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Agrium Incorporated. (NYSE:AGU)

Q1 2010 Earnings Call

May 5, 2010 11:30 a.m. ET

Executives

Richard Downey - Senior Director of IR

Mike Wilson - President and CEO

Bruce Waterman - CFO

Analysts

Jacob Bout - CIBC

P.J. Juvekar - Citi Group

Jason Miner - Deutsche Bank

Elaine Yip - Credit Suisse

Robert Koort - Goldman Sachs

Fai Lee - RBC Capital Markets

Edlain Rodriguez - Broadpoint Gleacher

Hari Sambasivam - National Bank Financial

Martin Lavigueur - Macquarie

David Silver - Bank of America

Horst Hueniken - Thomas Weisel Partners

Mark Connelly - CLFA

Operator

Good day everyone, and welcome to today’s Agrium Incorporated 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’d like to turn the conference over to Mr. Richard Downey, Senior Director, Investor Relations. Thank you. Please go ahead.

Richard Downey

Thank you, operator. Good morning everyone and welcome to Agrium’s 2010 first 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 and 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 containing 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 U.S. Security Commissions to which we direct you.

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

Mike Wilson

Thank you, Richard, and good morning and thank you for joining us today for our 2010 first quarter conference call. This morning I’ll provide highlights of our first quarter operating results, and share our insights on the spring season for the crop input market, will providing additional color to our earnings guidance for the second quarter and remind shareholders that the fundamentals remains strong for our business

I’d like to take a moment to personally thank those Agrium employees who put great effort in attempting to bring Agrium and CF together. Agrium has always been committed to a disciplined approach to grow in order to deliver value for our shareholders.

Our decision to ultimately terminate our offer for CF is another example of that that discipline. Under the circumstances, it was the right thing to do to ensure value for our shareholders.

Now the current business, our first quarter is typically our least profitable quarter, as we build inventories across all three business units in preparation for the spring season.

That being said, our wholesale business unit delivered the strongest first quarter ever from a net sales and volume perspective. And its second best ever first quarter gross profit in EBIT.

The cold weather in March significantly impacted our first quarter results for retail products and services, pushing sales into the second quarter. For wholesale, the weather reduced to proportionate of ammonia sales made into the higher valued agriculture market versus industrial sales in the first quarter.

We reported a net loss of 7 million in this quarter or $0.04 loss per share. However, excluding GAAP and other hedge position losses and stock based compensation expenses of which almost all were non-cash. Our net earnings were $0.41 per share for the quarter. This first quarter also included tax benefit of $0.17 per share on a previously unreal recognized tax benefit.

However, this is expected to be partly offset by $0.08 per share non-cash expense related to an anticipated one time tax change in Canada, in the second quarter of 2010, which is included in our guidance. So there is a balancing of tax one time components, as we move to the year.

We anticipate strong second quarter results as the fundamentals for agriculture through this spring season, and the crop input market remain solid. As a result, we expect our second quarter earnings to be in the range of $2.50 to $3, which would be the second highest quarterly earnings in our history.

Further more our field activity in March was heavily constraint due to adverse weather. The weather in April was near perfect. In fact, we’d probably experience the most active April on record.

Moving to our retail first quarter results, net sales were similar to last year at $1.1 billion. Gross profit was a 162 million this quarter, a $20 million increased over last year while our EBIT showed the 22 million year-over-year improvement.

Increased in retail earnings are due to a significant improvement in crop nutrients results. Gross profit for the segment was $63 million for a quarter, up significantly from 18 million the previous year. Crop nutrient margins approach to a more normal levels 17% for the first quarter, well above the 4% experienced last year.

Our crop nutrient sales volumes in the first quarter of 2010 were stronger than last year. Delayed start to the spring application season push sales in the southern U.S into April and May. The good news is that demand for crop nutrients was extremely high in April with many regions running out of product particularly ammonia.

Rains at the end of April were welcome since it allowed some restocking to take place. As many of our original managers said, in their weekly report at the end of April, it’s been a long time since they have been happy to see rain arriving in the spring. The breaking activity has provided the time to refill inventories in preparation for the remaining fertilizer application season.

A crop protection business reported net sales of 462 million this quarter, an 8% increase over the same period last year. Crop protection product margins were 15% for the quarter versus 18% for the same period last year.

The increase in net sales and lower margins was attributable to aggressive supplier repaid programs, promoting first quarter sales. Crop protection product margins are expected to increase in the second quarter, as a result of anticipated higher customer applied sales.

Net sales of seed were 191 million in this quarter compare to 148 million last year. Gross profit was 15 million for the quarter, compared to 25 million in the first quarter of 2009. Reduction in Gross profit compared to the same period last year was primarily due to higher proportion of rebate expected to be realized in the second quarter of 2010.

Our private labels seed product known as Dyna-Grow, met with some competitive pricing challenges in the first quarter of 2010, but Agrium increase its market share for the major crops. We expect increase our Dyna-Grow corn and cotton seed sales by over 20% in 2010.

We anticipate that our 2010 EBITDA were fully reflect the 115 million in annual synergies from the UAP acquisition and they return to more normal crop input margins. Such that we still expect to be within our normalize earnings range to retail in 2010.

Moving to wholesale business, also gross profit was 217 million this quarter. Almost doubled last year’s level. The strength in wholesale first quarter result was stood at the significant year-over-year improvement in potash and nitrogen, and purchase for resale businesses.

