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Terra Industries Inc. (TRA)

Q4 2009 Earnings Call

February 18, 2010 03:00 p.m. ET

Executives

Joe Ewing - VP, Investor Relations

Mike Bennett - President and CEO

Dan Greenwell - SVP, CFO

Analysts

Jeff Zekauskas - JPMorgan

Joe Fischer - Goldman Sachs

Sachin Shah - Capstone Global Markets

Allen Young - RC Management

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2009 Terra Industry’s earnings conference call. My name is Eric, I will be your audio coordinator for today. At this time all participants are in a listen-only mode. We will facilitate the question-and-answer session at the end of the presentation. (Operator Instructions). As a reminder, the conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Joe Ewing, Vice President Investor Relations. Please proceed, sir.

Joe Ewing

Okay. Thank you very much, Eric and I would like to welcome everyone to Terra’s fourth quarter and full year 2009 conference call. This morning we issued a news release announcing that for the 2009 fourth quarter Terra reported adjusted income attributable to common shareholders of $0.75 per diluted share excluding special charges of $0.79 per diluted share for a quarterly loss of $0.04 per diluted share.

For the full year we reported adjusted income attributable to common shareholders of $2.39 per diluted share, excluding special charges of $0.86 per share for an income $1.53 per diluted share. As also noted in our news release, our adjusted yearly results represent the third best performance in Terra's history. At the end of the new release, is our safe harbor statement. It describes the limitations of forward statements, and any other items that are not historical facts that are included in the news release. And please note that those same limitations apply to any forward-looking statements we may make during this call.

With me today are Mike Bennett, Terra's President and CEO, and Dan Greenwell, Senior Vice President and CFO who will share their thoughts on Terra's results and our outlook in a few moments.

Regarding recent and upcoming Investor Relations activity, as you can imagine we’ve had our hands full recently as we prepared to announce last Monday that Terra has signed an agreement to be acquired by Yara International. And Mike and Dan will have more say about this, but I would like to let you know how pleased I am personally to be able to deliver this news to our Terra shareholders and to the investment community generally.

I’ve spoke with many of you over the last few days and it’s been great to hear your enthusiasm about this transaction and to accept your well wishes as we move forward towards this exciting new phase in the company's journey.

With that said we will be curtailing our participation in many of the events we would previously have attended, focusing our efforts on completing the transaction with Yara and then working to achieve a smooth integration of the two companies.

I'll now turn the call over to Mike Bennett, so he can give us his perspective on the fourth quarter and the full year and Terra's outlook in the upcoming months. Mike?

Mike Bennett

Thank you, Joe. Good afternoon, everyone and thank you for joining us. Terra's business in the fourth quarter was influenced by three key factors, continuing caution on the part of growers and our customers regarding their fertilizer purchases, a gradual recovery from the soft market conditions we saw throughout much in 2009 and also a late harvest followed by untimely weather.

Through the fourth quarter our agricultural customers continue to remain hesitant in their purchasing behavior striving to maintain a balanced order book while limiting speculative inventories and managing working capital. Prices began to exhibit their typical seasonal strengthening in the quarter although a bit later than usual and certainly later than we expected. This helped to bring some cautious buyers to the market in preparation for the upcoming spring application season. We experienced the latest harvest in past 30 years due to a late spring 2009 planning and wet conditions throughout most of the corn belt and what would typically have been harvest time.

This late harvest affected the early fourth quarter demand for direct applied ammonia, although some of this decline in demand was made up to an extent by quarter’s end. UAN prices begin to move up closer to parity with urea during the quarter, though buyer resistance continued to slow UAN movement in the storage.

In the industrial business, we worked closely with our customers who had curtailed production or shut down plants in response to the overall economic slowdown. This situation began to ease mid quarter as industrial sales gained stability and volumes improved compared to the volatile conditions we experienced earlier in the year.

