Agrium Management Discusses Q4 2013 Results - Earnings Call Transcript

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

Agrium (NYSE:AGU)

Q4 2013 Earnings Call

February 21, 2014 9:30 am ET

Executives

Richard Downey - Vice President of Investor & Corporate Relations

Charles Victor Magro - Chief Executive Officer, President and Director

Stephen G. Dyer - Chief Financial Officer and Executive Vice President

Susan C. Jones - Vice President of Marketing & Distribution

Thomas E. Warner - President of North America Retail

Ronald A. Wilkinson - Senior Vice President and President of Wholesale Business Unit

Richard L. Gearheard - Senior Vice President and President of Retail Business Unit

David J. Tretter - Executive Vice President of Procurement and Executive Vice President of wholesale sales of UAP Holding corp

Andrew K. Mittag - Senior Vice President and President of Advanced Technologies Business Unit

Jason Newton

Kevin R. Helash - Vice President of Retail Canada/Pacific North West Region

Analysts

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

John Chu - AltaCorp Capital Inc., Research Division

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Michael Picken - Cleveland Research Company

Jacob Bout - CIBC World Markets Inc., Research Division

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Mark W. Connelly - CLSA Limited, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Joel Jackson - BMO Capital Markets Canada

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

P. J. Juvekar - Citigroup Inc, Research Division

Christopher S. Parkinson - Crédit Suisse AG, Research Division

Mark R. Gulley - BGC Partners, Inc., Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Operator

Good day, everyone, and welcome to Agrium's Fourth Quarter Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Downey, Vice President, Investor Corporate Relations. Please go ahead, sir.

Richard Downey

Thank you, operator. Good morning, everyone, and welcome to Agrium's 2013 Fourth Quarter Conference Call. On the phone with us today is Mr. Chuck Magro, President and CEO of Agrium. He is joined by our entire senior management team to review and discuss our results.

As we conduct this conference call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts, therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current 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. Chuck Magro.

Charles Victor Magro

Thank you, Richard, and good morning, everyone. The advantage of being a global leader across the agricultural products and services value chain was evident again this quarter. Our Retail business unit achieved record results for the quarter and for the year. In fact, Retail's EBITDA this quarter was over 35% higher than any previous fourth quarter. This was achieved despite the headwinds from a shortened fall application season in the U.S. and a weak nutrient price environment.

It was a challenging quarter for the Wholesale nutrient markets overall and our Wholesale business unit. Prices for all 3 major crop nutrients were down over 25% compared to the fourth quarter of 2012. The good news is that we have seen a significant rebound in global nitrogen and phosphate markets over the past few months. Furthermore, there has been a definite improvement in the sentiment within the global potash market.

With net earnings of $1.1 billion and over $2.1 billion in EBITDA achieved in 2013, this was still a strong year financially for Agrium. Furthermore, we generated over $1.2 billion in cash flow from operations in the fourth quarter alone, despite low crop nutrient prices. This was, of course, partly due to Retail's excellent results and strong prepays, another example of the value of our integrated strategy.

Our guidance for the fourth quarter was provided excluding one-time adjustments, share-based payments, hedging gains or losses and fourth quarter Viterra Retail results. On this basis, our net earnings from continuing operations were $126 million, or $0.80 per share for the quarter. We have excluded Viterra's earnings in our guidance as we have had limited visibility on our earnings profile within the quarter.

Admittedly, this was a bit of a noisy quarter from an earnings perspective due to several one-time adjustments. We recorded a purchase gain of over $250 million for the Viterra assets, which was the adjustment between the purchase price and the fair value of these assets. Any way you measure it, this was a home run acquisition and was largely made possible because of our integrated strategy. We also booked a $220 million write-down of our Australian Retail business due to difficult market conditions, lower sales and margin expectations, as well as delays in capturing synergies. That being said, we did achieve almost $20 million in synergies and continue to focus on additional synergies in improving the base business. Additionally, there was $75 million cash gain related to an insurance recovery from a long-standing litigation case dating back to the original AWB acquisition, which had been reported in our discontinued operations.

