Agrium's CEO Presents at CIBC's 17th Annual Whistler Institutional Investor Conference (Transcript)

Jan.22.14 | About: Agrium Inc. (AGU)

Agrium Inc. (NYSE:AGU)

CIBC's 17th Annual Whistler Institutional Investor Conference Transcript

January 22, 2014 5:15 PM ET


Chuck Magro - Chief Executive Officer


Jacob Bout - CIBC World Markets

Jacob Bout - CIBC World Markets

I think we will get going here. The next company we have is Agrium and we have the CEO, the newly meted CEO, Chuck Magro, and he is going to give a five minutes presentation, then we are just going to open up for Q&A. So, let me get someone to shut the doors in the back as well.

Chuck Magro

Thanks Jacob. Hello, everyone. Yeah. Just got a few comments to set the stage for our discussion, I thought what I could do is just talk about who we are, just hit the high points of the Agrium investment proposition and then wrap up with a quick market look, the long-term fundamentals, as well as current market conditions as we enter 2014.

Our forward-looking statement. Agrium is a diversified agricultural inputs company. Our strategy is unique. In fact we are one of the few -- very few publicly-traded companies that is integrated and integrated across the value chain.

We are the largest Ag retailer in the world. Our Wholesale business is sizable and it has very strong competitive advantages in North America. We have grown our EBITDA quite substantially since 2005 and what that has allowed us to do is return capital in the forms of dividend and share buybacks and I’ll talk a little bit about that.

As well as we have and I think this sets us apart from some of our other peers in space today, a really nice capital portfolio project where we have growth projects and they are in our control and they are more organic growth and capacity expansions.

And what that is allowed us to do is, I think as you see us grow you will be able to see us grow and then return some capital to shareholders, which I'll talk about in just a couple minutes.

Retail, this is the premier Ag retail distribution business in the world. We have leading positions in Canada, the U.S., Australia and South America. We now have over 1,400 facilities in seven countries and if you look at the graph to the right. What you are going to see is that we have a very balanced portfolio within retail of nutrients and crop protection and seed products.

We are also diversified and balanced on the crops that we have expertise and an experience and services on, and you can see that we are on over 50 crops around the world. And I guess most importantly, we are not only selling commodity-based products but we are providing service and agronomic advice to maximize farm productivity.

Wholesale business, 9 million tons of NPK production capacity, another 3 million tons of distribution capacity, with operations in North America, Argentina, Europe and North Africa, and you look at the chart on the right you can see that nitrogen is still a very good part of our wholesale business, 60% of our gross profit. We are the third largest producer of nitrogen in the world.

Why invest in Agrium? What we believe we have a very solid investment proposition. We have a proven track record of delivering results and we have with those results delivered significant capital back to our shareholders.

As I mentioned, we have a unique strategy, it is a diversified and integrated agricultural strategy. We're the largest and top performing Ag producer when it comes to distribution and we have sizable Wholesale business, as I mentioned, integrate growth portfolio.

This chart really shows how we’ve transform the company since 2005. This is a snapshot of EBITDA from 2005 and then in 2012, and you can see that we have grown the company quite sizable, both 20% per year compounded, 2012 numbers are now about $2.7 billion.

And the Retail business, if you look at it, in 2012 was bigger than the entire company than 2005. And then if you just look at the crop protection and the seed business, those two businesses together now we have revenues of over $5 billion.

So the company is bigger and it is more balanced and more stable when it comes to earnings generation and free cash flow. And what it has allowed us to do is allowed us to return significant capital, so can see we have now a $3 dividend and at today's stock price just over 3% yield, but we've also bought back $1.4 billion worth of stocks since 2012, reducing the shares outstanding by about 9%.

Our dividend objectives are very clear. We intend to increase our dividend overtime. It is a priority for us and we’re trying to target dividend as a percentage of free cash flow in that 25% to 35% of free cash flow after sustaining capital. So as our free cash flow grow so will our dividend.

A little bit on our Retail business. So we have significant competitive advantages. Size and scale would be the first domain with that allows us significant purchasing power. We have extensive proprietary products in the crop protection and seed parts of our company, which have very high margins for us. We are a leader in precision agricultural services. We have unprecedented agronomic skill and experience. We employ over a thousand agronomists around the world, and we have one of the most sophisticated Ag technology offerings in the world. It goes under the banner of Nutriscription HD.