Improvement was due to a combination of higher sales volume and lower per ton production cost, only partially offset by lower average realized sales prices. Our nitrogen business contributed 72 million in gross profit, compared to 55 million in the same quarter last year. The increase was attributed to lower cost of product sold per ton and a 9% increase in sales volume versus last year.

Increase sales volumes and higher operating rates at our production facilities result in a lower per unit cost of product sold. We expect a significant jump in ammonia sales volumes from the industrial sector to the higher margin agricultural sector in the second quarter, which will increase realized ammonium prices, particularly given the strong demand for ammonia this spring.

Our potash business was the key driver behind our strong first quarter results. The gross profit of 106 million this quarter compared to 21 million in the first quarter 2009. In fact potash accounted from most half of wholesales total gross profit for the quarter.

Sales volumes increased 458,000 tons or 600% versus last year, with the rebound in demand for both the domestic and international market. Cost of product sold dropped to $140 per ton in the quarter, a decline of $137 per tons verses last year, despite the much higher Canadian dollar.

The improvement is a result of that going facility, operating at near capacity, from March of the first quarter. Our phosphate business delivered gross profit of 18 million this quarter verses 26 million in the previous year. The reduction was due to lower year-over-year realized sales prices.

Sales prices in the first quarter of 2009 benefited from the forward sales, booked at higher benchmark prices in the fall of 2008. While first quarter 2010 sales were largely booked in the fall of 2009 before benchmark prices had appreciated.

Second quarter realized prices are expected to increase noticeably. This is likely to be offset by an anticipated increase in production cost due to the higher Canadian dollar. Phosphate sales volumes were 24% higher than the same quarter last year, as a result of increased demand. Cost of product sold was $388 per ton, a $42 decrease versus the same period last year, due to lower sulfur cost and significant increase in operating rates at our Conda facility. Purchase for resale returned to more normalized margins in the first quarter and is expected to deliver solid results in the second quarter of 2010.

The other corporate business unit showed a loss in gross profit $33 million this quarter. This is primarily related to inter-company sales of wholesale product to our own retail. There is a delay in recognition of these sales until retail has sold the product to the end customer which is expected to occur in the second quarter.

Agrium Advanced Technologies business gross profit was $15 million for the first quarter compared to $10 million of the same quarter last year. The increase is primarily attributable to inclusion of the new turf and ornamental business transferred from retail in the third quarter of 2009 and higher margins for controlled release products.

Partially, offsetting this was lower sales volumes for ESN as a result of the wet weather in the US. EBITDA dropped by approximately $3 million this quarter versus last year, due to higher SG&A cost related to the inclusion of the newly transferred turf and ornamental business from retail, as well as lower equity earnings from our investment in Hanfeng Evergreen.

We expect to see strong ESN product movement in the second quarter as the planting and application season progresses and due to the new production of available from our New Madrid facility that is now operational.

We’ll be hosting a grand opening in two of the new coating facility on May 19th, 2010, where a number of Agrium management, industry experts and regional dignitaries will be present.

Turning to the outlook. The crop prices and per acre cash margins for most crops continue to be well above average even with the volatility in crop prices experienced over the past few weeks. All indications from our extensive retail system across the US are the growers have returned to normal application rates of crop nutrient as well as other crop inputs. Growers were particularly anxious to return to strong application rates for nutrients and get the crop in the ground earlier this year given the late seeding at harvest last year.

In fact, many regions experienced crop nutrient product shortages in season this year given the strong pull from growers. Results from USDA perspective planting report indicate that US growers plan to seed 88.8 million acres of corn, 78.1 million acres of soybeans and 10.5 million acres of cotton.

This forecasted acreage represents substantial increases from last year, and corn and cotton area may even surpass these figures, which could further support profit for demand. The pullback in crop prices over the past month has been related to the rapid pace of seeding in the US in April.

This has by extension impacted valuation for Agricultural Companies over the past month. However, it’s important to note that we’re early exceeding can reduce the risk of (inaudible) damage and the fall. There is no meaningful relationship between a early seeding days and expected crop yield in that year.

The late spring in carry over higher inventories of some crop protection products from last year did result in limited price appreciation for these products and to a lesser extend for the seed segment in the first quarter of 2010. However, the early seeding progress goes well for increase and season seed in crop protection product purchases.

Moving to crop nutrient outlook. International urea prices have been under pressure over the past month, partly due to delayed spring demand in Europe and the US, and the lack of immediate demand in other international markets.

North American applications are expected to be strong in the second quarter due to increased acreage of corn and cotton. Also worth noting if the Indian domestic demand usually shows seasonal increases in the middle of the year.

In regards to the recently announced new Russian-Ukrainian Natural Gas Agreements, there still remains some uncertainty as to what Ukrainian producers will ultimately pay for gas this July. Although, most industry observers agree that the gas price Ukrainian nitrogen produces are expected to pay at the plant is likely to exceed $7 per million Btu, assuming the Ukrainian government follows through with IMF recommendations to remove the existing subsidies. Ukraine is therefore expected to remain as the marginal or high costs global nitrogen exporter followed by China.

Phosphate demand is expected to remain tight with US inventories staying below the five year average at the end of March and US spring applications expected to be strong. Brazilian imports were below average from November 2009 to February 2010, but surged in March.

