but at the same time, when you signed the supply agreement with OCP, my perception was that was partly motivated by desire to not lose out on potash sales to customers who purchase dry phosphates at the same time. I was hoping you could comment on whether you view having access to DAP/MAP sales as being necessary in any way to support your potash business?

Well, as you know, we do produce DAP and MAP and we certainly present ourselves to our customers as having the capability to supply them with potash and phosphate and nitrogen products, so yes, we do view that as value. We do view that as important. Our agreement with OCP was certainly an attempt to be part of that marketing effort that OCP was making into North America, but it really doesn't affect the way we position ourselves to our customers because we have -- our portfolio of phosphate products is diverse and has a lot of perceived -- has value and perceived value and we're proud of it. We will continue to offer that to our customers.

To your first part of the question, the focus, as we said, was in phosphate, really, to make operational improvements was our strategy that we laid out. Those improvements are in the form of getting our costs down, particularly the cost of rock in White Springs moving from the Suwannee River to Swift Creek where we had a pretty significant transition. As you know, at that point in time, we dropped granular MAP/DAP production at Suwannee River to make liquid products, only higher-margin products, I think was a very smart move and that's shown in the gross margins of phosphate, improved liability quite successfully and looking at the product lines that we have to exploit the best margins as we can. So that's been our phosphate strategy for the time being that we've been pursuing and executing quite well.

Thank you, that's very helpful.

Jeff Zekauskas, JPMorgan.

Thanks very much. In the beginning of the call, you talked about the importance of your dividends. If you had been successful at purchasing K plus S at sure offer price of, I don't know EUR41, as a base case, would you have maintained your dividend or have reduced it? What were your plans under that circumstance?

I appreciate the question, it's hypothetical.

Yes, it's a hypothetical.

We didn't pursue the transaction. We walked away from it and we explained why we did it and two reasons, macroeconomic environment and lack of engagement. The fact is, we are today where we are and as I say, it's really important for us to maintain our dividend. We stress tested it, we looked at what environment we can do that, and we believe that the current environment and the way we see the future evolving that we can sustain the dividend.

Great, thank you so much.

Joel Jackson, BMO Capital Markets.

Thanks. On the same topic on an updated side in your presentation about dividends cushion, you show that you have, assuming a $200 tonne realized potash price and 10 million tonnes of potash sales, you basically have no cushion for you dividend. Some would say that $200 tonne realized isn't the floor price in a uber bear-ish scenario potash and potash has never sold that many tonnes before. The question I would have are you willing -- how much leverage are you willing to add to support your dividend in a bad situation? Under what scenarios, pricing or free cash flow, would you be looking at cutting the dividend? Thank you.

We did stress test it and I appreciate you make reference to the slide, because it sets our debt $200 on unrealized potash prices, let me put it that way, the dividend is safe. There are also other steps. Our 2016 capital requirements will be, I should say, significantly lower than what they are in 2015, so our cash out the door will be less for that. So that is another contributor to ensuring the dividend is protected at the downside. I can't speculate. It's pretty obvious to say there is a potash price and there is a floor at which you can say, you can sustain a dividend and there's always a scenario that would push us in that. But again, it's hypothetically and we do align it at a certain price. With that, I don't want to say that it will never, ever happen to go below that, but I think we're comfortable to say that's an unlikely or has a very low probability one. In terms of leverage, I don't want to speculate on that because we don't see that as being a necessity at this point. We have a very low gearing. We're below 1.5 debt to EBITDA and we think that we've got a healthy balance sheet and that supports our opportunities in the future. Don't want to speculate on leverage because, again, that hypothetical. But in scenarios that we see, we think we can sustain a dividend.

Fai Lee, Odlum Brown.

Thanks. Just in terms of follow up to the previous question, in terms of the dividend, I understand there's also some flexibility around the maintenance CapEx; I think you've talked about a range of between $600 million to $800 million. I'm just wondering, if you spend $600 million, does that mean you have to spend more the next year or how should we think about that, those levels as sustainable capital needed that need to be spent every year?

I will give you a bit of -- we expect capital to be down about $300 million from the 2015 levels.

Right. But you've given a range previously about $600 million to $800 hundred million, is that correct?

Correct.

I'm just wondering what's the difference between the $600 million and the $800 million?

Oh, you mean -- well that's just I think the ability of us to really forecast what the needs will be. I think we project that number to be 2017 and 2018 and onward and I think we just reserve some flexibility and ability to protect. It's the resolution of the number that we can possibly develop.

Okay. But if you spend $600 million, does that mean you have to spend $800 million the next year is what I'm trying to ask?