And finally, we have the distinct privilege of working with about half a million growers and I think that allows us a lot of insight of what’s coming from a market perspective that we can take through the entire company including wholesale. If you look at the chart on the right, it shows our EBITDA growth. So those competitive advantages have generated about 35% compounded per year EBITDA growth.

The Wholesale business also has a set of strong competitive advantages. To be successful in Wholesale, you need low cost production, you need a very robust distribution system because given the seasonality and the weather volatility of this business, you have a very short window to get your product into the market and preferably and in pricing market advantage. And our Wholesale business has all of that and more.

You look at this chart here. This chart demonstrates those competitive advantages for our nitrogen business in North America. It shows our low-cost position and our end market price advantage. You can see Agrium's margins compared to our North American peers are about 16% higher over the last -- on an average over the last three years. And this is a pretty significant advantage when you think that we’ve sold upon average about 3.5 million tons of nitrogen in North America.

Switching to potash, the benefits of having an integrated wholesale producer with the retail distributor, one of those benefits is we are able to run our assets at higher operating rates because we have the distribution channel. And this chart just shows some of that advantage. Over the last five years, we've been able to run our potash facility 13% higher operating rates compared to our North American Canpotex peers.

Now, we have a 1 million ton potash expansion that's underway right now. It's just over 50% complete. It will take our capacity from 2 million tons to 3 million tons. But it'll do more than just take our capacity up. It will also drop our cash cost of production by about $20 Canadian per ton. And we expect to start up this capacity in the fourth quarter of this year. And even at today's potash prices amid the recent announcement with Uralkali in China in terms of 305 per metric tons. When we look at the economics of this project in our expansion, it’s still a very robust project for us going forward.

Switching to the long-term Ag fundamentals for just a minute. They are strong and they remain strong, really nothing has changed here. You've heard the story before but by the year 2030, there is going to be another billion people on the planet and the GDP will almost double. So therefore, there is going to be more people with more money and they are going to need more food and this chart just illustrates out with some numbers that by the year 2030, there is going to be a 35% increase in crop consumption. That translates to about 90 million tons per year.

And just to put the 90 million tons per year in perspective for you, Canada today produces about 70 million to 80 million tons. So the world has to find a Canada a year in and year out until the 2030. I think that's a real opportunity but also a real challenge. And finally, market conditions, so we have seen in the fourth quarter significant uncertainty in agricultural markets. It has impacted short-term supply-demand and Ag commodity prices.

And we had a press release this week that we talked about our Q4 numbers being at the bottom of our guidance range. Really the shortfall came from our Wholesale business. Price was down and our prices rebounded certainly in January but price was down in the fourth quarter and volumes started to sort of interesting. What happened in the fourth quarter for certainly for our Wholesale businesses in the U.S., the harvest was late and the application season for fertilizers was therefore compressed and then we had some timing issues from inter-company sales from Wholesale to Retail.

So, I think that bodes well for the spring application season because I don't believe that volume is lost. I do believe that we are going to see a really nice spring season with some of this being really a timing issue. The only thing that could change that is just -- if the economic incentive for the grower has changed. And this chart actually shows quite the opposite.

This chart shows that cash margins for the grower for most core crops are actually very solid. So we think that we are setting ourselves up for a fairly decent spring season and I think that given the right weather patterns in the U.S. and for the spring, we should have a very nice spring season.

So just to wrap up and then we can have our discussion, Agrium is a bit unique. It does have an integrated agricultural inputs focus. We are more balance with a stable asset portfolio. I think we have competitive advantages across wholesale and retail. We’re focused on returning capital to our shareholders and I think we have a very excellent growth portfolio that will add future earnings. So with that I look forward to our discussion.

Question-and-Answer Session

Jacob Bout - CIBC World Markets

Thanks Chuck. Maybe I’ll start off just asking a few questions here before we open up to the floor. Let me guess, first off, just on the transition seal, first month into the job and just strategically how you're looking at Agrium versus -- Mike -- anything changed thus far. We should -- how we should be thinking strategically about the vision for Agrium?

Chuck Magro

I think there is probably going to be evolutional change, not revolutionary change. Jacob, when I look at our strategy, we are an Ag inputs company. I think that’s going to stay the same. Our business model is one of integration and that integration, I think affords a lot of shareholder value. So as long as having wholesale and retail together creates significant value and certainly when you look at the second half of 2013 when the potash markets collapsed, Agrium held up very well compared to our peers.