Industry analysts’ expected firm demand from Brazil through the middle of 2010, this combine with India locking it over 6 million tons of DAP for 2010 is expected to lend support to the phosphate market.

The potash market has shown significant recovery from 2009. The Chinese agreement in Indian Nutrient Based Subsidy helped to provide clarity to the market. India continues to purchase potash and US inventory is tightened at the end of March, moving down to 21% below the five year average.

Looking ahead, we anticipate continued strong demand domestically while Brazilian imports normally peak in the third quarter. Overall the stronger fundamentals that we spoke up in the last conference call are here with us today. And fundamentals continue to look healthy in 2010. As I speak to you this morning the Canadian dollar is just getting started with the application and seeding season, while the US dollar is well on it’s way with retailers trying to catch their breath when and where they can.

Inventory levels for both retailer and wholesaler expect to be virtually empty by the end of this spring application season. This is positive news for everyone involved in the agriculture supply chain. Our competitive diverse assets combine with the implementation of our growth strategy over the last five years will allow Agrium to capitalize on these strong fundamentals.

Before I open the call to questions I encourage you to attend or listen the webcast of our annual general meeting that would be held in Calgary on May 12 at 11:00 a.m. mountain time.

I’d also like to invite you to our Investor day to be held in Calgary on June 15th with management presentations in the morning and a two one of our recent the acquired Canadian retail facilities in our Carseland nitrogen and ESN facility. You can sign up by visiting our website or contacting our investor relations department.

With that, operator, I’d like to now open it up for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentleman, we’ll now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Jacob Bout of CIBC. Please proceed with your question

Unidentified Company Representative

Good morning, Jacob.

Jacob Bout – CIBC

Good morning. Just more of (inaudible) type question, but you know what with CF behind you now, what are you thinking going forward here, as far as notionally what were you like to get involve either asset class or geographically?

Unidentified Company Representative

Bout, if you look at our strategy, it has -- nothing has not changed yet, yet we continue to look across the entire value chain. As I’ve said in the past the number one priorities is balance sheet and as you’ve realized we are strong financially. From our growth prospective in North America, we still have lots room to grow on our retail and we’re aggressively pursuing that. We continue to strengthen our distribution both in North America and globally in wholesale.

We have a new plant, we just started out for few weeks ago in new Madrid for ESN. Assuming success with that plant you will see us continue to expand that. And then if you look around the world, we’re tripling the size of our investment in Egypt which is not having any impact in our balance sheet.

Our potash expansion is still advancing at brown field and we will look it bringing on 800,000 tonnes of capacity. We are looking at how the leverage of a common market fertilizer position and we are looking at strengthening our South American position mainly triggering up a retail to expand.

So we have got lots of opportunity in North America, we’ve got lots of opportunity as we look around the globe but we’re disciplined and if we can’t find good growth opportunities we’ll return the money to shareholders.

Jacob Bout – CIBC

Anything that you wouldn’t touch to this point of the cycle?

Unidentified Company Representative

Anything that’s overvalued.

Jacob Bout – CIBC

Fair enough. Maybe, switching to phosphate sales like cost are coming down at the corn [ph] maybe you can talk little bit about what’s happening at caps casing and are you importing any rock at all right now?

Mike Wilson

I’ll get Ron to comment on that.

Ron Wilkinson

Hi, Jacob, it’s Ron. At Canada [ph], our cost coming down are a combination of a – little bit lower ammonia prices as gas comes down, lower sulfur prices versus last year and then running at full rate we're able to spread the fixed cost across more tons.

Moving to cap, we're still looking at the 2013 timeframe as the end economic life. We are currently mining some rock that has higher aluminum levels, that has cut back our production capability of Redwater. We're working that problem, planning for successful, get back to full rate. As Mike mentioned, the value of the Canadian dollar is hurting the cost position of our Canadian phosphate business.

In terms of imported rock, we have imported one cargo of rock and rock. That's going to be arriving at Redwater over the next four to six weeks, as we're availing it from the Gulf. And that rock actually will help us with the aluminum problem, we're able to blend that rock and that should get us back up to full rates of Redwater.

Jacob Bout – CIBC

What are your rock cost right now?

Ron Wilkinson

We can not talk rock cost but more just our total phosphate cost, but we can gone offline with you and get to that cost for cap.

Jacob Bout – CIBC

Okay. And then just last question here. Potash like Mike mentioned cost have been coming down to $140 per ton range, is there anymore downside there in your cost?

Ron Wilkinson

Jocob, there is a little bit more downside, through the first quarter of the brand say an average of 90% on a rate advanced core, little lower in January and then flat on February and March. We expect to run that way to the second quarter. So again with core production rates our fixed cost for a time shouldn’t go down. I do know that 140 of the cost products sold that's not a cost product manufactured for at this time. That is slightly below $100 on cost product manufactured.

Jacob Bout – CIBC

Great. Thank you.

Ron Wilkinson

Thanks, Jacob.

Operator

Our next question comes from the line of P.J. Juvekar of Citi Group. Please proceed with your question.

P.J. Juvekar – Citi Group

Yes, hi, good morning. First on retail, can you talk about your seed rebate program? Can you describe the program first and then how does it compare to prior years?