Our Terra Environmental Technologies business finished the year with strong contract sales volumes in part due to extreme cold temperatures throughout most of the US and the resulting need for power generation for heating. Likewise the mobile team made good progress towards building our Terra Care distribution network and securing supply contracts, both the stationary and mobile arms of this business are poised for further significant growth in 2010.

In total, our fourth quarter sales volume were better than last year. Nitrogen selling prices continue to recover and natural gas costs remain moderate. These trends then carried over into the first quarter and seem poised to remain on this path of improvement. Though buyers are likely to remain risk averse while closely managing their working capital requirements and though timing of demand improvement is difficult to pinpoint, we nonetheless believe that nitrogen purchases will accelerate as we move closer to the spring planting season.

The USDA recently reported improvements in estimated corn demand for ethanol and exports, lowering the projected stocks to use ratio for the current crop. They, along with other sources, are still projecting strong US corn plantings of anywhere from 86 million to 89 million acres this coming spring. The US still needs to import significant volumes of nitrogen fertilizer over the next few months to meet the anticipated demand to maximize the yields on this large intended crop.

Consequently, we expect prices to continue to appreciate to levels that will attract that imported material. Our industrial business is also showing positive demand recovery as our customers resume or increase production under more favorable economic conditions. Given the low fall application of nitrogen, conservative dealer inventories and the amount of snow on the ground in the Midwest, we expect a very challenging spring logistically and are positioning our business to meet the needs of our customers. As a result, like other industry observers, we are optimistic about a strong market rebound.

With that I'd like to turn the call over to Dan Greenwell for his review of the 2009 fourth quarter and the full year.

Dan Greenwell

Thank you Mike and good afternoon to everyone. Mike has highlighted the three factors influencing the business during the fourth quarter and our positive outlook for this spring. I would like to first round out our discussion of the topline with a few comments about product selling prices and volumes and about the impact of natural gas cost on our bottomline.

Then I'll follow with additional comments about our operating results and joint venture operations located in the United Kingdom and Trinidad and our status on the Woodward, Okalahoma expansion and our special charges during the quarter including additional taxes associated with international cash repatriation.

I'll then spend a few moments on the year-to-date results and summarize some of the 2009 financial highlights. Finally, I'll close with the summary of our strong liquidity position and the recap of returns to shareholders.

Fourth quarter adjusted net income available to common shareholders was $74 million or $0.75 per common share compared to last year's $164.7 million or $1.65 per share. We're pleased with the performance during these difficult economic times.

Items excluded from adjusted net income were $42.8 million of additional tax expense associated with repatriation of funds from our international operations. We do not anticipate further repatriations or associated tax in future periods. Excluding the special charge, our effective tax rate would have been 14%. This low effective tax rates results from significant tax planning activities initiated in 2008 and continued in 2009. Another special item excluded from adjusted net income was a loss of $53.5 million on the early repayment of our old bonds in October 2009.

Additionally, we incurred $3.8 million of additional defense costs associated with the unsolicited offer by CF industries during the fourth quarter of 2009. After taking these adjustments into account, net loss for the quarter of $3.8 million. Revenues of $361 million in the fourth quarter of 2009, decreased by $322 million as compared to last year. Selling prices, decreased revenues by about $337 million, while higher volumes increased revenues by $15 million, compared with 2008 results. The 2009 fourth quarter impact from several derivative positions was approximately $4.6 million compared to $189 million in the 2008 fourth quarter.

The annual impact of hedging our firmed price sells activities was approximately $112 million in 2009, compared to a $173 million in the prior year. Our derivative position that we carry into 2010 approximate $8.4 million lower than market and are associated with firm open orders. The majority of these positions will settle in the first quarter.

The year-over-year increase to fourth quarter selling, general and administrative expenses was $4.9 million, primarily due to share based compensation. The increased primarily results from the mark-to-market accounting treatment for the Phantom share program. Terra's stock price closed 2008 at $16.67, while 2009 closed at $32.19.

Total long-term incentive compensation plans, consisting of restricted and Phantom share programs had 2009 annual expense of $16.2 million, compared to $8.1 million in 2008. As we noted the majority of the increase related to the increase in Terra's stock price.