I think you're starting to see the testimony of our strategy with our share price and over the commodity cycle, I think if we can continue to outperform, that’s what I’d like to focus on. From a strategic priority perspective, the one thing that will be different between, say the previous focus areas and future focus areas is we’re going to put a little bit more focus on operational excellence.

We want to be the best operators in our industry and by that, we’re going to pick a few key metrics such as return on capital, working capital, of course our cost structure and really try to simplify the company and get efficiencies and returns out of the assets we already own.

Now I did mention we have just a wonderful growth portfolio. We can’t drop the ball on that because depending on the pricing and margins that we use, that could add somewhere between $700 and $1 billion of EBITDA. So that will remain a priority for us but we also are going to spend a little bit more time focusing on just getting our base operations running really well.

Jacob Bout - CIBC World Markets

And then longer-term, how are you looking at growing the topline on retail versus wholesale, some of the projects you are thinking about?

Chuck Magro

While the projects that we have today will grow both. We’ll take retail from 2012 number, $950 million of EBITDA to $1.3 billion and you can talk about that journey. I think we have a very solid plan there.

And then in wholesale, it's really the potash capacity expansion. We do have a project that we will take to our board in the first quarter, an expansion for Borger, Texas, that will be a urea capacity expansion that looks really good right now. We also have a host of other nitrogen expansions, the MOPCO project. We have a small 120,000 ton expansion on our Profertil, Argentina facility and we’re constantly looking for further growth in nitrogen.

And then phosphate for us, it's the smallest part of our portfolio. We are on supply contract for part of our production now and we’d like nothing more than find our own [Rockies], also if we could do it in an economic manner.

Jacob Bout - CIBC World Markets

So on Kenai, how should we think about the gas contracts there and what is your sense of what's available and what is the state of plants are right now?

Chuck Magro

The plant has been preserved. We did -- we did make some very wise decisions when we shut it down and we have preserved the plant. It will require capital to restart and really the key question with Kenai is, is there enough gas to restart the plant. And what we’ve told people all along is that we need a year. So this passed in 2013. There is some drill -- some significant drilling going on now on the Cook Inlet and their finding gas but there is not enough gas for us to restart our plant now.

And you can only drill in the summer times. So we really need another drilling season and we won't have those answers until the second -- probably late in 2014. If we were able to bring that plant up that will be by far the best capacity expansion we’ve ever done. But I can sit here and tell you what the odds are. We really need another year of drilling data by the folks that are drilling for gas up in Cook Inlet.

Jacob Bout - CIBC World Markets

Remind us again how big that Kenai plant is and what would be the CapEx roughly to start that up?

Chuck Magro

So rough numbers, it's about 1 million tons, slightly over 1 million tons of ammonia, urea capacity and the capital numbers which are not nowhere near from finalize, we think it could take $200 million, maybe $250 million to restart. So if you look at those economics, they are phenomenal and they are worth, a year’s worth of investigation to see if it's even possible.

Jacob Bout - CIBC World Markets

So you talk a bit about the retail opportunity growing from the $950 to $1.3 billion in EBITDA. But you had in the fourth quarter you wrote down Landmark. How big was Australia as part of that growth in the retail side. What exactly is going on there?

Chuck Magro

Yeah. Good question. So what we said in our press releases that the issues we've had in terms of being at the lower end of our guidance range were Wholesale related. We did make a few comments about our retail business. We said, they had a very strong Q4 and they're going to set EBITDA record for 2013.

Now it's on an apples-to-apples basis exclusive of Viterra. So that does show the significant growth and stability of Retail business. When I look at it, I say, commodity prices NPK almost across the Board fell $100 year-over-year and Retail is going to set a record. That just goes to show the stability of Retail and the Agrium strategy have been integrated across the value chain that work.

Now specific to your question about Australia, we had to take a write-down of $220 million for our acquisition. It was somewhat offset by a long standing legal issue that we had an insurance settlement of $70 million that was related to the acquisition.

So that, we're talking about a net write-down of about 150 million bucks. When I look at it, say the performance of the business, didn't justify the purchase price of that business that’s what it’s come down to. But it doesn't mean that Landmark, our Australian Retail business can’t be a significant contributor to that $1.3 billion.

If you look at that $1.3 billion, it would, what it means is that, Landmark would be about $100 million of EBITDA and in 2012, the numbers around $70 million. Now we haven't provided the numbers, so I'll wait for the earnings call to do that. But we have a lot of work to do in Landmark.