Unidentified Company Representative

I will get Tom Warner to cover on that term.

Tom Warner

P.J. the seed with the rebate program, yet two different programs one is national brands and it’s similar to lower level then crop protection based on sales and a performance of sales. Now on a private label for [inaudible] we don’t have a rebate group map that is really self contained, we do keep dollars back from the branches and to later in the year and presenting to that point but on the national side its similar to crop protection just the lower level zone.

P.J. Juvekar – Citi Group

So you have to achieve certain level of sales on market share to get the rebate?

Tom Warner

It's based on goals and performance, so that share will be a part of it, but really its deployment of goal savage by yourself and the supplier ahead of time.

P.J. Juvekar – Citi Group

Okay. And then quickly on the wholesale side, you know Mojack [ph] recently bought a staking buy our mind from valley [ph], you know, you guys always had cheaper sulphur but more expensive rock. Would the deal like that make sense to you and did you look at that deal sort of why and why not? Thank you.

Ron Wilkinson

PJ, its Ron Wilkinson. Yes, we've five hour and given much valley sold the share for that's a little higher than we would expect to pay for rock reserves on any simple basis and as Mike said, we're disappoint investor. So, we felt the price was to high for Agrium. Having said that we continue to have our outlook out there for new rock sources. Going forward with that mine coming on, we expect actually rock prices will become more competitive in the future and we would wait for rock prices to come down and then take advantage of that opportunity.

P.J. Juvekar – Citi

Thank you.

Unidentified Company Speaker

Thanks, PJ.

Operator

Our next question comes from the line of Jason Miner of Deutsche Bank. Please proceed with your question.

Ron Wilkinson

Good morning.

Jason Miner – Deutsche Bank

Thank you. Good morning. Just focusing on seed per minute, can you describe what level of pricing pressure you're facing and what's driving the price pressure in your opinion?

Ron Wilkinson

Tom, do you want to comment on price pressure on the seed?

Tom Warner

Hello. Jason. Jason, you know, through the market share driven there is a drill technical where (inaudible) between the major players in a reserve and obviously (inaudible) had a lead here for the last few years. The back up will be for last year. But truly struggle from the two of retail players on a market share and quite frankly we get call over the middle out of a bit our shop other distributors. It also I would have travelable brand we (inaudible) some of that as well but that's the reason for the pricing pressure on seed today.

Jason Miner – Deutsche Bank

Is private label perhaps somewhat insulated by being in different niches been over this taking place?

Unidentified Company Speaker

Once again, what is that Jason.

Jason Miner – Deutsche Bank

I am just wondering private label was in the different niche and perhaps some what insulated from the large…?

Unidentified Company Speaker

Well it is little different niche but been some token [ph] we should have call (inaudible) down to selling corn seed and its we had lot of the same treats taste genetics that's only corn we able -- we do get conform better in our private label and we do along the national brands. And we're seeing at this year as I Mike said our private label was up across (inaudible) your corn seeding is in garden very conservative national brand issue.

Jason Miner – Deutsche Bank

Thanks, and just shifting for moment in the other segment any gross profit impact there of inventory that was in past retail given your comments on pipe nitrogen inventories is that fair to assume that was mainly potash inventory that has yet to be sold through.

Mike Wilson

I don’t have its Mike here I don’t have the specific so what was the potash was the part of that and as expect and we put in our guidance a lot of that will be sold in second quarter.

Jason Miner – Deutsche Bank

Thank you, and just lastly on touching back on a prior question I wonder how that conditions we're actually looking for acquisition and it didn’t call out any firms on our acquisition this quarter but could you comment on the role of the strategy and how looks at this point.

Mike Wilson

Well the roll out strategy we comment or announcement we've actually close something and we're working on a number of opportunities today and will continue and if you look at our strategy of getting $2 billion of EBITDA by 2014 from retail. We would have to do quite a few so can't comment any specifics but we are actively working on a number.

Jason Miner – Deutsche Bank

That's helpful. Thank you

Mike Wilson

Okay. Thank you.

Operator

Our next question comes from the line Elaine Yip of Credit Suisse. Please proceed with your question

Elaine Yip – Credit Suisse

Hi, good morning. Just wanted to talk about your retail business and how it has approach the spring season. We've heard that many dealers indicate that they want to end of the season empty. Is your business exercising that same degree of consciousness?

Unidentified Company Representative

I’ll get Richard Gearheard to comment on where we see we’re going to be ending the year and all the season and degree of cost Richard?

Richard Gearheard

Yes, Elaine. I would say we’re certainly aiming to be empty in the season and I might add that is wearing summer to past years except for the last two. So, this was something that all retailers want to do is the empty by the end of this spring fell in --mid to late summer for the fall and then the empty at (inaudible) use to do.

Unidentified Company Representative

The other comment I will got Ron Wilkinson to make a few comments on where we see wholesale ending up with the end of spring

Ron Wilkinson

Yeah Elaine there is been a lot of commentary around retail inventories. I’ll just say that our goal and wholesale always to end the spring with zero inventory there essentially zero inventories and were roll up on a way to do that. So, the entire system program hopefully is empty at the end of spring which really boards well going forward

Mike Wilson

Yes, the implication is that we should have a good fall.

