CALGARY Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Agrium Inc earnings conference call or presentation Thursday, August 6, 2015 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Richard Downey Agrium Inc. - VP of Investor and Corporate Relations * Chuck Magro Agrium Inc. - President and CEO * Steve Douglas Agrium Inc. - CFO * Steve Dyer Agrium Inc. - President of Retail * Ron Wilkinson Agrium Inc. - SVP and President of Wholesale Business Unit ================================================================================ Conference Call Participants ================================================================================ * Ben Isaacson Scotiabank - Analyst * Andrew Wong RBC Capital Markets - Analyst * Jacob Bout CIBC - Analyst * Don Carson Susquehanna - Analyst * Adam Samuelson Goldman Sachs - Analyst * PJ Juvekar Citi Bank - Analyst * Jonah Weisz HSBC - Analyst * Peter Prentice AltaCorp - Analyst * Mark Connelly CLSA - Analyst * Steve Byrne Bank of America - Analyst * Chris Parkinson Credit Suisse - Analyst * Matthew Korn Barclays - Analyst * Michael Piken Cleveland Research - Analyst * Nolan Pearson BMO Capital Markets - Analyst * Vince Andrews Morgan Stanley - Analyst * Christopher Perrella Bloomberg - Analyst * Tyler Etten Piper Jaffray - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings and welcome to Agrium's second-quarter 2015 earnings call. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Downey, the Vice President, Investor and Corporate Relations. Please go ahead Mr. Downey. -------------------------------------------------------------------------------- Richard Downey, Agrium Inc. - VP of Investor and Corporate Relations [2] -------------------------------------------------------------------------------- Think you operator. Good morning everyone and welcome to Agrium's 2015 second-quarter conference call. On the phone with us today is Mr. Chuck Magro, President and CEO of Agrium, Mr. Steve Douglas, our CFO, and our entire executive management team to review and discuss our results. As we conduct this conference call various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders as well as our most recent annual report, MD&A and annual information form filed with Canadian and US securities commissions to which we direct you. I will now turn the call over to Mr. Chuck Magro. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thinks Richard and good morning everyone and welcome to Agrium's second-quarter earnings call. Agrium delivered strong results this quarter. One underlying factor behind this performance was our continued focus on making operational excellence core to everything we do. The strength of our wholesale sales and operating performance this quarter is just one illustration of its ongoing value. Agrium's EBITDA was up 10% over last year in spite of significant weather and market-related headwinds. These results were made possible by the strength of our competitive advantages across our product portfolio, the diversity of our products, and our geographic reach. Our wholesale operations delivered higher production volumes and stronger margins even in a lower fertilizer price and demand environment. Our retail distribution segment performed well in the US and Australia despite tough market and weather conditions. The major variance in retail earnings from last year was Western Canada where severe drought and [earnings] impacted results. A highlight for our wholesale operational performance was the 35% increase in nitrogen sales tonnes over the prior year. This was made possible by strong facility utilization rates again this quarter. In fact the first half of 2015 delivered the highest total production levels since the year 2000 for our ammonia facilities and they operated at our target 90% utilization rate for this period. This was supported by excellent performance from our wholesale marketing and sales group and by optimizing our retail distribution channels. The higher volumes and lower gas costs also contributed to lower per tonne cost. Altogether this resulted in our nitrogen gross margins reaching $220 a tonne or almost double last year's levels. Potash production and sales volumes are on track to meet our targets as we continue to ramp up our expansion of Vanscoy. We surpassed our target of 700 thousand tonnes for the first half and we are maintaining our estimate of 2.1 million tonnes for 2015. We have seen our potash cash cost of production decline to $110 a tonne this quarter and we expect a further reduction in the second half of the year. Phosphate results remain strong with margins of just over $100 a tonne and gross profit of $29 million, achieved despite conducting planned turnaround at both sites in June. The retail distribution business faced three major headwinds this Spring: adverse weather conditions, grower sentiment and currency. Weather conditions across North America were challenging with record amounts of moisture across most of the Corn Belt in Southeast US in June and a serious drought in Western Canada. The drought reduced demands for crop input and services in Canada. The wet weather in the Corn Belt prevented growers from accessing their fields to side dress nitrogen and apply crop protection products and also prevented some soybean acres from getting planted in the southern states. In California the ongoing drought removed at least 700,000 acres from production. Despite this our California business is performing well due to strong demand for permanent crops and higher value fruits and vegetables. Grower sentiment was impacted by a lower crop price environment, which led to a shift in seeded acreage, influenced grower's purchases, and compressed seed margins. We also saw an acreage shift away from some input intensive crops such as corn, cotton, and canola towards less intensive crops such as soybeans and sorghum. Despite these factors, our market intelligence indicates our US retail distribution operations performed significantly better than our peers. One example of this was the prevailing sentiment at the recent Southwest Fertilizer Conference that US nutrient demand was down in the Spring compared to last year. Comparatively our US retail business achieved a 3% increase in nutrient sales volume. Despite these conditions we held our nutrient margins to similar levels to last year in the US with margins at $107 a tonne this quarter compared to $111 per tonne for the same quarter last year. In crop protection we delivered impressive results under tough market conditions. We achieved higher year-over-year margins, sales volumes and gross profit in North America this quarter. This was largely attributed to continued growth of our Loveland proprietary products line which saw a 10% increase in sales this quarter and represented 23% of our total crop protection sales. The feed market was the most heavily impacted by lower crop prices. And the shift in crop acreage