Following a strategic review of our Advanced Technology business units, we have transitioned the ag business, which is primarily made up of our Environmentally Smart Nitrogen product to Wholesale, and are evaluating ways to maximize value, including the potential sale of the Turf and Ornamental and Direct Solutions businesses. This was done as part of our ongoing focus on optimizing our business. We believe through this action, we can better leverage Wholesale strength in manufacturing and distribution of ESN to Wholesale ag customers. And we expect to see ongoing cost savings of $10 million to $15 million per year. Our 2013 ESN sales volumes grew by 20% over 2012 levels.

Turning to our Retail results. We saw impressive performance in the quarter, particularly in light of some challenging market conditions for the sector. Excluding one-time adjustments and Viterra results, Retail EBITDA this quarter was $170 million or 37% increase over the previous fourth quarter record set in 2012. On the same basis, our full year Retail EBITDA reached $961 million in 2013, surpassing the previous year's record of $951 million. Retail achieved fourth quarter results, primarily due to higher year-over-year margins on nutrient seed, as well as services and other products. The acquired Viterra business reported an EBITDA loss of $12 million, which included an $8 million cost for integration, resulting in an operational EBITDA loss of $4 million. The fourth quarter is traditionally a slow quarter for Viterra. Canadian ag Retail earnings are almost internally generated in the second quarter and a small portion in the third quarter.

Crop nutrient gross profit increased 15% this quarter on higher nutrient margins, partly due to higher prescription blends and proprietary nutrient sales. Total nutrient sales volumes were 16% higher than in the fourth quarter of 2012 as a result of the addition of the Viterra business. However, the compressed fall application season resulted in U.S. Retail nutrient sales volumes being down 6%.

Crop protection sales and gross profit were both up slightly compared to the previous fourth quarter on the contribution from the Viterra acquisition. Margins as a percentage of sales this quarter were slightly lower due to a higher proportion of Wholesale versus Retail sales for this product line.

Gross profit from seed was up 40% this quarter, supported by strong seed margins. The increase was due to a higher supplier rebates associated with higher annual seed sales, as well as an increase in our sales of our proprietary Dyna-Gro branded seed, which provides higher margins than third-party branded seeds. Proprietary seed continues to show strong growth, accounting for approximately 18% of our total seed sales and approximately 26% of our total seed gross profit for calendar year 2013.

The services and merchandise categories both showed significant year-over-year increase in gross profit this quarter. We expect further growth in the services category, in particular, as we continue to expand our high service precision agricultural product offering. Agrium's Precision Ag is being used on over 10 million acres in the U.S. and we expect this to continue to grow at a rapid rate.

Retail comparable store sales were up 5% over 2012, after normalizing for changes in nutrient commodity prices. While Retail financial metrics did not increase as much as we would have liked, this was partly due to the inclusion of the Viterra assets in a negative earnings quarter and due to the significant drop in nutrient prices during 2013. We are committed to meeting our 2015 EBITDA target of $1.3 billion and the additional financial metrics. Most of this will come from continued organic growth and improvements in our international Retail operations. As you have seen, we have made changes in our management structure to support this effort.

Turning to Wholesale, adjusted EBITDA was $234 million this quarter compared to $516 million reported in the fourth quarter of 2012. The reduction was principally due to significantly lower global crop nutrient prices across all 3 nutrients. Nitrogen gross profit in the fourth quarter was down $164 million compared to the fourth quarter of 2012 due to lower selling prices, higher North American gas prices and planned outages at our Carseland and Redwater facilities, impacting both volume and cost. Both facilities restarted as planned in the quarter and are running well today. The challenge at Carseland was fully addressed and the new heat exchanger is on order for Redwater.

Potash gross profit for the fourth quarter was $39 million, compared to $79 million reported in the same quarter of 2012. The decline was due to lower international and North American prices. Strong operating rates in the fourth quarter allowed us to build some inventory in December to support expected robust North American demand in the first half of 2014.

Agrium's Vanscoy potash expansion projects continue to progress on time and we remind investors that there will be an extended 14-week outage in the second half of 2014 in order to tie-in the new equipment. The expansion project, however, has experienced cost escalation of around 25% from the original estimate due to a disappointing low contracted productivity level and extreme winter conditions in Saskatchewan. We view this project as an important investment that will provide solid long-term returns through the combination of lowering our per ton cash cost of production, increasing our CapEx x market allocation, and allowing us to further leverage our unique Retail position.