So the question naturally is, what are we doing about that? Well, we've done -- we've made several key steps in the second half of 2013. We changed out the managing director so the highest ranking person in our business. Half the management team we've changed though.

We've taken out to 25% of the G&A and we still have more work to do in 2014 and we're rapidly moving our high proprietary margin products in terms of crop protection and see into our Landmark business. So I think it can still be a major contributor, but simple fact to the matter is, it didn’t justify the purchase price back in 2011.

Jacob Bout - CIBC World Markets

And when you take a look at Western Canada, clearly it looks like Glencore got a pretty good price on the total purchase on that production up 20%. How do you look at Western Canadian retail specifically from the traditional retail business versus the Ag equipment? And would you possibly think about taking the Western Canadian model and using that in the U.S.?

Chuck Magro

Yeah. Just a few comments on your Glencore thought. So I think they did wonderful acquisition and I think it’s -- they are very pleased with that and we actually meet with them couple of months ago and we had a bit of celebration.

Just our side of the equation, we also this week in our press release that we need to adjust the purchase price up for Viterra and that will be a positive indication on our earnings that you'll see in Q4.

And so when you look at all the moving parts of this acquisition, which you're going to see is that we were able to acquire 210 retail facilities in one of the Ag markets in the world plus 17 warehouses and distribution points in Australia for about the cost of the working capital slightly more than that.

So when I look at Agrium's part of this deal, I'd say that's a home run. In fact, that coupled with the thought we've already communicated, I said, that business we think will be $100 million of EBITDA inclusive of synergies by 2015, that's a home run for us.

So now when you look at -- what did we get, I mentioned, we got 210 retail facilities, but we also bought some businesses that we are not in today that we are learning about. We bought their canola seed business and we actually own the canola seed technology.

And this is one of the best canola seeds, if not the best canola seed business in the world. And so we're trying to understand where the value generation is there, but we know that Australia grows a lot of canola. So is there an opportunity for us to take that into landmark? That’s an interesting fact that we’re actively pursuing right now.

To your point, Jacob, we also bought a fuel distribution business and that typically has a lower return. But it causes our people be able to drive down, the farmers driveway and have another contact and discussion with him about his inputs as well as selling him some fuel. So we need to make a decision about the fuel business.

And then as you mentioned the equipment business and the equipment business is an interesting business for us. We’re new to it and what I would tell you is we are going to assess all of these businesses and make decisions on what we do with them and can we take them across the rest of the retail network. But that’s going to take us about a year to figure those businesses out.

Jacob Bout - CIBC World Markets

Just open it up for a few questions. Maybe, I’ll ask the question on the potash side. What is your sense as far as how this industry is operating right now, because we’ve heard various things out of the Russians about a volume overpriced strategy and if that will continue? And when we take a look at pricing, the other question that came about the Chinese contract was, is this three or five the right number and there was talk about a $20 per ton price discount? And when can we expect to see Canpotex contract?

Chuck Magro

So, I don't have anymore insight than you do on the specifics for the year, Uralkali agreement with China. But what I would tell you is based on our experience, the 305 would be comparable to the 400. That answers your question there. What’s going on? I think finally there has been some movement and a price has been set from China with the Russians.

And I think that's all good news for the spring season because what happened and certainly in the fourth quarter as buyers went to the sidelines, they didn't want to catch a falling knife. And they didn’t know where the prices were going, so they step to the side. Now that there's transparency, I think you are going to see agreement set around the world based on logistics and cost structure like you normally do. And I think that's nothing but good news for the spring season.

Canpotex, all I can tell you is that, I think it was important for Uralkali to set the deal and Canpotex is working hard to do their own arrangements with multiple customers and hopefully, we’ll have some good information for you soon.

Jacob Bout - CIBC World Markets

But your thought going in 2015, is to effect from the operated and then scoring flat out.

Chuck Magro

So that the potash expansion will come online in 2015 and our plan is to run that to capacity. Now, what we've always said is that that million ton will take us three years. It's not a third or third or third. We’ll give a little bit more guidance as soon as we get some technical details worked out. But let’s just say, its half of production will be up in ’15. And we have the benefit of having our Retail business.

The only thing that could prevent us from doing that is if the international markets just ceased up, because part of that new capacity has to go through the Canpotex business internationally. That million tons is too big to put into North America and we have our Canpotex allocation. So barring that unforeseen event, absolutely we would say that we’re going to run our new capacity at capacity.