Maybe if you use the midpoint, $700 million, that's probably a good reflection of our expectation.

Okay. All right, thank you.

Thanks.

Andrew Wong, RBC Capital Markets.

Thanks. So, Jochen, just going back to the production strategy, matching supply with demand, how do you decide that curtailing production is the right strategy? How do you compare that to lowering prices to sell more volume? Are there any scenarios or maps that you've looked at that you can maybe just help walk us through? Regarding operational flexibility, how do you evaluate that on economic basis? I'm assuming there's some cost to maintain the operating capacity when you don't use it. How do you walk through that? Thanks.

Thanks, Andy. To your first question, I can't get into a specific scenario, but I can tell you we ran a lot of scenarios and we continue doing that. It's kind of an ongoing thing. You can appreciate there is a lot of game theory behind the assumption. There's a lot of Monte Carlo risk scenarios that you evaluate and there's a lot of experience and intuition around this table here. Those are the things that all play a role and we are and continue running through scenarios. The key assumption, and I mentioned it earlier, that we base our decision on is our view of supply and demand going forward. That's an assessment that goes to every operation that we know of, every project that we know of, and our assumed operating capacity of those projects or operations versus what we believe demand in the future is going to be. If that bandwidth is relatively narrow, then we feel that the proven approach of matching supply to demand is the right one and we speak publicly about our S&D assumptions. You can always discuss whether or not specific operations have a higher or lower number and some of it is in the future, but that's our view on which we base that decision. In terms of, to your second question, in terms of maintaining optionality, you're absolutely right. There is a cost involved, but there's also an ability on our part to lower that cost and bring it down. Steps I've outlined and they've been in progress here in for a number of years, getting Rocanville up to its capacity, shutting Penobsquis down, getting Piccadilly up, those are all steps to lower operating costs while we're able to maintain our flexibility. And the cost of optionality I think is entirely appropriate and supported by our view that in a mid-to long-term demand will increase and we don't want to give up that optionality, while keeping their operating costs as low as we possibly can.

Okay, thanks.

PJ Juvekar, Citibank.

Yes, hi, good afternoon. Jochen, you seem to be committed to this price or volume strategy. But at the same time, you're borrowing money to pay the dividend. So I guess if potash prices remain weak, what are the macro reasons? How long can you continue with the strategy? Second, sort of related question is, at the end of the quarter you had $73 million of cash on the balance sheet, which I think is the lowest in the last 10 years. What was the rationale behind that? Thank you.

I'll let our CFO speak to our cash balance but that's just how we manage our cash balance. We always keep it down. In terms of -- to your question of sustaining the dividend, I think I've already commented on how we stress tested it and what we believe is a reasonable set of boundaries. We look at potash prices, realized price to be in the neighborhood of $200, and we looked at whether or not that allows the Company to sustain its current dividend payout. And we look in the future and we look at our cost profile and our capital expenditures and so on and believe that supports our assumption. As I said before, you can always create a hypothetical scenario in which that may not be doable and possible, but that's not one that we believe is likely. So to I think your final point for how long do we think we can sustain that? Well we do believe that the Company and the growth that we anticipate will allow us to sustain that. To the question on cash on balance sheet, Wayne?

I'd just say we have operations and investments in various jurisdictions around the world and so we have strategies for bringing cash back home from time to time and that's all that's really reflected in that cash entering the balance sheet.

Don Carson, Susquehanna Financial.

Thank you. Just a question going back to market demand, you're a little cautious on the offshore outlook. I'm wondering how much of that is due to the feeling that some of your contract customers, like India and China, may take less optional tonnage late this year, given that the prospects of the significant contract price declining or their hopes for a contract price decline next year?

It's well observed that in the last quarter, we take a bit more of a cautious approach. To the specifics, to the extent that we actually can talk about expectations on whether or not these option tonnes will actually be exercised, Stephen, if you want to add some flavor on that?

I think a little different situation in China and India. India is more, right now, influenced by the monsoon and as their season goes on. China is coming out of the year and in the case of Canpotex, the Canpotex contracts are little different in the sense that they have a minimum and a maximum. With their customer base, the expectation for Canpotex volumes will be reaching towards the maximum volumes under those contracts. So, I would say that the demand in China that you refer to is actually quite strong. We think that consumption in China this year is going to be around 14 million tonnes, which is an all-time high and we have observed momentum there over the last couple of years. There's really no obvious reason right now to think that 2016 is going to decrease. You have the [VAP] situation that could play a role but really, it's the momentum that's driving that and our expectations right now for demand in China in 2016 is to be either flat or slightly higher.