Our United Kingdom nitrogen joint venture with Yara generated approximately $11.7 million of earnings during the fourth quarter and $14.2 million for the year. Operating results, strengthened significantly during the fourth quarter of 2009 and continued into 2010.

Our North American joint venture nitrogen operations consisting primarily of our Trinidad ammonium plant provided earnings of approximately $6.8 million during the fourth quarter and $17.7 million for the year. During 2009, we received approximately $57 million of distributions from our North American and United Kingdom joint ventures.

Terra's effective tax rate after minority interest and United Kingdom equity earnings, was 32.9% for the year. As we noted earlier, approximately $42.8 million of tax expense, was associated with international funds repatriation in the fourth quarter of 2009.

Net cash tax payments in 2009 were a $142 million as compared to payments of $199 million in 2008. We anticipate future affective tax rates to be in the range between 28% to 32%. In the fourth quarter of 2009, we paid $7.60 of dividends on Terra common shares, consisting of a $0.10 regular quarterly dividend and a special $7.50 dividend. Total dividends paid to shareholders in 2009 were $7.90 per common share.

The Terra stock price at the end of 2008 was $16.67 per share. Once the transaction with Yara closes, the 2009 dividends of $7.90, plus the $0.10 dividend announced today, plus the merger price of $41.10, aggregate to a total of $49.10 of real value that will be delivered to Terra shareholders since that time. It was an excellent period to be a long term Terra shareholder, an investment that provided returns of approximately 295% in a little over a year.

Our cash of approximately $500 million is invested in high quality money funds that remain highly liquid. As noted earlier, none of our cash balances are invested in a liquid asset classes. We spent approximately a $134 million for normal maintenance capital, Woodward expansion capital and turnarounds during 2009. We estimate our 2010 sustaining capital expenditures and turnaround costs will total between a $110 million to $120 million, we also estimate that finalization of our liquid UAN expansion will require between $85 million to $90 million. In the aggregate, we estimate our 2010 capital and turnaround spending will be in the range of a $195 million to $210 million. Terra declared a $0.10 dividend per common share payable on April 7th, 2010 to shareholders of record as of March 17th, 2010.

At this time, I'd like to turn the call back to Mike Bennett.

Mike Bennett

Thank you Dan. Turning now to more immediate matters, as Joe and Dan mentioned and as most of you I'm sure have heard, we did announce this week that our board has unanimously approved the definitive merger agreement with Yara international to de-sale all the outstanding shares of Terra at about a price of $41.10 per share. Dan, I think very clearly pointed out. You’ll remember that Terra did pay a special cash dividend of 750 per common share in December of last year. And once you combine that with this transaction value, we think Terra has delivered significant value to its shareholders. The transaction is tremendously exciting for us, because we think it represents an excellent opportunity for all Terra stakeholders.

The two companies have highly complimentary geographical footprints. Yara brings to Terra a wealth of resources, in terms of products, supply and operational flexibility, along with the obvious benefits of being an integral of a truly global industry leader. Once the transaction closes, we expect by the end of the second quarter, Terra will become a wholly owned Yara subsidiary, operating under the name, Yara North America. Yara North America will oversee all North American operations for the combined company, including all of Yara’s existing manufacturing and sales facilities in the US and Canada.

We look forward to working with Yara's management team to combine these two successful companies to form a world class industry leader.

And with that, we are going to open the call to questions. And at this time, one thing I would like to point out. I understand that some of you may have questions about the background and details leading up to this transaction with Yara. That background information will become public when our proxy is filed in due course.

As a result, we will not take questions on this in today’s call.

At this time Eric, could you please give our audience instructions to address questions to us.

Question-and-Answer Session

Operator

(Operator questions). Your first question comes from the line of Jeff Zekauskas with JPMorgan.

Jeff Zekauskas - JPMorgan

What I was hoping Mike is that you might be able to sort of compare the UAN and your urea and ammonia markets domestically right now. That is when you look at the trajectory for demand and price over the next month or so or towards the next three months. How do you see these three markets evolving?

