Agrium Inc. (AGU)

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Agrium Inc. (AGU)

Q3 2010 Earnings Call Transcript

November 3, 2010 11:30 am ET

Executives

Richard Downey – Senior Director, IR

Mike Wilson – President and CEO

Richard Gearheard – SVP, Agrium and President, Retail Business Unit

David Tretter –- VP, Retail Procurement

Kevin Helash – VP, Marketing and Distribution

Chuck Magro – VP, Manufacturing

Tom Warner – VP, Retail East Region

Ron Wilkinson – SVP, Agrium and President, Wholesale Business Unit

Andrew Mittag – SVP, Agrium and President, Agrium Advanced Technologies Business Unit

Bruce Waterman – SVP, Finance and CFO

Analysts

P.J. Juvekar – Citigroup

Edlain Rodriguez – Gleacher & Company

Jacob Bout – CIBC World Markets

Jeff Zekauskas – JPMorgan

Elaine Yip – Credit Suisse

Don Carson – Susquehanna

Mark Gulley – Soleil Securities

David Silver – Bank of America-Merrill Lynch

Lindsay Drucker Mann – Goldman Sachs

Fai Lee – RBC Capital Markets

Horst Hueniken – Stifel, Nicolaus

Mark Connelly – CLSA

Hari Sambasivam – National Bank Financial

John Redstone – Desjardins Securities

Charles Neivert – Dahlman Rose

Presentation

Operator

Good day, everyone, and welcome to today’s third quarter results conference call. Following today’s remarks, we will conduct an electronic question-and-answer session. Instructions on how to pose your question will be given at that time. As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Downey, Senior Director of Investor Relations. Please go ahead, sir.

Richard Downey

Thank you, operator. Good morning, everyone, and welcome to Agrium’s 2010 third quarter conference call. On the phone with us today is Mr. Mike Wilson, President and CEO of Agrium. He’s joined by our CFO, Mr. Bruce Waterman, as well as other Agrium officers 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 quarter report to our shareholders as well as our most recent Annual Report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions to which we direct you.

I will now turn the call over to Mr. Mike Wilson.

Mike Wilson

Thank you, Richard, and welcome to everyone joining us today. I’ll be reviewing our third quarter results on the call this morning. However, given the strength of the fundamentals of our business, I recognize that the primary interest among the audience will be on the outlook for the crop input sector and Agrium in particular. As a result, I’ll be brief in my opening remarks this morning to try to ensure there’s sufficient time to address your questions.

Earnings from our base business this quarter were much stronger than the same period last year. Retail EBITDA almost doubled last year’s level, while wholesale EBITDA was up over 60%. The outlook is for an even stronger rebound in earnings in the fourth quarter.

Furthermore, given the underlying strength in the crop sector, and the potential for future tightening in the crop input market, we believe the full strength of our earnings potential will become even more apparent in the first half of 2011.

First let me take a few minutes to review the third quarter results. Our retail EBITDA this quarter was $103 million, the second highest on record for third quarter. This was supported by higher nutrient sales and the return to more normal 20% margin on crop nutrients.

However, net sales for crop protection products and application services was lower this quarter due primarily to unusually low pest pressure across much of the U.S., as well as price deflation in glyphosate.

Crop protection product margins averaged 24% this quarter, an improvement over the first quarter of 2010 and the third quarter of 2009, but still slightly lower than historic levels. Indications are that suppliers of most crop protection products have worked through their inventory positions and that the market will return to normal in most products in 2011.

We believe that the diversity of our retail business will be demonstrated once again in the fourth quarter as the extended fall window will allow for strong nutrient applications. Wholesale also delivered their second best quarter ever, with EBITDA up 65% over last year on improved nutrient demand and pricing.

Furthermore, we anticipate significantly higher results in the fourth quarter across all three major crop nutrients. This is due to higher seasonal volumes at much stronger prices as there is always a lag between changes in benchmark prices and realized prices.

Our interest in the MOPCO Egyptian nitrogen facility contributed $6 million in equity earnings to our third quarter. In addition, the project to triple the production capacity is on schedule for completion by mid 2012. Nitrogen accounted for a little over 40% of our wholesale gross profit this quarter.

Gross profit from the domestic market was 58% higher than last year due to stronger sales volumes and higher realized sales prices, partially offset by higher natural gas costs. Our realized average gas cost was $3.73 per million Btu this quarter versus $2.88 per million Btu last year, excluding hedge gains on losses.

Stronger domestic results were offset by significant reduction in sales tons and higher cost from the Profertil facility in Argentina, due to an extended plant turnaround.

Total average margins were $84 per ton slightly lower than last year. Domestic urea margins remained above $100 per ton in the quarter. Domestic ammonia margins were impacted by a higher proportion of sales to the Industrial segment that always occurs in the third and first quarters.

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