A follow-up for Wayne, on the PRT, as your expansionary CapEx comes down next year, what impact will that have on PRT? How much will it rise, if you have a ballpark number in terms of dollars per tonne?

Don, it should be around 20% or so of the gross margin in potash, so it will be fairly close to where it is. As you know, the government instituted some changes that took away the 100% deductibility, especially on the sustaining CapEx. You're not going to see the kind of volatility you've seen in the past because of that tax change.

Okay, thank you.

Vincent Andrews, Morgan Stanley.

Thank you and good afternoon, everyone. Just sort of more of a question on share repurchases versus the dividend. I guess my question is, you've got a 7%-plus dividend yield now, which is kind of like a high-yield bond and your CapEx is coming down. You guys have a positive, multi-year view on what's going on here. I guess it just looks to me like the market isn't as focused -- the market is kind of saying the dividend's not sustainable and you guys are very focused on protecting it and keeping it out there. I'm just wondering why aren't you more interested in buying back $1 billion of stock each year at the current valuation versus just paying it out as a dividend?

I mean it's the same analysis in terms of what we believe is a better way of allocating our capital and essentially creating value for our shareholders and at this point of time, our focus on sustaining dividend. If you contemplate a share repurchase program, it has to be meaningful, it has to be significant. I don't think leveraging the balance sheet up at this point, at this stage, with those concerns that have been raised would make sense. So you shift away from the dividend to another program, make it meaningful. Those are all considerations that we've gone through. Those are all considerations we always look at and we believe, at this point in time, that the dividend program provides better value for our shareholders than shifting away from it and almost opportunistically trying to revamp it and protecting our balance sheet is our key priority. And I think as we've got more transparency and clarity what the markets look like in 2016 and beyond, I think it's just paramount to do that.

Is there a share price at which that view might change?

When you look at accretion calculations and you compare dividend payout versus the accretion of a share purchase program, there is a share price at which point in time they'll question a share repurchase program would become more accretive. I don't want to say whether there is a particular number, because that is hypothetical, but that's stating the obvious that there is a point. But at this stage, we don't believe we're there.

Okay, I really appreciate those comments, very helpful. Thank you.

Adam Samuelson, Goldman Sachs.

Yes, thanks. Good afternoon, everyone. Just a question on 2016 operational capacity. Following the closing of Penobsquis and the ramp of Rocanville, is the idea that you were this year, at [10.9] pre-closing Penobsquis, take that out, [10.1] and then next year, you have Rocanville in the second half, so it's 1 million tonnes to 1.5 million tonnes added and then you're at 13 million tonnes capacity by 2017, is that the way the math works?

We're not going to say yet what expectations are for 2016 specific numbers, because we do that late in the year. So the one data point that you have is that Penobsquis has 800,000 tonnes of capacity. That will come off and then it'll be in the ramp up replaced by Piccadilly. So in terms of expectation for sales operating capacity in 2016, it's a little early to talk about that.

Okay, thank you.

Thanks.

Matthew Korn, Barclays.

Hello, everyone, thanks for taking my question. So I'm going to follow up a little bit on what Andrew and PJ asked before and first this. Is there, in your view, sufficiently capacity on track, with enough credibility over the back half of the decade, among non-current market participants like EuroChem and Laos and Thailand and so on that you could see risk to your efforts to keep balancing supply and demand? And if so, and even if not, is there any kind of threshold in potash price or even your own valuation multiple, in which you say, look, we're low cost, we're getting lower. We've got the most capacity and we're not going to bear the brunt of balance in the market because we're not harvesting what we think the fair share of gains are for doing so? Thanks.

Yes, thanks for the follow up, Matt. The one part of the equation that is equally important is what we believe growth is going to be and even we realize it's not steady. It's not a constant line, but we do anticipate growth to be around 2.5% going forward. So you pick your point in time when you expect the capacities will come online and that corresponds on a 2.5% growth year-over-year with the demand at that point in time. That's one part of the equation, one part of our assumption. In terms of the predictability, who's coming online and then second-guessing or questioning whether or not decision we have taken in this quarter is right or possibly wrong, it's obvious by the actions that we have taken that we're absolutely convinced that the ability to respond to demand and unmet supply with demand is the right answer under those circumstances. So we don't want to second-guess that, because we do believe it. Again, it's based on the assumption what we believe future supply is going to be and what we believe future demand is going to be.

Right, thanks much.

Jonas Oxgaard, Bernstein.

Thank you. On the nitrogen side, I have three related questions. I was wondering, you mentioned that there were some mechanical issues and I was wondering if that is because the plants are old and if you'd see that being a recurring problem? Then following up on that, I was just curious about the progress on Lima expansion and you said you were going to do some efficiency improvements in Trinidad and Tobago?