this year to lower value crops as well as some trading down of seed traits. We increased sales of our proprietary seed lines year over year which supported our seed margins and again demonstrates the importance of our proprietary product strategy. In total, our retail metrics fell short of targets this quarter, but we are focused on implementing a variety of operational excellence initiatives to ensure we continue to make solid progress towards them in the future. While our normalized comparable store sales were down 1% year over year, we believe that we outperformed the market as we estimate total North American crop expenditures were down approximately 5% largely due to changes in crop acreage. Moving from our results to our expansion projects, we mentioned we have kept our annual potash production target at 2.1 million tonnes and our Canpotex proving run remains scheduled to start in the second half of this year. I now also want to provide an important update on our Borger expansion project as we have made changes to its scope. Our original scope encompassed a refresh and expansion to the existing ammonia plant and the building of a new 610,000 tonne urea facility. After careful consideration, we've made the decision to reduce the scope in order to de-risk the project, to manage project cost pressures and ensure the highest possible return. In this regard we will finish building the new urea plant and refresh the existing ammonia facility to improve on-stream time and to ensure continued operation of the Borger facility which is our oldest nitrogen plant. However, we have decided not to expand the existing ammonia plant given the high cost and the significantly longer downtime required to complete this portion of the project than was originally planned. In effect, the economic returns on a 145,000 tonnes debottleneck do not justify the cost or risk of this component of the project. The project CapEx remains within 5% of the original $720 million estimate. We anticipate the completion of the ammonia facility refresh in the first quarter of 2016 and to have the urea plant mechanically complete by the end of 2016. The IRR for the project is expected to still be in the double digits and the scope change is not expected to have a material impact on our future earnings. We believe the revised project plan is the best option to preserve returns and to manage the risk going forward. I would like to turn over the call now to Steve Douglas to review our key financial metrics. -------------------------------------------------------------------------------- Steve Douglas, Agrium Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Chuck, and good morning everybody. Agrium's results this quarter were strong with adjusted earnings at $4.90 per share bringing our first half adjusted earnings to $5.01 which is right in the middle of our guidance range. We also grew earnings over last year in spite of a more challenging market condition which shows the unique strength of our business model. We are committed to ensuring we deliver on our capital allocation vision and strategy and as Chuck has just discussed we're willing to make difficult decisions if projects are not meeting return expectations. We expect our total capital expenditures to come in at our previous range of $1.2 billion to $1.3 billion for 2015 and $800 million to $900 million in 2016. We continue to execute on our existing share buyback program and we've purchased approximately one million shares since the end of March. We also expect to be active on our share buyback program through the second half of this year. Our financial capacity and flexibility is derived from our strategic competitive strengths which underpin our strong cash flow generation and our balance sheet position. In this regard we have $2.2 billion of undrawn lines of credit and over $640 million in cash on hand. Our net debt EBITDA of 2.5 times on a rolling four quarters basis, well within our targeted comfort zone. This ratio has remained steady over the last three quarters and it is expected to decline as we move into next year. The average interest on our long-term debt is 5% and we have less than $700 million maturing in the next five years. I am pleased to report that we have already exceeded the $475 million target that we set for our operational excellence program, well ahead of our 2017 target timeline which includes $350 million of one-time cash realization initiatives and $125 million of recurring EBITDA improvement. The one-time cash realizations have been achieved primarily through our portfolio review and reductions in our working capital. Recurring EBITDA improvements have been driven by logistics and procurement efficiencies, lower operating costs, and reductions in G&A costs of over 25% since 2013. We will continue to set aggressive goals in this area in order to build upon the momentum we've achieved to date. The new Alberta government recently announced an increase to the corporate tax rate from 10% to 12%. The impact to Agrium in the second quarter of this year was $21 million, the majority of which was a one-time adjustment on a non-cash basis to a deferred tax liability on our balance sheet. As a result our 2015 effective tax rate will move from approximately 27% to 29% and expect that after 2015 the effective tax rate will be somewhere around 28%. We've provided updated 2015 annual guidance for earnings of $7.00 to $7.50 per share. We believe nutrient prices are at near at or near full price levels, that our costs will remain low, and our plant utilization rates will remain strong. However we did move significant wholesale volumes in this quarter which resulted in the lower ending inventories in June across all nutrients. We anticipate second-half retail earnings will be similar to levels achieved over the past few years. I want to emphasize that our free cash flow message remains intact. We generated over $4.00 per share of free cash flow in the first half of 2015. We are still on target to meet our objectives, remain committed to both expanding capital returns to shareholders, and to continue to grow the business. It is possible due to our stable yet growing earnings profile, a continued focus on OpEx and the strength in our balance sheet. With that I will turn it back to Chuck for his thoughts on our outlook. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [5] -------------------------------------------------------------------------------- Thanks Steve. Turning to the market outlook, the wet weather in the US Corn Belt reduced yield potential such that record yields are unlikely to be attained this year. However, the excess moisture came after most crops had been seeded and emerged and too much rain on its own rarely has a dramatic impact on average US yields. We are still cautiously optimistic for the second half as we've seen nutrient prices already near floor price levels and expect our operations to continue to achieve low cost of production. The excess rain in the US this year has likely contributed to nitrogen loss in soils which will support nitrogen applications this Fall. One variable we are monitoring is moisture levels in Western Canadian soil as growers in this region will need additional moisture in order to apply normal levels of Fall ammonia. Before I wrap up, I would like to take a moment to welcome Harry Deans who will be officially starting at Agrium in less than two weeks to assume the role of Wholesale President. Harry comes to us from the INEOS group in Switzerland where he was most recently CEO of INEOS Nitriles. Harry has over two decades of experience managing petrochemical and commodity businesses as well as significant large project expertise and we're excited to have him join our team. Ron Wilkinson will remain at Agrium as a special advisor to the CEO. I would like to finish our comments this morning by reinforcing that Agrium's strategy, our competitive advantages across our product lines, growing free cash flow, and clearly articulated capital allocation plans make for a positive outlook for the Company. As Steve Douglas has just mentioned, we generated over $4.00 per share of cash flow in the first six months of the year, which is up 15% from a year ago and illustrates our cash flow generation potential even in a lackluster market environment. Our free cash flow is expected to grow as our potash expansion continues to ramp up, as we grow retail and we recognize increasing benefits from our focus on operational excellence. Our unique business model sets us apart from our peers and we are confident we will generate excellent returns for our shareholders. With that, I'd like to open the call up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- At this time we will be conducting a question-and-answer session. (Operator Instructions) Ben Isaacson, Scotiabank. -------------------------------------------------------------------------------- Ben Isaacson, Scotiabank - Analyst [2] -------------------------------------------------------------------------------- Thank you very much. Just one question. When I take a look at your commentary about drought in Western Canada or California and wet weather in the Corn Belt, it raises the question about what is normal weather. As we saw this quarter this does have an impact to your business in terms of pricing and margins. And without opening up a climate change debate, is this a trend that you are seeing, or is this a risk that needs to be managed over the next four or five years or so? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [3] -------------------------------------------------------------------------------- Yes, it's a great question Ben. Look, we are not in the business of forecasting weather, of course. But what I can tell you is we do expect that we're going to have challenges every year when it comes to the growing conditions. If you look at the retail business model physically, that is why we are on so many different crops in so many regions around the world is to diversify our portfolio. And when you look at our overall results, even though you never want to see retail numbers head downwards, when you step back and you look at retail's overall performance in a pretty tough market condition with really difficult weather, you look at that and you say the retail business has actually performed exceptionally well. I mentioned comments on my prepared remarks with the Southwest Fertilizer Conference, we are hearing retailers that are regionally-based being down 20% or more in certain regions. The feed and chemical guys were down over 10% and yet we did have a major drought in Western Canada, which really hurt the Western Canadian business. But the Australia business from an EBITDA perspective was up. Our US business was down only modestly, about 3%, I believe, year over year. So when you look at that, I think that we are going to continue to see weather challenges, and that is why our strategy of being large and diversified has so much value. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Andrew Wong, RBC Capital Markets. -------------------------------------------------------------------------------- Andrew Wong, RBC Capital Markets - Analyst [5] -------------------------------------------------------------------------------- Hi, thanks for taking my questions. This is probably a little bit too early right now, but with farmers cutting back on spending this year, if we enter next year with a similar dynamic in the Ag markets with crop prices were they are, would you expect a similar response from farmers and continued challenges on pricing and margin? And then just on top of that, with the cut back in crop inputs, chemicals, seed fertilizers, can we expect to see any impact on yields with the lower spending? And if we don't, what does that tell us about the value add from the crop inputs side of things? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [6] -------------------------------------------------------------------------------- Hey Andrew. I will have Steve Dyer, our President of Retail, just talk about the current farmer's sentiment and where we think we're heading for 2016, and then address your question on crop input. -------------------------------------------------------------------------------- Steve Dyer, Agrium Inc. - President of Retail [7] -------------------------------------------------------------------------------- Hi Andrew. Yes, in terms of the overall farmer's sentiment, we see commodity prices on corn and soybeans in particular around where they are today. Yes, we will see similar pressure that we've seen this year into next year. If you look at overall farm spending, it is still fairly strong. Again what we've seen is that we have seen some margin pressure. We've also seen some pressure particular on seed around the trade down of quality of seed, that type of thing, as well. But what we also see for us as a big strength is our proprietary products. Again our proprietary products are up. If you look at on the chemistry side, we're up from a year-to-date 20% of our sales to 23% of our sales. And on the seed side we are from 22.5% to 23.5%, so that is also helping to support our margins going forward and gives us an advantage as we move forward. So I think overall farm sentiment may have prices stay at roughly where they are would be similar to this year. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Jacob Bout, CIBC. -------------------------------------------------------------------------------- Jacob Bout, CIBC - Analyst [9] -------------------------------------------------------------------------------- Good morning. Question on the ability to place your potash tonnes as Vanscoy ramps, given the US potash demand weakness. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [10] -------------------------------------------------------------------------------- Are you asking if we're going to have trouble placing the tonnes? -------------------------------------------------------------------------------- Jacob Bout, CIBC - Analyst [11] -------------------------------------------------------------------------------- Yes, you're going to ramp to, what, 2.1, I think you said this year? And then eventually up to, what? High twos? And just your thoughts on that given some of the weaknesses we seen in potash demand. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [12] -------------------------------------------------------------------------------- Yes, okay. So, Jake, I will have Ron Wilkinson talk about the sales and marketing plan to sell out the Vanscoy production as we ramp it up. -------------------------------------------------------------------------------- Ron Wilkinson, Agrium Inc. - SVP and President of Wholesale Business Unit [13] -------------------------------------------------------------------------------- Hi Jacob, it's Ron. Yes, as we -- obviously as we ramp up production we are going to have to also ramp up our sales. We've got really four areas that we're looking at in sales. So, obviously the most important is our own retail group and we will be moving a significant amount of our domestic sales through them. But we also have a solid sales plan and distribution plan in place with what we will call the independents. We also have an industrial book on potash, and of course there is the Canpotex sales. And Canpotex is actually looking at a record year. So that will help absorb some of our additional volume. So, we don't see a problem in the second half. Our production target for next year is 2.45 million tonnes. And again, we've got the sales and marketing plan in place for that. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [14] -------------------------------------------------------------------------------- And Jacob, just to finish off your question, Steve will just talk a little bit about our retail potash volume. -------------------------------------------------------------------------------- Steve Dyer, Agrium Inc. - President of Retail [15] -------------------------------------------------------------------------------- Yes, just to highlight overall, if you look at our overall fertilizer volumes, particularly in the US for the larger potash market, is it's actually up about [2%] and our product volumes were very stable year over year. So that I think bodes well for us to optimize between wholesale retail going forward. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Don Carson, Susquehanna. -------------------------------------------------------------------------------- Don Carson, Susquehanna - Analyst [17] -------------------------------------------------------------------------------- Thank you. I had a question on another retail question just on seed in particular and the weakness there. We always hear that seed is the most important decision a grower makes. If your results were quite weak, talk about trading down of trades. Can you talk about price pressure? And you made some comments about competitive pressures between suppliers. Was there a mix shift away from seed being sold through retailers like yourself and back to correct sales from the seed companies? -------------------------------------------------------------------------------- Steve Douglas, Agrium Inc. - CFO [18] -------------------------------------------------------------------------------- Yes, in terms of seed if you look at our seed we are -- our total sales were actually up slightly. And we actually see that as to the positive because we did have the shift in acreage from corn to soybean as well as some of the other higher valued seeds like canola, and cotton acres were down significantly. So being up in that environment definitely said we grew our seed business. We haven't seen a major shift in terms of the channels it is going through to your question related to that. And then just back to the proprietary product side again, our proprietary products were up from -- as a total percentage of our sales of seed from 22.5% to 23.5% year-to-date. So again, really pressure has been on the seed as a little bit of trading down on the quality of seed on the corn. And the big one was on the shift of acres as well, particular corn to soybean and the lower cotton and canola acres. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [19] -------------------------------------------------------------------------------- Yes, Don. It's Chuck. Maybe I'll just add a couple comments. Just based on the couple of questions that have already been asked, in this market environment, which we think is still decent -- it is not great. I would say that the farmer sentiment is conservative, but they're certainly going to protect their crops. What we're seeing is significant growth in the proprietary products. So there is some trading down between branded to our proprietary products. As you know, that those products have twice the gross margins that we get compared to the third party. So it has actually been very good for us. And we can see that trend continuing as long as we're in this current climate. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Adam Samuelson, Goldman Sachs. -------------------------------------------------------------------------------- Adam Samuelson, Goldman Sachs - Analyst [21] -------------------------------------------------------------------------------- Yes, thanks, good morning everyone. Question in retail. Actually two parts. And first in the quarter, your gross profit, your cash -- obviously your cash selling expenses and other operating expenses were down about 1% year over year. Your gross profit was down about 6%. Can you comment on how you feel about operating expense control, given the current farm spending environment? I suspect some of the mix on crop protection and proprietary is influencing that somewhat, but pretty meaningful deleverage for a distributor. And then secondly, given the current macro environment and the performance in Canada, can you talk about timeline and path to actually hitting the $1.3 billion retail EBITDA target over the next couple years? Thank you. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [22] -------------------------------------------------------------------------------- Hey, Steve. Why don't you start and then I'll chime in. -------------------------------------------------------------------------------- Steve Douglas, Agrium Inc. - CFO [23] -------------------------------------------------------------------------------- Sure. From a cost perspective, we said we were down slightly. That does (inaudible) include the absorption of a number of tuck-ins we have done, as well. So I'll just go around the globe quickly a little bit. If you look at the US, we were -- our costs were flat year over year. Again our revenue was actually up. Yes we have had some -- a bit of margin pressure there, but overall we're fairly flat the last year even on the bottom line performance. And that included $20 million of expenses coming from tuck ins as well. So we have been able to take -- basically absorb that $20 million from a US perspective. In Canada, we are down $26 million in total expenses and in Australia we're down $18 million in expenses. So we have a big focus on expense control as we go through and continue to look at opportunities to leverage and through operational excellence, we have a number of initiatives that we've identified from purchasing, continued consolidation. And just to highlight that, actually in the first half of this year we did close 50 locations. A good chunk of those locations were in the US, but we also did some consolidation both in Australia and Canada, as well. And we have a number of other opportunities that we're looking at to do some further consolidation. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [24] -------------------------------------------------------------------------------- And then just, Adam, on your question, the journey to $1.3 billion. Look, when you look at the 2015 market conditions, with the spend per acre coming down, lower acres and the difficult weather that we've already talked about, the journey to $1.3 billion, we don't expect to get any help from the market at all. So what that's going to entail is aggressive growth of our market share building out the proprietary product portfolio like we talked about and aggressive network optimization, which Steve had just commented on that we're already acting on quite quickly. We certainly think we can get there. But without any help from the market in today's market environment, that will be the journey to get there. Now when we set that target at $1.3 billion, corn was over $7.00 a bushel. There was much higher spend per acre and the number of acres were higher. So, if we were to normalize that at a higher market environment, we think we would be within 5% to 10% of that as we said here today. So the market has impacted retail, but I think that the journey that we are on with the network optimization, aggressive growth of proprietary products, and aggressive market share will get us there even in the market conditions that we have today. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- PJ Juvekar, Citi Bank. -------------------------------------------------------------------------------- PJ Juvekar, Citi Bank - Analyst [26] -------------------------------------------------------------------------------- Yes, hi. Just a quick question on crop protections. Chemical sales being up slightly, this is despite high of inventories exiting last year and somewhat different than what your suppliers have said so far. So I was wondering, was that mostly the inventory issue was mostly at your suppliers? And what are your inventory levels at your levels? Thank you. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [27] -------------------------------------------------------------------------------- Go ahead Steve. -------------------------------------------------------------------------------- Steve Douglas, Agrium Inc. - CFO [28] -------------------------------------------------------------------------------- Sure, yes. Just starting off with inventory levels very quickly. They're very comparable to previous year. We're actually maybe slightly up in the US and significantly down in Canada. Overall we're down on chemical inventories year over year at the end of June. For us, there is a couple of factors here. One is -- obviously we manage our inventory very closely and so you see others may have had more inventory in their channel at the retail level. And I think that is what is impacting suppliers to an extent. The other impact for us, as I mentioned, our proprietary products are up year-to-date 3%. So from 20% of our sales to 23% of our sales. So we have more going through our proprietary channel as well. And that is having a bit of impact, as well, from a supplier standpoint. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Jonah Weisz, HSBC. -------------------------------------------------------------------------------- Jonah Weisz, HSBC - Analyst [30] -------------------------------------------------------------------------------- Hi there, good morning. I would like to ask about the ammonia expansion. Maybe you could discuss some of the considerations that went into the cancellation of the ammonia expansion. Exactly what type of risks were you de-risking in this decision? And perhaps on a broader note, if you look out at the North American nitrogen market in, let's say, three years time. Would you be more positive or less positive than today? Because some suggest that one of your domestic competitors is expanding overseas to escape a deteriorating North American Market Outlook? And I would be very curious to hear what your view is on that. Thank you. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [31] -------------------------------------------------------------------------------- Good morning, it's Chuck. I'll start and then I'll have Ron Wilkinson also comment. So, the Borger expansion project, the things -- what we're trying to balance of course, our management of risks and costs and trying to drive the highest returns for the capital that has been allocated. And when we simply looked at the smaller part of the project, which was the expansion of the ammonia plant, when you look at that, it's a 40-year-old plant. By the time we finished the detailed engineering and then the outage planning, it became really evident that the capital costs and the downtime to get that 145 thousand tonnes while doing open-heart surgery on a 40-year-old ammonia plant, the risk profile and the return profile didn't make sense. So it's a tough decision. It's absolutely the right decision. The current scope that we have now de-risks the project very significantly. Pushing out the urea plant by several quarters will also help us contain the costs, because we won't be running the construction crews on extra overtime. And it keeps the Company within our declared CapEx. So 2015, total capital for Agrium will be what we've communicated historically:$1.2 billion to $1.3 billion, and next year about $800 million to $900 million. And when you look at the earnings impact, I know there has been some people that have written on this already. Our view is that the change in scope has really no material impact on earnings. We believe it is about $0.10 to $0.16 a share on a run-rate basis. And so it's a smart decision with the highest probability of success. Ron, do you want to comment any? -------------------------------------------------------------------------------- Ron Wilkinson, Agrium Inc. - SVP and President of Wholesale Business Unit [32] -------------------------------------------------------------------------------- I'll just add that as we got into the detailed construction planning for the ammonia and the bottleneck, we started to uncover a lot of risks that was very intrusive into the existing unit. And the biggest risk we were concerned about along with the cost was just the length of the turnaround that we were going to need to take to tie all this in, commission it, and restart the unit. So, it really was a risk-based decision as Chuck has mentioned. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [33] -------------------------------------------------------------------------------- On your second question on the Outlook for nitrogen, what I'd tell you is, look, even though nitrogen is produced around the world, you really do need to look at the different regions. And there are supply-demand considerations in the regions. We still like North America a lot. We'd probably be more optimistic a couple years from now than we are today. We actually think that when you look at the Agrium footprint and what our strategic direction is to grow our nitrogen position in North America, we think that is going to create a tremendous amount of value. And so we are a little bit more optimistic than I think other of our peers. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Peter Prentice, AltaCorp. -------------------------------------------------------------------------------- Peter Prentice, AltaCorp - Analyst [35] -------------------------------------------------------------------------------- Good morning everyone. My question is on the nitrogen operations. You had an impressive lift in sales volume and you make mention there of your operating rates being strong and the inventories coming down. Are you able to quantify, or at least comment, on where the inventory sits now on a relative basis? And just given the strength of the quarter and notwithstanding the normal second half turnarounds, why wouldn't you be a little bit more optimistic on the guidance figures you have for sales volume and nitrogen? Thanks. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [36] -------------------------------------------------------------------------------- Ron? -------------------------------------------------------------------------------- Ron Wilkinson, Agrium Inc. - SVP and President of Wholesale Business Unit [37] -------------------------------------------------------------------------------- Yes, in terms of our inventory levels, Peter, you're right. We pulled our inventory levels down considerably by the end of the second quarter. Normally they are -- we are pretty empty at the end of the second quarter. But we are probably a little less or a little more empty than normal. Looking ahead at the third quarter, we expect our production volumes to be actually higher, slightly higher than the second quarter. We set a number of production records in the second quarter and we've continued a number of those into July for our ammonia plants. The third quarter itself is usually a lower sales quarter. And the half is a little lower sales half than the first half. Just based on the size of the Fall season to the Spring season. So there is really nothing abnormal going on there. It's really business as usual. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Mark Connelly, CLSA. -------------------------------------------------------------------------------- Mark Connelly, CLSA - Analyst [39] -------------------------------------------------------------------------------- Chuck, can you give us some sense on how to think about 2015 and 2016 capital spending with the Borger change? I assume you're not spending anything meaningful on Kenai, then. What does the overall spending cycle look like now? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [40] -------------------------------------------------------------------------------- Good morning Mark. Sure, so let's assume that we do not proceed with Kenai. The way the capital would unfold is for Agrium wide, including our sustaining and growth capital that we've identified, 2015 would be $1.2 billion to $1.3 billion. 2016 will see a nice decline in the $800 million to $900 million range, which is pretty consistent with what we've been saying since the beginning of this year. So you're going to see our CapEx decline as we do wind down our major gross phase of the Company and our free cash flow, as a result, improve. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Steve Byrne, Bank of America. -------------------------------------------------------------------------------- Steve Byrne, Bank of America - Analyst [42] -------------------------------------------------------------------------------- Yes, thank you. I was wondering if you had consolidated a view from your retail operations about unseeded acreage percent harvested et cetera and came to a view as to whether or not you think crop production estimates are likely to go up or down from here. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [43] -------------------------------------------------------------------------------- Steve Dyer will answer that question for you. Steve? -------------------------------------------------------------------------------- Steve Dyer, Agrium Inc. - President of Retail [44] -------------------------------------------------------------------------------- Yes, Steve. In terms of our view right now, talk about the USDA numbers first. Again they looked at around 89 million acres for corn and a yield of 165. At this point we wouldn't debate that too much other than we -- probably a little pressure on that yield mainly driven by particularly the Eastern Corn Belt and the very high moisture we had in that area. And on soybeans, that's where we feel there was a few acres that did not get planted in terms of soybeans, again, because of the weather conditions, but again USDA is around 85 million acres, and again yield at 45 is probably roughly on target. And so that is -- we wouldn't have a radical departure other than probably maybe a little bit of downward pressure on corn yield. -------------------------------------------------------------------------------- Steve Byrne, Bank of America - Analyst [45] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse. -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse - Analyst [47] -------------------------------------------------------------------------------- Perfect, thank you. Your profitably in wholesale has continued to improve and I'm sure that's partially attributable to easy comps in 2014, but it certainly appears like you're moving in the right direction on cost cuts, as well. Can you just highlight on overall how you feel about your gross profit per tonne across wholesale? And then how you can improve from a purely operational perspective? And just any update on Vanscoy costs as you head into the Canpotex allocation? Or better rock procurement and phosphates would be appreciated. Thank you. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [48] -------------------------------------------------------------------------------- Hey Chris. What I would say is we're feeling very good about the journey that we're on. We still have more to do and I'll have Ron Wilkinson talk about where we are heading. -------------------------------------------------------------------------------- Ron Wilkinson, Agrium Inc. - SVP and President of Wholesale Business Unit [49] -------------------------------------------------------------------------------- Thanks Chuck. Chris, to your question on cost. Our costs are going down. There's a couple of big things that we're moving on. One is obviously improving our reliability. With higher production rates, we have more volume to spread those fixed costs over. So that is driving our costs down. And then both Chuck and Steve Douglas have talked about our Operational Excellence program. We're working very hard to cut out as much cost as we can from the discretionary side. We obviously want to keep refreshing these assets as we go, but we are streamlining our operation as we move forward. And then we have a couple of tailwinds. One has been the value of the Canadian dollar. That's has helped our Canadians sites. And then, obviously on the nitrogen side, lower gas prices. And that flows through partly to our phosphate business too. In terms of potash we're really pleased with where we are in our cost position. Our cash costs for Q2 were $110 a tonne. We see that dropping below $100 a tonne as we move into the third quarter and ramp up our production rates. And again in that business we continue to optimize how we are running the business. We've just signed a new labor agreement with more flexibility, which we think will again support our cost position. And we think we will be very competitive on a cash-cost basis going forward. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [50] -------------------------------------------------------------------------------- So Chris, it's Chuck. So if you think about what Ron just said and then what Steve Dyer previously around the opportunities that we still have for continuous improvement in network optimization and retail, it's consistent with Agrium's been saying for several quarters now. Our strategic priorities are to streamline our portfolio, drive these operational improvements to the bottom line, grow our earnings in free cash flow both from our current assets and in of course the growth projects, and then return capital to shareholders. That is the strategy that we have been on for several quarters now and it's starting to really come together. So we are quite excited about the future value generation that we have as a Company. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Matthew Korn, Barclays. -------------------------------------------------------------------------------- Matthew Korn, Barclays - Analyst [52] -------------------------------------------------------------------------------- Hi, good morning everyone. So, we've heard you -- some of your peers anticipate lower potash prices going forward, at least through the rest of this year perhaps. And we've seen some shipment profitability guidance reduced as a function of this. What do you think gets the market for potash trending up again? Does consolidation at least -- has this been proposed by some participants? Does that help? Is it a matter of seeing Brazil get through the current hiccup and come back to market in the way they have the last couple years? What is the best opportunity for that market to see prices strengthen? Thanks. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [53] -------------------------------------------------------------------------------- Well, Matt, I don't think I have a great answer for you. It's the function of supply demand. This is a commodity-based business. And I think that others in the industry are working on supply. I think demand is increasing and will increase over time. Our projections are still in that 59 million to 60 million tonnes. So I think more strength out of Brazil would be nice. Even more out of China would be nice from a demand equation. But it is completely a function of supply demand, so there's two alternatives to get there. You either reduce the supply or you grow the demand. And I think the demand is growing and will continue to grow. It's just a matter of can the supply demand be altered by other things in the marketplace. And time will tell, but we are actually quite optimistic about potash in the future. Now we could see lower prices in the Fall. In our guidance range we do have lower pricing built into that. But I think the long-term fundamentals are still very strong and it is a function of supply demand. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Michael Piken, Cleveland Research. -------------------------------------------------------------------------------- Michael Piken, Cleveland Research - Analyst [55] -------------------------------------------------------------------------------- Hi, good morning. Just wanted to think through the implications of some of the consolidation we are seeing potentially on the nitrogen side and potentially on the seeding crops section side and how that's going to impact retail's purchasing plans. And do you see more consignment projects coming along the way? And how the flow has been working in retail with more consolidations and taxing level? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [56] -------------------------------------------------------------------------------- Yes, look, we're trying to get our heads around what is happening, a lot of these proposed mergers or announcements of deals. They are speculative at best right now I think. So we don't really want to comment specifically on what that specific deals could look like. I'd say in general from a retail perspective, once the deals are consummated and we understand what actually happens with these deals, then we'll have a much better understanding of the impacts for our retail business. But what I'd also say is, look, we're talking about the world's largest Ag retailer. We are diversified in seven countries. We buy an awful lot of fertilizer, chemicals, and seed and in any equation in the new world, we're going to be a very important part of that Ag value chain. And probably a very important customer for whatever combinations happen. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets. -------------------------------------------------------------------------------- Nolan Pearson, BMO Capital Markets - Analyst [58] -------------------------------------------------------------------------------- Hi thanks and this is Millan stepping in for Joel. I just wanted to circle out to Egypt actually and just ask what gas allocation has the second line at MOPCO been getting? Can you talk a little bit about, if the second line gets a little bit better gas allocation than the first, does it cannibalize gas away from the first line? And then can you maybe talk a little bit about going forward? What contribution you expect out of MOPCO? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [59] -------------------------------------------------------------------------------- Ron Wilkinson? -------------------------------------------------------------------------------- Ron Wilkinson, Agrium Inc. - SVP and President of Wholesale Business Unit [60] -------------------------------------------------------------------------------- Hi, good morning. We have been able to start up the first expansion train and produce both the urea and ammonia in June. It has been running off and on as gas is available as has the original MOPCO unit. It is very warm in Egypt right now so all of our plants are down. Going forward, we anticipate that there will be enough gas to run at least two of the three plants likely starting in October through the rest of the year and into next year. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Vince Andrews, Morgan Stanley. -------------------------------------------------------------------------------- Vince Andrews, Morgan Stanley - Analyst [62] -------------------------------------------------------------------------------- Thank you and good morning. Just a quick question on crop protection. Seeing that North America, as you referenced your sales increase slightly, I'm just wondering -- I've been under the impression that glyphosate pricing was down substantially in the quarter. So how did you overcome that and still wind up having positive sales? -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [63] -------------------------------------------------------------------------------- Steve Dyer. -------------------------------------------------------------------------------- Steve Dyer, Agrium Inc. - President of Retail [64] -------------------------------------------------------------------------------- Yes, if you look at glyphosate particular, number one glyphosate in terms of our total crop protection portfolio is relatively small and definitely where -- somewhere it was maybe five, seven years ago. So if you look at our total revenue from crop protection side is around $240 million for the first half from glyphosate, just to give you a little perspective. So if you look at it, yes, pricing was down about 7%, but our volume also was up about the same amount. So those two offset themselves from a glyphosate particular. So I think the biggest message to leave with you is it's not that big of a component of our overall crop protection portfolio anymore. Just from where the pricing has gone over the last five, six years. And to put it in a little perspective. So it represents, you can call it maybe about 10% to 15% of our total portfolio from a revenue standpoint. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Christopher Perrella, Bloomberg. -------------------------------------------------------------------------------- Christopher Perrella, Bloomberg - Analyst [66] -------------------------------------------------------------------------------- Thank you. How did Echelon perform in terms of demand and pricing in the first half of the year? And did the lower crop prices have a negative impact on potential uptake of the precision Ag products. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [67] -------------------------------------------------------------------------------- Steve Dyer. -------------------------------------------------------------------------------- Steve Dyer, Agrium Inc. - President of Retail [68] -------------------------------------------------------------------------------- Yes, in terms of Echelon again, just a little bit on precision ag, under Echelon, we do look at it as a broad offering from - right from providing information around data like higher level analytics that we do through Echelon to the field services. We do everything from soil sampling to the new description of portfolio we offer to variable rate application. And then that dovetails into our proprietary products, as well. So if you look at it, I think we continue to move forward with our Echelon. I think the excitement around precision ag has cooled off a little bit. The excitement of -- created a couple of years ago. But we continue to move forward on the Echelon. For example in Western Canada, our acres were up for about two fold where we do some of our higher level Echelon, as well. And if you look at our application services that we put within our precision ag, we are up as well in the US. So we continue to move forward, but the farmers are taking a look at their decisions a little closer now with some of this more advanced spend I'll call it. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Tyler Etten, Piper Jaffray. -------------------------------------------------------------------------------- Tyler Etten, Piper Jaffray - Analyst [70] -------------------------------------------------------------------------------- Good morning and thanks for taking my question. I was wondering if your guidance is assuming that there will be more of what we saw this year in slow or delayed farmer purchasing. If you're assuming that farming comes and grain prices will be similar to where we see them now next year. -------------------------------------------------------------------------------- Chuck Magro, Agrium Inc. - President and CEO [71] -------------------------------------------------------------------------------- Yes, so the guidance assumption is that we have baked into the range that we put out this morning, specifically in retail has what we would consider to be fairly normal chemistry and fertilizer application rates specific in the US and Canada. In wholesale, as I mentioned already, it does have lower potash and nitrogen prices. But it's pretty healthy volumes and it is also assuming that we do get a little bit more moisture in Western Canada, which we actually did get this week and have more of a normal Fall application season for ammonia. So that would be the fundamental assumption from a business perspective for our guidance range. -------------------------------------------------------------------------------- Richard Downey, Agrium Inc. - VP of Investor and Corporate Relations [72] -------------------------------------------------------------------------------- Thank you operator and thanks for everyone for all your questions today. That is all the questions we have the time for and on the call lined up. So, if you have any other questions, Investor Relations is available to take any of your other calls. Thanks. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- You may now disconnect your lines at this time. Thank you for your participation.
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