Elaine Yip – Credit Suisse

Okay. And then on your crop protection business and your retail business, you mentioned that margins were under pressure because of supplier rebate programs. Is that expected to off to be a drag on the second quarter? And what is -- can the margins in that business return to normalize or the levels that we saw historically in the mid to high 20% level?

Mike Wilson

We have Dave Tretter online and Dave manages our chemical business and procurement. Dave, you want to comment on that?

Dave Tretter

Sure. Hello, Elaine. In regards to the products that drew the margin down first quarter, it was primarily driven by some fungicide products. We had a large inventory carryover from last year and the basic supplier had a program to give the growing incentive to take those early. So with all that focus on those early products, it had the tendency to bring pressure on their whole product line. As we look at the month of April, our margins have come back to normal historical levels on a crop protection line.

Elaine Yip – Credit Suisse

Okay, great, thank you.

Operator

Our next question comes from the lines of Robert Koort of Goldman Sachs. Please proceed with your question.

Robert Koort – Goldman Sachs

Hi, good morning. Mike, in your outlook comments you discussed and you referenced little bit the Ukrainian gas price and recommendations from the IMF. Can you give us a sense of what you think they were paying over the past year? And then if the IMF does have them remove that subsidy what they could pay in the future?

Mike Wilson

Kevin Helash, who is in that. My understanding is they were around 206 without subsidies and they have announced 230. But Kevin, who will be giving more flavor.

Kevin Helash

I think, Robert, their gas this past year, I’d say allowed them to make some money, the $250 to $300 export range, kind of what we are focusing on right now where they are in Q2 in the second half. We are thinking that their gas price is today in the lower to mid 6 is going up towards 7, which means that a price where they are today, basically is going to put them as a marginal exporter. So I think to answer your question, we think from Ukraine side they are above where they can get to as far as pricing goes, and I think there has been some announcement today at some of the production in Ukraine actually going down in current market conditions. When we see the fund [ph] start to drop below 230 we see them starting to shut in.

Robert Koort – Goldman Sachs

And did you see them as much of an end point in the market over the past year, or because of their prior shutdowns where they're not very active in the North American markets?

Kevin Helash

Well, it’s the global commodity, so when they shut down in the Ukraine if the [inaudible] towards its way to North American all around the world. We got a small amount of capacity in Romania places like that, that are ever higher cost has come down, but Ukrainian will have an impact.

Robert Koort - Goldman Sachs

Great. Thank you.

Unidentified Company Representative

Thank you.

Operator

Our next question comes from the line of Fai Lee of RBC Capital Markets. Please proceed with your questions.

Mike Wilson

Hi.

Fai Lee – RBC Capital Markets

Hi, Mike, I believe earlier you had mentioned that you expect retail. I think you mentioned that we get back to a more normalized retail EBITDA range. Can you maybe just remind us what that level would be?

Mike Wilson

Yeah. What we said is that normalized range should be in the 500 to 550 million EBITDA range.

Fai Lee – RBC Capital Markets

Okay.

Mike Wilson

Given everything we are seeing we should be there.

Fai Lee – RBC Capital Markets

Okay. And it sounds like in terms of the chemicals that you mentioned, I think you had mentioned earlier that the margins that have gone back to more a normal levels. And I guess, I’d just intend to see, just talk about rebates, timing of rebates. Given that, this quarter on the seed business, the margins were a little bit lower than what we’ve normally expected, should we expect it overshoot in the second quarter do their timing of rebates?

Mike Wilson

Tom, do you want to comment on seed rebates and the expected margins?

Tom Warner

The first quarter was a little bit influenced by -- we had a little carry over from 2008 and to 2009, so when that happens and you -- of course we have a small sales number, the numbers get inflated. So, that happened in last year. So, last year it was, we probably had a higher number than typical in this year we didn’t have in 2010. So, that’s was probably the causes thing. I have agreed that we’re going back to more normal numbers in 2010 as well. I do believe that we might be down slightly as the year goes [ph] it could be very slightly.

Fai Lee – RBC Capital Markets

Okay. Great. And just, in terms of the cost curve, I know you’ve talked about the Ukraine, but I’m just wondering if you put aside the Ukraine, where is this China sit based on your estimates on that cost curve in to the point?

Mike Wilson

I’ll get Ron to comment on that.

Ron Wilkinson

I guess, where we see China today is very close to Ukraine as a marginal exporter. Of course two things are very important there, both control by the government. One is the feedstock prices that the government charges and the second is the export tax regime. So, going forward, we expect China to manage their exports using their export taxes and along with the Ukraine there will be that remain on one of those marginal exporters.

Fai Lee – RBC Capital Markets

Okay. Thank you.

Mike Wilson

Thanks, Fai

Operator

Our next question comes from the line of Edlain Rodriguez of Broadpoint Gleacher. Please proceed with your question.

Edlain Rodriguez – Broadpoint Gleacher

Thank you, Good afternoon, guys. Quick question on potash, can you -- I mean relative to the strong Q1 results you saw there. Can you talk about what you seen so far in terms of volume and price in movement in Q2?

Mike Wilson

Kevin, you want to comment on volume, and price in Q2.

Kevin Helash

We continue to see very strong demand for potash. We are in good shape on our inventory. We are drawing down our field inventory quite rapidly. We expect to end the season very low. So we are very happy about that as far as pricing goes. I’d say it's really a non-event right now. Prices are set to spring and we expect to see, you know relatively firm prices at least through the second quarter.