Mike Bennett

First of all, Jeff when looking at the ammonia market obviously right now global ammonia values have improved over the past month or two. It would appear that at least now the supply situation is relatively snug at the Gulf, and certainly I guess my expectation is that we could see further improvement there.

In terms of the agricultural ammonia markets here, really I think much of this is going to be quite frankly a matter of timing, relative to when we get spring underway. There has been material purchased at least by a number of dealers to at least get the first round of ammonia out in the field when the things finally do open up. And quite frankly at this stage of the game, though we still have concerns over the amount of moisture, that's out here in top of the ground. We got a ton of snow here in [two] city and I think much of the country has snow covered at this point in time, so it's always difficult to say how early the spring will be.

A late spring obviously will create a very compressed ammonia application season, when we would anticipate would be somewhat hectic anyway given the sub par application we had last fall and so certainly I think ammonia will be solely a logistical market and the ability to get trucks moved and product delivered is going to be key and I think ultimately that will drive where prices may lead.

In terms of urea, at this point in time I think urea market has shown some strength. It’s somewhat leveled out at the current time. I think that’s reflective of certainly the global market as things exist today, but again our view is that there’s not a tremendous amount of inventory out there in the hands of customers and we anticipate that more buying will be needed.

As with the case in UAN, we think that the amount of product out there in dealer storage right now is lower than normally one would expect it to be. That again we attribute primarily to very cautious attitudes on the parts of our customers and tight working capital. And so it’s really going to take some movement and demand from those customers and increase shipments really to get price moving.

Quite frankly if it’s late spring, I think UAN is going to be a product in very strong demand and I believe that subsequent order activity and demand from customers and the logistical challenges in the marketplace should lead to some improved value for us.

Jeff Zekauskas - JPMorgan Securities

And if I may just try one last question, in assessing the offer that Yara made for the company, what were the principal value measures that you and the Board looked at? Was it long-term discounted cash flow or replacement value? Or how did you measure the value of the offer versus the value of Terra as you saw it?

Mike Bennett

Well Jeff, there are customary methods of evaluating valuation of your company, we go through processes like this, certainly discounted future cash flows can be one of those. It can be peer comparisons, there are really a number of different comparisons that you look at as you try to triangulate value and I guess the key point is at the end of the day, that in looking at all the information available to us after listening carefully to our shareholders, our Board ultimately unanimously decided and believed that this transaction was compelling for our shareholders.

Operator

Your next question comes from the line of Joe Fischer with Goldman Sachs

Joe Fischer - Goldman Sachs

I'm filling in for Bob Koort today. You mentioned nitrogen prices need to rise to attract imports. I was curious if you could just talk a little bit more specifically about where you see prices need to go to attract those imports and what kind of import demand you guys are thinking for 2010?

Mike Bennett

Well first of all, I don’t have the last month's number, thus far through the end of the year imports of all three major nutrient products, ammonia, urea and UAN have a pretty significantly lagged the 5 year average and as we look at the supply-demand balance to the upcoming spring, basically we're in a position where we need a more of a normalized level of imports to ensure adequate supply for the types of crop that we anticipate. Frankly, if I recall correctly and this number could be a little bit off but I think UAN imports for example, through the end of the year, we're still something in the order of thirty some percent lower than atypically would have been through the first six months in the nutrient year.

I know that urea imports have also lagged significantly as has ammonia. So we really need some catch up. We believe that some catch up has occurred probably in January and February, but certainly still not to the extent needed and when you look at urea prices for example in the Gulf right now, they are pretty much on more or less at par and possibly even a slight discount yet to what we see in some of the global markets.

So the exact nature of the price increase, I don’t have a specific dollar value for you, but number one to move prices up and get that material in here, people have to step up and decide to be buyers and as orders are placed, we think that the markets will discover prices that attract product into the country to meet our needs.

