Q2 and the first half of 2012 were the strongest periods in the company's history. All three business segments had strong earnings. The Retail and Wholesale segments had record EBITDA.
Agrium expects continued strong performance going forward. Record grain and oilseed prices should provide growers with the economic incentive to expand acreage, and therefore, increase their use of Agrium's products and services.
The night before the call, Agrium announced the sale of Viterra's equity interest in the Medicine Hat nitrogen facility. As a result of this sale, Agrium purchased Viterra's retail business for $175 million plus working capital of approximately $400 million.
Agrium's Retail segment had the highest Q2 and first half earnings in the company's history due to continued strong demand for crop input products and services across all products and most regions. Nutrient sales were strong in Q1 due to the early start to spring. Strong demand resulting from higher acreage, strong crop prices and strong cash margins resulted in an 8 percent increase in nutrient volumes in the first half. The early spring should not affect sales in the second half; rather, it should provide a wider window, which would be a positive development.
Agrium does not see any change in chemical sales in the second half of the year, although there may be some immaterial decline in fungicide sales.
In Advanced Technologies, Agrium's expansion project, which will more than double its ESN capacity, remains on schedule and on budget. It should be completed during Q3.
Agrium is progressing on all three nitrogen expansion projects: (1) a debottleneck of its Redwater urea unit, (2) a debottleneck of its Borger ammonia unit and a new urea plant there, (3) the greenfield, for which it does not yet have locations. The Medicine Hat sale will not impact the timeline of these projects.
Agrium hopes that its plant in Egypt will restart in Q3. President Morissey has apparently stated that one priority of the new government is for MOPCO 3 to restart as soon as possible. Agruim hopes its expansion projects in Egypt will be able to start again in Q4.
Agrium has not heard of any change in the ethanol mandate, although some producers are cutting back a bit.
Evaluation of markets.
Grain and oilseed prices have risen dramatically in the last 2 months due to the drought. U.S. corn condition ratings are at the lowest levels since the 1988 drought, which saw yields comes in 25 percent below trend levels. Russian and Ukraine export forecasts have been reduced significantly, and so far, Indian monsoon rains have been below average levels. Agrium expects about 120 million acres of corn crop this year. There will be some shortage of genetic seed corn next year. But, including overseas production, there should be enough crop to reach 95 million acres.
70 percent of the seeds this year are under irrigation and therefore not affected by the drought. Going forward, there will be some shortfalls in some hybrid seeds. Agrium expects seed prices to increase by 8 to 10 percent in 2013 due to commodity prices driving seed prices higher. Additionally, some seed will have to be grown in South America, which makes them more expensive.
Agrium does not see a problem with cash flow for growers. It noted that the growers had historically strong balance sheets at the beginning of the season and have crop insurance, which will allow them to purchase crop inputs for the next growing season. Although farmers are somewhat confused because its been a long time since they've seen such a poor crop, they are looking at the higher prices this year and the opportunity to sell at those prices in 2013. Therefore, most will be willing to reinvest next year. However, rain is necessary for this to happen, especially with ammonia. If there is some rain, all the farmers will put on ammonia.
Other geographies are benefiting from the drought in the midwest, notably the northern plains of the United States, Western Canada and the southern hemisphere.
The drought should not negatively impact nutrient demand in the fall. Nutrient use levels increase during droughts. Plants use the majority of nutrients during the early growing stages. The drought occurred during the later part of crop development, which is positive for nutrient removal. These conditions, along with the declining phosphate and potash levels in soils and high grain and oilseed prices, should result in continued nutrient use for the next growing season.
Demand for phosphate and potash will likely be delayed in the fall due to the drought. The market for phosphate has ranged from balanced to tight due to demand from India and Brazil, tight inventories, higher crop prices, and lower expected exports from China. North American inventories of potash are at high levels, although Chinese imports of potash have increased 20 percent year to date. Although potash prices are currently soft due to seasonal factors, Agrium expects the prices to increase in the fall.
Agrium expects strong demand for nitrogen in the second half of 2012 due to high crop prices. There are only 2 global nitrogen facilities that are planned to come online for the rest of 2012, which are 2 Algerian facilities. The company expects the supply of nitrogen to tighten in the fall and the pipeline is pretty empty. Accordingly, nitrogen prices should remain high.
Agrium does not expect the drought to have any impact on crop protection sales. It expects farmers to plant large acreages and protect their crops from pests, disease and weeds.
Agrium does not expect the crops from Brazil and Argentina to be down this year, although it is a little early to forecast.
Financials.
Retail segment.
In the Retail segment, EBITDA to sales increased to 9 percent in the first half of 2012. In North America, the ratio was 10 percent.
Gross profits for crop nutrients in Q2 increased by 6 percent and increased by 13 percent in the first half. Crop nutrient margins were 17 percent, a 1 percent increase from Q2/2011 and a 2 percent increase from Q1/2012.
Crop protection gross profit in Q2 increased by 23 percent as a result of higher sales volumes and a 1 percent increase in margins. The margins increased due to a higher proportion of private label sales and an increase in margins from Agrium's landmark business.
Gross profits from seeds declined slightly in Q2 due to a higher percentage sale of soybeans and small grains. For the first half of 2012, gross profit from seed sales increased.
Wholesale segment.
Gross profit from Agrium's nitrogen business increased by 33 percent in Q2 as a result of higher prices and cost reductions resulting from Agrium's North American gas advantage. Nitrogen gross margins increased almost 50 percent.
Products gross profit declined slightly in Q2 as a result of lower domestic volumes caused by tight inventory availability. International sales volumes were unchanged.
Profits from phosphate operations declined due to lower prices, higher manufacturing costs associated with both of phosphate facilities taking planned maintenance turnarounds in June , and higher sulfur and rock costs. Agrium's average realized sales price decreased from Q2/2011 when phosphate market conditions were extremely tight. As a result, margins were lower than Q2/2011, but higher than Agrium's U.S.-based peers. For the next year, rock costs from Kapuskasing will continue to move up as Agrium approaches the end of the mine life. It is difficult to predict the cost of Moroccan rock because it will depend on the finished phosphate price.
Advanced Technologies segment.
In the Advanced Technologies segment, EBITDA increased from Q2/2011, driven by higher earnings from acquisitions and stronger sales in the direct solutions segment.
Company-wide
Net earnings for the company for Q2 were $5.44 per share.
Working capital as a percentage of sales is trending down. Agrium has been working to get its fertilizer inventories down as it has seen payable terms this year that it hadn't seen in years. So far, fertilizer inventory is down 35 percent from last year.
In Q2, Agruim more than doubled its semiannual dividend to $.50 per share, which was its second substantial dividend increase since December. It expects to be able to provide more dividend increases in the future.
Agrium announced a $900 million share repurchase program in connection with the sale of the Medicine Hat facility that was announced the night before.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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