Edlain Rodriguez – Broadpoint Gleacher

So are you seeing some of the price increase that was announced flowing through [inaudible] price increase?

Kevin Helash

Yeah, we did, we didn’t get all of it that the market place, but I’d say for sure we got 50% of it.

Edlain Rodriguez – Broadpoint Gleacher

Okay, thank you. Another question is that one on the phosphate business. Can you remind us again about your sulphur cost relative to the American producer, I mean I know you don’t pay the some of the those guys. So did you see the same price increase in terms of that’s $55 price increase that went to and how does your cost compared to your competitors?

Mike Wilson

I’ll answer this way when we -- if you kind of think about we see 50% of the Tampa [ph] index move for our business that’s not a bad walking around number.

Edlain Rodriguez – Broadpoint Gleacher

Okay.

Mike Wilson

Up a $100 which are really got 50.

Edlain Rodriguez – Broadpoint Gleacher

Okay. Thank you

Mike Wilson

Thanks, Edlain

Operator

Our next question comes from the line of Hari Sambasivam of National Bank Financial. Please proceed with your question

Hari Sambasivam – National Bank Financial

Yeah, thank you. Just a quick question on the potash prices. I noticed that the average sales price for potash domestically was substantially higher than the international price. Could you just -- maybe just give us a color as to why there is that level of discrepancy, I mean just I was just wondering there might be a reason to have the international price maybe a bit higher. And I am just wondering how much the discrepancy between domestic and international should we be thinking about for the second quarter and for the rest of the year?

Mike Wilson

I will get Ron to comment on that.

Ron Wilkinson

Hari, it's Ron Wilkinson. I guess the difference in the first quarter was certainly prices in North America average realized prices were higher than many other markets and obviously on net back some profitability freight comes in to it and you can ship potash in North America lot cheaper than we can say get it to the far East. So that’s a very important consideration.

That difference will continue in the second quarter as we move into the second half, it all depends on the relative movement of international pricing verses North American pricing, but we believe supply is tight and inventories are coming down and certainly current inventory are below five year averages that there will be some upward momentum on price.

Hari Sambasivam – National Bank Financial

And just a quick word please, on the timing of the Brownfield project, the go/no-go decision?

Mike Wilson

We are very discipline when it comes to capital project. We are spending a lot of money on the Brownfield. We won't be going to the Board for final go/no-go until the end of this year, early next year. But everything we’re spending on it, it looks very positive.

Unidentified Analyst

Thank you

Operator

Our next question comes from the line of Martin Lavigueur of Macquarie. Please proceed with your question.

Martin Lavigueur – Macquarie

Hi, good morning guys. This question is more for Bruce. I think during the Q4 conference call you had mentioned that there would be $350 million cash payment for differed taxes in Q1. I was wondering if that came through and if not, when we can expect that?

Bruce Waterman

No, we did – it's Bruce here. We did make that payment in the first quarter, so that’s a cash balance reflects that payment.

Martin Lavigueur – Macquarie

Okay. Do you expect any other cash tax payments in the rest of the year?

Bruce Waterman

You know it went that size, no.

Martin Lavigueur – Macquarie

Okay, thank you.

Bruce Waterman

Thanks.

Operator

Our next question comes from the line of David Silver of Bank of America. Please proceed with your question.

Mike Wilson

Hi, David.

David Silver - Bank of America

Hi, guys, how are you? I think I just like to start with one question about the mark-to-market on your natural gas hedges. If I understand it right, I think 61 million of that is for the unrealized portion, I just want to confirm. Is that in your opinion, I mean, is that largely offsetting physical orders for product that you booked already, in other words your margin management and is just a timing difference and when (inaudible) side to that are recognized or is this from more speculative positions?

Mike Wilson

I wouldn’t call speculate, what we do, I will get Rich here, first to comment on -- it is a large part of our corporate program that goes forward.

Bruce Waterman

Yeah, David its Bruce, here. Really the [inaudible] team not realized and unrealized, you see as we actually take hedge positions we came for particular period on our margin management that would be looking forward to actually when we made a forward sale. So that would be normally but right now we will be looking at spring. And difference with realized and unrealized is really related to how you would treated if you are qualified for hedging treatment and under the accounting rules we don’t qualify for hedging treatment so we do mark-to-market, which means that we have realized washes and gains in our hedge position as the hedges come off and when we actually sell the product or where the hedges expired. But we also recognize an unrealized gain or loss based on our forward position which should be qualify for hedging treatment of course will be differed and that reflect to this part of the gas price in the future. So that’s really the difference, is that answer for your question.

Unidentified Analyst

So I was just spoke – that was mine concern was on the 61 million or so that’s unrealized as of March 31st so that’s largely backing orders for physical product but there is still difference in the timing of recognizing it for reporting purposes?

Unidentified Company Representative

No, less actually the entire fact of the forward grow in all of our positions, so that would include the margin management position which will just before the spring really the next they can made really positions and then all of our forward programs which actually below that we have to go to November 13th tier.

David Silver – Bank of America/Merrill Lynch

I see.

Unidentified Company Speaker

If you want, you know, we can – I can certainly break that down between the next couple of months and – with low income.