Joe Fischer - Goldman Sachs

Maybe just one other one. You mentioned potential for logistical issues a couple of times, I think it’s interesting, I've heard just about everything you said echo except for that from the corn belt, I'm curious how serious that could be and if what your thoughts are on maybe the potential that the market at the distribution, the supply chain is maybe moving more towards closer to adjust in time situation and may be less of a restock and this is the adjustment year to something like that?

Mike Bennett

Well, based on market behavior this year and certainly the apprehension of customers I think they definitely are signaling they'd like to go to adjust in time system. Unfortunately you don’t snap your fingers and change that in the course of the few months and fact of the matter is that our sales for example we don’t have nearly the storage capacity for nitrogen that we carried 15 years ago when producers tended to carry more of the inventory and discipline and so from my perspective the earlier the spring opens up and we gained more product the better we have for a number of years now as an industry really relied on the storage base and capacity of our customers to help ensure that adequate supplies will be in position for spring application this year, we don’t believe that storage is full as we will typically like to see it and frankly it could leave to some very significant challenges for us and deliveries especially if we get a late start to the season and we get a compressed application period.

Operator

Your next question comes from the lime [James Kennedy with Citi] please proceed.

Unidentified Analyst

Good afternoon just a quick question from debt holders perspective. Will the Terra 19, your one issue, remain outstanding once Yara acquires you? And would they be guaranteeing that debt?

Dan Greenwell

I think Yara will make that decision in due course at this point in time would probably not like to speculate whether or not they would to remain outstanding after Yara acquires Terra.

Operator

(Operator Instructions). Your next question comes from the line of Sachin Shah with Capstone Global Markets. Please proceed.

Sachin Shah - Capstone Global Markets

Just wanted to find out if you guys have talked to CF since deal announcement. Is there any indication from your perspective that CF will make a counter offer, especially since they withdrew its offer last month? The reason why I'm asking is, based on the premise that the stock is trading above the deal value.

Mike Bennett

First of all, it's difficult for me to speculate on what CF may be thinking or may or may not do. I also never been able to figure out sometimes why share prices of many companies trade where they do at certain points. But beyond that, as far as any detail on the background of the merger agreement, as I indicated in my statement we will provide some of that background detail in our proxy statement that will be filed in due course and hopefully that will give you and other shareholders a better sense of the process.

Sachin Shah - Capstone Global Markets

Okay. How did the board kind of balanced the risk of losing a Yara bid with their fiduciary duty to maximize shareholder value, especially since the last CF bid was reasonably close to Yara offer?

Mike Bennett

Again, I think that once you have an opportunity to review the proxy statement, you'll get a better context for the flow of events and activities and hopefully that will answer your question.

Sachin Shah - Capstone Global Markets

Okay. So the basic premise is that we are not missing anything? The proxy statement is going to clearly identify the process and the board doing its fiduciary duty for the shareholders?

Mike Bennett

Absolutely.

Operator

Your next question comes from the line of Allen Young with RC Management. Please proceed.

Allen Young - RC Management

Just curious what announcement if any has been made regarding the Terra Nitrogen Master Limited Partnership units?

Dan Greenwell

No announcements been made regarding the partnership units.

Allen Young - RC Management

Any insights as to what Yara will do or.

Dan Greenwell

No we probably not want to speculate at this point in time.

Allen Young - RC Management

Will it be proxy address decision at all?

Dan Greenwell

Well I don’t think with respect to if there's any decision taken between now and then I am sure that it would but at this point I don’t want to speculate on what your may or may not do with the partnership units.

Operator

Ladies and gentlemen we have no more questions in queue. I would like to turn the call over to Mike Bennett for closing remarks.

Mike Bennett

Thank you very much. We appreciate your interest in Terra. We are going to go to work here and get ready for a busy spring season. In the meantime if you have any follow up questions please contact Joe Ewing. We appreciate your interest and look forward to seeing you again soon. Take care.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a good day.

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Source: Terra Industries Inc. Q4 2009 Earnings Call Transcript
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