Phosphate gross profit this quarter declined by $51 million compared to the fourth quarter of 2012 as a result of significantly lower realized sales prices. Phosphate markets firmed in the early part of the year and we believe that fundamentals will allow for us sustained improvement in pricing and margins.

I would also like to draw your attention to a topic that I am very passionate about, which is our environmental health and safety performance for the year. This is an area that is critical to the success of our business and essential to all the decisions we make. In 2013, we set new records for all 5 of our major EHS&S metrics. Our safety performance is one of the best in the industry and is a cornerstone of our corporate social responsibility program.

On the topic of health and safety, I will just mention that on the evening of February 14, our Vanscoy potash operation experienced a fire in the mine, which started on a piece of underground mining equipment. We initiated our emergency response protocols, ensured all employees got to safety in a quick and safe manner, extinguished the fire and had all employees back up above ground within 16 hours. The cause of the fire is under investigation and we do not expect any material impact on production. I want to thank everyone involved for their commitment to bringing our employees home safe.

Turning to the outlook, the fundamental driver of our business is the need to increase crop yields. And this need remains as strong as ever. While grain prices are lower than in the past few years due to strong crop yields last fall, they remain above historic norms and U.S. farm incomes remain at -- near our record levels. A higher crop yield across North America also drew down soil nutrient levels, which will now need to be replenished. These factors, combined with a shortened application season in the U.S., bodes well for the demand for the upcoming spring application season.

We expect corn acreage in the U.S. to be between 90 million and 94 million acres this spring. However the 2% to 3% switch to other crops is not expected to have a significant impact on nutrient demand or our business. Furthermore, we do not foresee any significant impact on the spring season for crop inputs resulting from the harsh winter across North America this year.

Rail performance has been significantly hindered by the severe winter weather across North America. In Western Canada, the very large crop harvested last fall, combined with slow rail movement, has resulted in large on-farm grain carryover and will be one factor to watch this year. With the extreme cold this winter across most of North America, we have also seen a short term run-up in natural gas prices. Agrium's gas hedging program largely mitigates against this risk. As of early February, we were about 80% hedged for the gas requirements for the first quarter and about 75% hedged for the second quarter. We expect North American gas prices to moderate significantly as spring approaches, given the vast quantities of shale gas available. The global urea market started to strengthen in late December, driven by strong demand in markets, such as North America and Europe and supply constraints from some major exporting regions. The compressed fall season that resulted in reduced ammonia applications in the fourth quarter is expected to result in increased demand for urea in UAN throughout the spring season. Chinese urea exports may start earlier than past years due to a lower export tax structure and strength from the global market. Global potash markets have firmed following several recent contract announcements that have provided additional certainty to the market. Global potash customers are expected to play catch-up in terms of increased imports, and this is expected to drive increased global demand in 2014. Our expectation for global potash demand in 2014 is 56 million to 58 million tonnes, an increase from the 54 million tonnes obtained in 2013.

Phosphate prices have seen a significant rebound since mid-December, driven by the combination of stronger demand, particularly in North and South America and some supply constraints. We believe conditions should stay firm as we enter the spring season in the Northern Hemisphere. Phosphate prices should also be supported in 2014 by the recent significant increase in international sulfur prices.

For Agrium, we have an advantage on sulfur costs relative to other North American producers. As we move out of winter, things are looking promising for a strong spring season and sustained strength in the nutrient markets. Lower [ph] prepays to U.S. Retail, which can be a leading indicator for spring demand, are up over 6% to approximately $1.7 billion.

Before I turn the call over for questions, we would like to mention a few people who have been significant contributors in building Agrium to the company it is today.

Richard Gearheard, our Senior Vice President of Retail, who is on the call today, has decided to retire March 31 after more than 40 years with Agrium and predecessor companies. I don't need to tell you that Richard has been instrumental in the success and growth of Agrium's Retail business. From being a small U.S.-based business generating $50 million in EBITDA in 1996 to the largest distributor of crop inputs and services in the world, generating almost $1 billion in EBITDA. We will miss him and wish him the very best in his retirement.