David Silver – Bank of America/Merrill Lynch

Okay. Now, I’ll move on. No, thank you for that. I just had a logistics questions. So, there is two issues. One is the issue in the gulf with the oil spilt and your thoughts on whether any limitations on movement either in-and-out of the gulf might effect your business. Then also there is the western among your pipeline which I think is going down for repairs for a fair amount of time. Do you anticipate either of those logistics issues kind of affecting your business over the next couple of months?

Unidentified Company Speaker

Kevin, do you want to comment on logistics?

Kevin Helash

David, actually I asked the same question to our logistics people yesterday on the oil field and according to our shipping people, it’s – business is usual. I think that it is a very good question that you know, we need to think about is there is – will there be an impact to our business at all but as of today, the answer is no. shipping traffic apparently is normal and they have screening process, etcetera. So I don’t, I guess as of today, no. by that something we’re watching very closely. You know, as far as the ammonia pipeline, we’ve been on that for a long time, we actually welcome that, that activity, David, if we want to get that pipeline operating as well as Kane, we’re really prepared in our view for the outraged. And when it comes to backup, we’ll be ready to role. So, not really anticipating any major impact for me to those events.

David Silver – Bank of America/Merrill Lynch

Okay. Then thank you for that comment. And then last question will be from Mike (ph) and this has to do with you your 2Q guidance. So last year and what was kind of a more difficult environment you’ve reported $2.36 and this year you set all that guidance range of $250 to $3. I don’t know when I look through the wholesale division line-by-line, I mean part as phosphate etcetera, it seems like, and there should be positive year-over-year results pretty much up and down the line. I don’t think you will have any where near the same kind of inventory holding risk. You know average with the shifting around a rebates and everything, your retail division should probably do better year-over-year as well. So I guess, I’m just wondering, about how conservative you consider that guidance. In my opinion there is probably some upside even to the high end of your range. So could you comment and I am missing some offsets or some other negative factors that need to be considered?

Unidentified Company Representative

When we do our guidance David, one that will be the case and then we do arrange around it that’s how we arrived to $250 to $3, and there may have been some period from 2009 of pricing that was set at a higher level in 2009 in the wholesales side of business, we cannot by guidance and we don’t feel we been already conservative.

Ron Wilkinson

Dave, its Ron Wilkinson two other comments on the wholesale side, one is part as pricing even though volume was down pricing was much higher in the second quarter last year than it well be this year. The second impact is that value of the Canadian dollar is hurting us on fixed cost.

Unidentified Analyst

Okay. Very good, thank you.

Ron Wilkinson

Thanks David

Operator

Our next question comes from the line of Paul D'Amico of TD Newcrest. Please proceed with your question.

Unidentified Company Representative

Hi, Paul.

Paul D'Amico - TD Newcrest

Thanks for taking my. First just for Ron on – most of my questions were asked and answered so I’ll be quick. Ron, if you could, the Q1 production tonnage, the absolute production tonnage of the potash segment.

Ron Wilkinson

Q1 production for potash was around 450,000 tons.

Paul D'Amico - TD Newcrest

Okay. And just going forward in terms of the fact that Q1 had a very strong North American situation and Q2, there seems some carryover as well. Just next question for Bruce. On the working capital side, are we still talking every typical usage in Q2 or is it potential that is either really smaller that could actually be different than it's been in the past?

Bruce Waterman

Well, it's Bruce here. Paul, as you are aware in the second quarter what we do is really convert inventory to receivables. We end up the second quarter with pretty high level of receivables. Our working capital position coming out the second quarter will to a large degree depend on what kind of pre buy positions we take particularly in retail on chemicals and seeds sometimes we have opportunity to make a very advantages pre buy of inventory. If that happens, that could be a big number. That’s just a time issue in the second quarter versus third quarter but that could impact our working capital.

But we tend to come out this June, the second quarter with fairly high working capital just because of the high level of receivables.

Paul D'Amico - TD Newcrest

Right. (inaudible) in terms pre buy, I was just trying to get an idea whether (inaudible) that was done.

Bruce Waterman

Whether I'm sorry, which was done.

Paul D'Amico - TD Newcrest

Whether there was lot of prebuys such that there will be a more of a draw down and there is build up.

Unidentified Company Representative

Those decisions to be made over the next month or so.

Unidentified Analyst

And last question for Richard, is around the gross margin for seed in Q2 '09, because the seed versus service or excluding services, just seed on its own. Q1'09 it was about 17%, what was it in Q2 '09?

Richard Gearheard

Let see here, I got that. It was like 104 million, 251 divided by 529, 998, that’s 19.7%

Unidentified Analyst

Okay, I appreciate it. Thank you.

Operator

Our next question comes the line of Horst Hueniken of Thomas Weisel Partners. Please proceed with your question.

Richard Gearheard

Hi, Horst

Horst Hueniken - Thomas Weisel Partners

Hi, good morning. My question relate to the price of potash ship to Brazil. I understand the procedures including your firm are attempting to push through a price increase through your involvement in Canpotex. At the same time I'm hearing farmers in Brazil want to keep the price at around $400 per metric ton. What are you able to share with us to, how is that likely to have a price increase in that market over the next month or two?

Ron Wilkinson

Horst, it's Ron. (Inaudible) you are absolutely correct, the producers are pushing for price increase and there is some resistance in Brazil. And I guess it's one of those things where wait a while and we’ll see in terms of whether the resolve of the producers is stronger than the buyers. The bottom line is that Brazil needs a lot of potash and we’re hopeful that Canpotex will be able to push that price increase through.

