Agrium Inc. (AGU)

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Agrium Inc. (AGU)

Scotiabank Agriculture & Fertilizers Conference Transcript

September 24, 2013 11:00 AM ET

Executives

Chuck Magro - Chief Operating Officer

Analysts

Ben Isaacson - Scotia Capital

Presentation

Ben Isaacson - Scotia Capital

So next up we have Agrium and Chuck Magro, COO is going to be speaking. Chuck?

Chuck Magro

Thanks Ben. Good morning, everyone. It’s pleasure to be here in Toronto. This morning I plan to talk about Agrium’s integrated strategy. I will talk a little bit about the fundamentals currently driving the industry, provide a high level overview of the three business units we have and wrap up with our capital allocation priorities and future opportunities for the company.

But before I get started, you will have probably seen that we increased our dividend again, made an announcement yesterday. We increased it by 50% to $3 per share. This was part of our annual strategic review process. I think it does illustrate our confidence and the ability of our company to generate significant cash flow even in these uncertain times and I think it does show the testament and the value of our integrated strategy.

Despite some short-term headwinds impacting our Wholesale business in Q3, as per our recent press release, we believe the long-term fundamentals of our business remains very strong and we expect solid crop input demand as we move into the fall season. Our Retail business is expected to deliver very strong results surpassing last year's third quarter and with that we will get started.

Our forward-looking statement. This chart shows a snapshot of the portfolio of our businesses. Back in 2005 and then again in 2012, and you can see how we've grown the company in this time period, from about $650 million of EBITDA in 2005 to about $2.7 billion in 2012.

With the 2012 EBITDA of $2.7 billion, this represents about a 23% compounded growth rate over that seven-year time period. And to put this in perspective, if you look at our Retail business earnings in 2012, while they were larger than the entire company was back in 2005. And we now have a crop protection and seed business that exceed collectively $5 billion of revenue.

And if you look at our Nitrogen business, well, in 2005 it was about 65% of the company-wide EBITDA and in 2012 it represents about 45% and has grown in absolute terms. So we now have much broader exposure to the agricultural fundamentals.

Our strategy, well, our strategy is unique. We are the only publicly traded company that is integrated across the value chain. We believe that having wholesale production integrated with the Retail Distribution business provide very significant value creation for our shareholders.

We have significant operating synergies by running our potash assets at higher operating rates to supply our retail business to the tune of about $750 million of value. Our integration has provided many opportunities for acquisition, most recently the Viterra agri-products business which had both wholesale and retail assets.

Also having two integrated businesses allows us to have a much higher debt capacity of about $750 million. And finally having a larger, more stable business and earnings allows us to increase our dividends and our share repurchase as we demonstrated yesterday.

The Viterra acquisition, while we are very excited about this opportunity to add another 210 retail facilities to our portfolio in Canada and we do welcome all the new employees into the Agrium family.

We expect this acquisition to be highly accretive with an impressive IRR and significant EBITDA contribution and it will also help improve key operational excellence metrics such as working capital, the revenue. We will provide more financial information after we close on the transaction which we expect to be in the very near future.

Before talking about the long-term fundamentals, maybe just a quick update on our outlook that we provided yesterday. The Wholesale part of our company, while we are seeing a slow volume demand and weaker pricing across all three nutrients, NP&K.

Harvest is just getting started in the southern part of the U.S. and many growers right now are taking a wait-and-see approach to buying fertilizer. Also, as a result of outages at our nitrogen facilities, we had lower Q3 inventories going into Q3 and are experiencing higher cost as a result of this.

Our factors -- all other factors considered, Wholesale is likely to be down about $200 million of EBIT less than the same period of last year. However, Retail is experiencing a solid quarter and we expect that to surpass last year and be more in line 2011 levels.

Now to the fundamentals, the long-term Ag fundamentals are really quite still are strong, really nothing is changed here. The consumption of grain is still growing at about 2% per year and crop demand is expected to continue to increase at the rate -- at the same rate for the foreseeable future. And this is driven by things we've talked about for many years’ global population increases and global wealth.

So how do we increase production to meet the steady demand? While there are two ways, you can increase the amount of crop area and you can increase the amount of crop yield. The chart on the left shows the crop area increase that we've done and this is 100 million hectors over the last 10 years that the world has put in to production.

It’s come from places like India, China, Brazil, Africa and even United States where there are finite limits to how much land can be added. And the question you have to ask yourself is what will happen in the next 10 to 20 years.

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