Steve Dyer, Agrium's CFO, will be replacing Richard as Executive Vice President and President of Retail, and has a wealth of experience from numerous positions he had held across the company over the past 23 years, including distribution, IT and leading the Western region of Crop Production Services. Steve will stay on as CFO and until a replacement has been found. And Tom Warner, who has been appointed President of North American Retail, will act as Interim President of Retail until that time.

Also on the call with us today is Mike Webb, who joined Agrium as Senior Vice President of Human Resources. Mike most recently came from HSBC where he held the position of Senior Vice President of HR for Canada. Mike has taken over from Jim Grossett who retired after 11 years of leading Agrium's HR Department. Jim and his team have done an outstanding job of developing strategies and programs to support Agrium's growth and ongoing success.

So with those comments, operator, we can now open the lines up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Don Carson of Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Chuck, a question on capital allocation. I noticed that you've got about 1.7 million shares left in your share repurchase authorization. Just wondering, what are the CapEx needs over the next year or 2, once you finish Vanscoy, specifically, on the nitrogen side? Are you going to go ahead with Kenai instead of doing Borger? And so how do you see CapEx versus returning cash to shareholders over the next 2 years?

Charles Victor Magro

John, what I'll do is talk about capital allocation, and I'll turn over the specific CapEx question and the share buyback status to Steve Dyer, our CFO. So when we look at capital allocation, I think we've made our priorities as clear as we can. It's really sustaining our base operations. And also, when you look at sustaining our investment grade rating from a balance sheet perspective. Beyond that, then, it is growth of our business and when we look at the growth we have, quite attractive [ph] capital projects on the go in 2014. That will require capital, but then our other priority, of course, is our dividend and we've said very clearly that we'd like to connect our dividend to the increase in free cash flow. So as we invest in these growth projects, the free cash flow will increase and we will increase our dividend over time. The third priority, from a capital allocation perspective, is share buybacks. And I'll just turn the call now over to Steve Dyer just to talk a little bit about our 2014 CapEx requirements and the status of our share buyback program.

Stephen G. Dyer

Thanks, Chuck. John, if you take a look at our capital program from '14, we'll be around $1.7 billion to $1.8 billion overall for our capital requirements. About $550 million of that will be sustaining capital. And obviously the majority of the remainder of that capital spend will be associated with the 2 expansion projects we're looking at Vanscoy completing it, as well as the Borger project once we get approval from our board on that, that we're looking to get in February. So that's kind of our overall capital plan. Obviously, once we get into 2015, the Vanscoy capital expenditure falls off, we will have -- still have some expenditure associated with the Borger project as well. But obviously, our free cash flow goes up significantly after you take off those investment capital. In terms of share buyback, you're right, we have about -- versus the authorization we added a 5% share buyback, we have about 1.7 million left. We're currently not actively buying back against our share buyback. Basically, with that heavy capital expenditure through 2014, we'll continue to evaluate on a regular basis and take a look at it. But right now, we're not actively buying.

Charles Victor Magro

And Dan, maybe one last point is, on anything that is of significant capital spend, such as the Borger project, we always look at is that is the best use of the capital, and we look at it from a build versus buy. We look at that in terms of should we be buying back our stock, is that a better investment and try to find the best return for that capital. So even though we have the priorities from a capital allocation perspective, with large capital investments such as a Borger expansion project, we will look at, is that the best use of capital compared to a share buyback and make the best decision from a value creation perspective.

Operator

Our next question comes from the line of John Chu of AltaCorp Capital.

John Chu - AltaCorp Capital Inc., Research Division

About 1 year ago at this time, management said that the [indiscernible] fertilizers mentioned in potash and phosphate was very good, and they talked about how for example, 75% of volume capacity was committed for the first half of last year and was fully committed for Q1. And a lot of that commitment we saw in prior quarter and the early part of the year. Can you give us an update in terms of how things are progressing this year? What type of demand commitments have been made as a percentage of your total volume capacity?

Charles Victor Magro

Okay, John, I think we caught your question. You were a bit mixed up. If your question is how -- for the forward markets, how much are we sold? I'll pass the call over to Susan Jones, our VP of Sales and Marketing for Wholesale.