Thank you, Jonah for the question. So Raef Sully's here, our President in Nitrogen, and he can give you the detail on our plants and the Lima expansion.

We have seven ammonia plants in our system and I want you to know that we've been spending a good deal of sustaining capital on them over the years and their reliability's actually been improving. The maintenance issue we had was minor, most of the lost production in the last quarter was actually Lima being down for the completion of the turnaround. It is up and running well. In Trinidad this year, we recently finished revamping our 2003 plant to bring the efficiency of that plant in line with our others. There are two other plants in Trinidad we are thinking about doing similar energy efficiency projects to. We're just in the stages of doing some engineering studies on them and if it makes sense, we'll do them.

Excellent. So those energy efficiency programs with the curtailments in place, does that mean you're simply increasing output?

That means we're increasing output. Is curtailments continue with those efficiency projects, we will basically be in a position to negate curtailments if we do them and if we get more gas, we will produce more product.

Fantastic. Thank you.

Michael Piken, Cleveland Research Company.

Good morning. Just wanted to sort of take a look out to 2016 a little bit with some of the production cuts you guys of taken, maybe that'll lead to some short-term higher costs and yet over the long run, I would expect your cash costs are going to come down. So if you could kind of walk us through whatever cost savings you might have for next year? Will that be enough to maybe sufficiently offset the headwinds in pricing or what do you sort of see for potash gross profits for 2016?

Yes, we can give you a bit of a directional idea. I'm not sure if I can add a lot more to what was already said in terms of getting Rocanville up and Piccadilly up. We can certainly add a little more specific around that. When we go back in 2013, our target was to lower operating costs 20% to 30%. That was the initiative that began at the end of 2013 with the operational streamlining. When we look at that today, with a bit of a tailwind certainly from the weaker Canadian dollar, we'll get there, we fully expect to get there. In terms of 2016, really, the change will come through Piccadilly's ability to produce more tonnes. Our ratio of fixed or variable costs, pretty much across the board, is 40/60, 46 variable. So you'll appreciate that each tonne that we can produce out of Piccadilly and Rocanville, additional tonne, incremental tonne will have a significant impact on cost profile. That's really the biggest driver that we see in addition to other programs. I don't know, Mark, if you wanted to add a few more words to that?

Good afternoon, Mike. I think Jochen pretty much covered it. I think we're continuing to look for opportunities on improvements in efficiencies and reliability and we think we are well-positioned to continue to do that. But the key drivers for 2016 certainly will be the beginning of the ramp up of the Rocanville expansion, the expanded capacity in the latter part of the year. And then, as we indicated, with shutting down Penobsquis, Penobsquis, of course, being a high cost operation. The ramp up of Piccadilly and we have a lot more confidence in the ramp up of Piccadilly because of the fact we spent the last while developing our production panels and we're now starting to mine and production sequences. So we've got a lot of confidence we can bring that ramp-up up through 2016. And as we do that, we're going to start to see improvements there and overall, that'll result in continued progress in terms of lowering our operating costs through the year.

Chris Parkinson, Credit Suisse.

Perfect, thank you very much. You mentioned in your prepared remarks that you'd consider an [intermarket] agreement within the context of overall MAP market strategy when you were talking about the potential for acquisitions or all those comments towards the end of your remarks. Can you just give us a little more color this? Does this potentially mean you'd even consider a tolling agreement to turn to investment or is it too late for that or how are you thinking about this? Can you just give us your thought process on some of the potential types of options you'd find the most lucrative from your shareholders perspective? Thank you.

Thanks, Chris. I appreciate you picking that up. I do have to apologize by saying it was probably more of a general comment in the way we see the possibilities of creating value. It was in reference to a specific arrangement or a specific agreement and I think it was -- what we said that there were several ways, there's multiple ways of creating value for shareholders and marketing or operating arrangements are one of the options. What we meant to say by that is that not everything has to be the acquisition of an asset, but it can be something that we look at how we make our arrangements. I think the best example for that is really a relationship with Heringer where we've bought a minority equity stake. But after closing, we've also come to a marketing arrangement and we do believe that generates significant value for our shareholders because it gave us an opportunity to sell tonnes in Brazil or additional tonnes. That's an example for the reference to the narrative I gave. There's no further example, but it's a concept that we will keep in mind. It's a concept we think has merit and as anything evolves, we'll certainly talk more about that.

Perfect, thank you very much.

Thank you, everyone. Thank you very much. Please, if we didn't cover your question today, don't hesitate to pick up the phone and give us a call at the office. Have a super day.

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