Phosphate Holdings Inc. (PHI) the sole shareholder in Mississippi Phosphates, reported a 207 percent increase in net income for the third quarter ending Sept. 30, 2008, to $12.6 million ($1.56 per diluted share) compared to the year-ago $4.1 million ($.50 per share). Net sales were up 310 percent during the quarter, to $171.6 million versus the year-ago $41.9 million.
“The third quarter of 2008 represented another solid quarter for the company,” said Robert Jones, PHI CEO. “We maintained near-record sales prices per ton of DAP sold, but did see our margins decline significantly as a result of higher raw material input costs.”
Despite the upbeat results for the third quarter, PHI said the fourth quarter is off to a difficult start due to declining sales volumes in an increasingly illiquid phosphate market. PHI said phosphate demand began to decline late in the third quarter and that it has continued to the point that there is now very limited demand. As a result, prices have fallen and the company is now evaluating production curtailments in the fourth quarter. PHI would use this time to do maintenance.
Jones expects a lack of demand will cause curtailments in all exporting countries, with reports that Russia has cut production by 50 percent. Jones said one sulfuric acid plant was down in October for nine days and that the DAP plant was down several days in early November for a repair. Jones noted that because of the current situation the company did not work 24/7 to get the plant back up.
Jones downplayed the idea of a flat-out cold curtailment, the total shutdown of the plant. He said such would cost about $1 million per month.
Current DAP inventories are put at 40,000 st, with storage capacity at 55,000 st. The company said it has 200,000 st of phosphate rock in stock, which is higher than in the past. It traditionally carries low levels of ammonia and sulfur in inventory, and says it has not begun negotiations for first quarter 2009 phos rock purchases. Rock is at historically high levels. Jones expects to negotiate a new rock contract by the end of the year. He said current rock prices will not support DAP production at current levels – the price of rock will have to come down, DAP go up, or there will have to be curtailments. He estimated that 30 percent of the world production is based on purchased rock. Jones also noted that the company may have to take a write-down on the value of its inventories in the fourth quarter.
Jones said prompt demand is virtually non-existent and that sales are “very, very weak.”
“Buyers are essentially on strike,” Jones told analysts. Citing low corn prices, Jones said $4.00 corn going forward is still a good price. He added that there is a very full supply chain in the U.S. and Latin America, which has retarded movement to warehouses.
“Buyers are unwilling to catch the falling knife.” He said they fear prices will fall further.
Jones said warehouses in the U.S. are full and that once the late harvest is completed, inventories can quickly be depleted. He hopes this will happen during the rest of the year.
“While the worsening financial crisis has had a sudden and dramatic effect on phosphate demand, we firmly believe that phosphate fertilizer demand will resurface in the near term because an adequate supply of phosphates is so essential to world agriculture,” said Jones. “Phosphate fertilizers play a critical role in producing food for a growing world population. If the financial and credit issues constraining international phosphate trade are not resolved, an already tight food supply chain could be unduly stressed.”
“We are not making Gucci purses at Pascagoula,” Jones told analysts. “We are manufacturing food. And that food is essential to feed a growing world population.” “We firmly believe DAP demand will return,” Jones continued, adding that the “return to normalcy” should be “sooner, rather than later.” He said the basic drivers – population growth and improving diets worldwide – have not suddenly changed in the past three weeks. “This does not feel like a cyclical downturn,” added Jones. “I have been through a lot of those in 35 years and this is not one of those.”
He said global DAP demand is impacted by the global financial crisis. “Banks will not loan to buyers or confirm letters of credit,” he said, particularly to emerging countries.
“This has caused a clamp down on international trade.” “The sole respite has been sharply lower raw material costs,” said Jones. He cited the recent drop in Tampa ammonia from $931/mt to $350/mt and Tampa sulfur from over $600/lt to $150/lt. PHI called sulfuric acid prices at $100-$150/st down from $250/st one month ago.
The average sales price for DAP for the third quarter was $1,045/st, a 167 percent increase over the prior-year price of $392/st. DAP tons sold during the quarter were put at 162,926 st. Operating income was $20 million during the quarter, up from the year-ago $6.6 million. EBITDA was $22.5 million, up from $8.7 million.
Nine-month net income was $54.6 million ($6.75 per share) on sales of $410.0 million, up from the year-ago $37.7 million ($4.67 per share) and $151.8 million. Nine-month operating income was $85.9 million versus the year-ago $22.9 million. EBITDA was $94.3 million, up from $66.2 million. Net income and EBITDA for the year-ago nine-month period included hurricane-related insurance recoveries of $37.8 million.
While PHI continues to progress with its IPO before the Securities Exchange Commission, Jones said the drop in public fertilizer stock values by over 70 percent since June/July may cause the company to defer this option. He said if conditions are as they are now when the SEC process is complete, the company will not launch the IPO.
Proceeds from the IPO were to fund a new sulfuric acid plant. The company has submitted a permit request for the new plant and has ordered a new absorption tower. However, this can either go to a new plant or replace one of the existing four towers.