Jacob Bout - CIBC World Markets

Because I guess the conundrum in my mind, is if you assume that growth year-on-year this year is going to be 4 million tons and then years thereafter would be say three. It’s not a lot of growth in volume considering what other producers are talking about as far as how much capacity they are going to ramp up. And so, I’m not sure especially from some of the comments that we’ve heard out of Uralkali. What do you look for that would indicate that or should we be looking for, so that we know that the price over volume strategy is actually working?

Chuck Magro

Yeah, the price over volume, volume over price, I can't speak for anybody except for Agrium. What I would tell you is what we're focusing on is just maximizing our margins. And so it is a balancing act between how much volume that you can sell and how you are going to impact the market. And I think, generally speaking most people would think about it the same way where I don't think it's going to be as black and white as one over the other.

I think what you are seeing now to be honest with you is market price has been set and I think that's good news. We’re going to understand as an industry what the demand equation looks like. We’re looking forward to incremental growth in Brazil and then India and hopefully China.

So, I think that you are going to see some demand growth, but after that then all the players have to step back and look at their supply plans and understand what actions they want to take. The only thing also I would tell you is we do have the benefit of our Retail business, so we are able to go and sell above our market share through our retail channel.

Jacob Bout - CIBC World Markets

Maybe just trying to -- to phosphate, you now move to them rock and rock. What type of hit on margins you are going to see as result to that and longer term what is the solution. I know you’ve talking possibly Utah. Sure, you would be looking at Peru and what do you have in Utah. Do you have mineral rights, do you have any land there?

Chuck Magro

So the phosphate portfolio for Agrium's is about 1.2 million tons to 1.1 million to 1.2 million tons. Half of that is in our condo Idaho facility and that has integrated rock. And it has a really nice sulfur position and low-cost ammonia coming up from our operations in Canada.

So what we're talking about in terms of imported rock is on the other side of that which is our Redwater, Alberta facility so about half our capacity. And we had integrated rock at Kapuskasing and now we had the rail at from Kapuskasing, Ontario to Alberta. So the total delivery cost was not what I would consider to be really low cost. And we’ve signed a contract now with OCP at Morocco to deliver rock into Redwater. And the cost of that -- the way it works Jacob is that cost of rock is indexed to the price of map.

So what that allows us to do is as prices go up, we give a little bit of the margin we at the top but it protects us as prices come down. But there is a lag and the lag is two to three months. So when prices come rapidly down with our costs are going to look a little higher because it needs to flow through the contract equation and then as prices come back up which we’ve seen recently, things will get a little bit better for us over time.

So were going to have to take sometime to explain this to the Street and to yourselves and we’ll do that at the fourth quarter earnings call. But what I would tell you is that the range of incremental cost depends on what the price of map is, is somewhere between $20 and $50 a ton. And then looking forward, we now have a supply contract.

We understand the economics of that and that’s really the no capital version and so the question we have to ask your elves if we put capital to work. Can we get a better return based on the supply contract and it’s a very simple easy economic decision. The trick is finding the right investment project. And what we've done last year as we looked at about 400 projects, around the world we’ve got that narrow down to about five but its going to take a say year to 18 months to work through these now in the second level of diligence and valuation to understand that we have some time to be honest with you.

To your point about Utah, we have some reserves in Utah. We have the option. We don't own the land. We have the option for the mineral rights. But that will require significant capital investment and we’re putting that process through the same thing. I just talked about in terms of, does that make sense or should we continue to receive the supply contract from the third-party supplier.

Jacob Bout - CIBC World Markets

Maybe just last, your outlook for 2014 acreage in the U.S. how strong will the demand be from the U.S. farmer, and just you thoughts like globally?

Chuck Magro

Assuming that theirs is no catastrophic weather events what we would say specifically to corn as we think it's going to be in 91 and 93 million acres. So down 3 to 5 million acres not the end of the world, certainly not for Agrium where we’re so diversified. I think the outlook is positive. I think growers look at the last turn I showed you the cash margins are healthy. I think they have all the economic incentive in the world to maximize your yield still and based on Q4 volumes I think there’s a bit of pent-up fertilizing demand that we should see in this spring assuming that we have the right window for application.

Jacob Bout - CIBC World Markets

We’ll leave it there. Thank you very much, Chuck.

Chuck Magro

Thank you.

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