Unidentified Analyst

Is that, fair for me to assume that we will know the outcome by say the end of June?

Unidentified Company Representative

I would think might be a back later than that, I think into July we should start to understand what’s really going to happen there. And of course, it’s going to depend the little bit on crop prices where what happens with crop prices between now and then because of course the Brazilian growers have a sharp eye on the crop prices.

Unidentified Analyst

Understood, that’s helpful. Thank you very much.

Unidentified Company Representative

Thank you.

Operator

Our next question comes from the line of Shelly Coffman of UBS Securities (ph). Please proceed with your question.

Unidentified Company Representative

Good morning.

Unidentified Analyst

Hi, good morning. We think the issues with many natural gas, what are the downs address that they don’t think is mentioned yet is increasing prevalent of some nice income producers worst thing cash, now such as you’re on top market price is definitely lower that will take the contract. I was wondering what you thought the trend might be for this going forward, how much down address there is and frankly what the ability is to shift way from the contractors offered this is going forward?

Unidentified Company Representative

When you look at nitrogen, the key is looking at who is the high cost producer and Ukraine is today and they just settled with Russia. So I don’t see that changing in the near future and so from a down side rest point of view, if price drops or gets under pressured is going to drop into the Ukraine is disappeared. And as Ron, said earlier, the Chinese today at that $230 number for metric ton are also sort of un edge. So era has a combination of aren’t understandings of spot asset and contracts related to oil pricing, the crude pricing, but we don’t see them really being on the swing.

Kevin Helash

Yeah. Sam, its Kevin here. We look at that quite a bit and I don’t – we don’t see a scenario to any of the analysis and analyst where by European gas will be anywhere near the price of North American gas in that picture. That’s we’re getting at.

Sam Kanes – Scotia Capital

Yeah. And I guess, I seen reports the gas and its whole gas to Europe at 550 which I think about $4 equivalent, this one in Ukraine. So, just as the potential risks that, we’re just looking for a few excitements for that. We can move further I had another question, just in terms of and what you see like say margins turning to your retail business?

Unidentified Company Representative

So you are looking up the little bit? Try to safe market?

Sam Kanes – Scotia Capital

Yeah. What I was looking at your inside since is where you settled up the generic pipeline inventories and, whether or not, you see pricing power returning to this market any times?

Unidentified Company Speaker

Dave, do you want to talk on that take credit.

Dave Tretter

Sure. I’ll take that, Andy [ph]. As far as the inventory or the pipeline of the generic products, it’s certainly lowered today than it was in the past. It’s more of a normalize level where it has been past years and going forward we don’t see much opportunity for upside pricing, the Chinese prices is remained relatively steady, there still is a large capacity for production in China. So we don’t see much upside opportunity in the price for about to say.

Unidentified Analyst

Okay, Kevin. And just as a final question. You mentioned that never performance is disappointing, but you expect that to be down as but is such seasonal factors or is there anything else in that we should consider?

Unidentified Company Speaker

You talk about for the first quarter?

Unidentified Analyst

Yes, I think it's say something about 20% future growth rate and profitability, I am sure if that exact number but, yes, like your comment was that you expect the performance to be significant better than Q1 going forward?

Unidentified Company Representative

Well, what we are projecting is pretty nice increase, in the second quarter we are projecting across (inaudible) brand Corn, Cotton and Soybeans growth in all three sectors Corn and Cotton we should close it on 20% plus.

Unidentified Analyst

Okay.

Unidentified Company Representative

Increase in sales over 2009.

Unidentified Analyst

Okay, great thank you very much.

Unidentified Company Representative

Operator, we’ll take one more question.

Operator

Our last question comes from the line of Mark Connelly of CLFA Please proceed with your question.

Mark Connelly – CLFA

Thank you Hi Mike. Just two part question. In the services business, if I think about the rebound that we’re seeing in April would you expect your nitrogen application business across the first half to be relatively back to normal? And the second question is respect to soil testing. Farmers we’re talking to seem pretty relaxed about the soil testing results, which suggest that they don’t feel they in a tremendous rush to get nutrients back down. Can you tell us what you are seeing in your soil testing businesses?

Unidentified Company Representative

Richard Gearheard, you want to comment on that?

Richard Gearheard

Okay, well. On the application, I’d say even follow both the volume of fertilizer and chemicals in the second quarter and we expect that to be up. We were down a little bit in the first quarter. Essentially on application we were down about $1.8 million. So it’s not a – I don’t think we’re going to talk about a major change here but I do expect it to be comparable to prior years and up a little bit in the second quarter to make year-to-date, okay. Soil test, really we haven't heard that there are not concerned about the nutrient level in the soil because we were saying that the application rates are up, particularly phosphate and potash. So, I would have to say that that’s not been our experience.

Mark Connelly – CLFA

Okay, very helpful. Thank you

Mike Wilson

Thank you very much Mark

Just in closing I just remind everyone that the green fundamental look strong. If you look at the demand side, the things going into the spring and April was great, we see that continuing through the rest of spring season and we think we are very well position to capitalized on that. So thank you very much.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation

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Source: Agrium Incorporated. Q1 2010 Earnings Call Transcript
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