Susan C. Jones

John. Yes, similar to last year, we've seen good commitments for the first half, for nitrogen, we are 80% committed. For phosphate, we're 85%. And for potash, we're 80%. And we do layer in our sales as we go. So we have some carryover from Q4 that is going to be going through our results in Q1, and as we've been moving through January, February, we've been layering in as prices have been increasing.

Operator

Our next question comes from the line of Ben Isaacson with Scotiabank.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Chuck, first question is on the compressed fall that we saw last year, which presumably would lead to a bit of a stronger spring. Given the harsh winter that we're having, is it too early to say that we're going to have a bit of a late spring plant here? And if so, can you talk a little bit about what the impact would be on the Retail business?

Charles Victor Magro

Ben, thanks for the question. We'll turn that question over to Tom Warner, our newly appointed President of CPS. Go ahead, Tom.

Thomas E. Warner

Ben, it is too early. The fall season in the Corn Belt was late. We didn't get all the ammonia we planned to get on, nor the -- apply down our phosphate potash. But it is that we do have to spend a harsh winter, as you probably know, in the Corn Belt that we have a lot of snow on, a lot of frost to ground, but it's still long ways to April 1, so it's too early to tell, but likely, we'll be later than typical.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Okay, great. And then just my follow-up question is just on your gas hedging. I think, you said you were 80% from Q1 and 75% from Q2. Can you just give a little bit more detail in terms of roughly what average cost you're hedged at or kind of when the timing of those hedges came into effect?

Ronald A. Wilkinson

It's Ron Wilkinson, Ben, I'll handle that one. Chuck mentioned, we are about 80% hedged for Q1 and 75% hedged for Q2. That does include our industrial sales, which is about 17% of our total. And those essentially just flow through to the customer. On the gas that we hedged, we're hedging the gas as we're getting the sale. So as Susan mentioned, some of those sales were from Q4. So we're actually hedging from Q4 and continuing to hedge through Q1 here as we've got new sales. So for both the first and the second quarter, our hedges are less than $4.

Charles Victor Magro

For gas.

Ronald A. Wilkinson

For gas.

Operator

[Operator Instructions] Our next question is from the line of Adam Samuelson, Goldman Sachs.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

First, just a clarification question. I think in the prepared remarks you said Vanscoy had a 25% cost overrun and I think at the October Analyst Meeting it was a 15% cost overrun for a total cost of $1.75 billion. Is that $1.75 billion now marked up? Or did I just mishear you, I'm sorry?

Charles Victor Magro

Adam, I'll clarify and then I'll pass over to Ron just to talk about some of the specifics on the Vanscoy potash expansion. So that's right, the project now is up 25% from the original estimate and we did say before it was 15%. So we've seen further cost pressure. And it's really a matter of construction productivity. We now have the amount of labor we need on that site. We have all the equipment. It's just a matter of putting it all together. And with the harsh winter right now as well as lower-than-expected construction productivity, costs are escalating. And maybe I'll just pass over to Ron to talk about the specifics.

Ronald A. Wilkinson

Yes, as Chuck mentioned, Adam, we are seeing significant cost pressures on the project. The weather has not only been cold. We've lost several days due to wind. And I think in Saskatoon in December, more than half the days were below minus 30 degrees Celsius at one point. And it's been extremely hard to make progress in those conditions while we have a full workforce on site. So productivity has been extremely poor and that's really the reason why our costs have been going up. As Chuck said, all the pieces are there, we just need to put them together.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

All right, that's helpful. Maybe just switching gears in Retail. Pretty significant drought kind of ongoing right now in California. I know that's not an insignificant region for the Retail business. And maybe can you comment on any impact that you're seeing there in terms of nutrient demand or crop chemicals on some of fruits and vegetables?

Charles Victor Magro

I'll just pass that call over to Richard, our President of Retail.

Richard L. Gearheard

Yes, you're absolutely correct on the low moisture. We did get some significant rain and snow in the Sierras about 10 days ago, but we're still quite a bit short. Probably there'll be certain markets that will be allocated water severely -- I mean cut back severely. And the permanent crops have been increasing year-after-year and those will have to get water and you will see the vegetable markets probably suffer somewhat on the west side of the San Joaquin Valley.

Operator

Your next question is coming from the line of Michael Picken, Cleveland Research.

Michael Picken - Cleveland Research Company

I had a couple of questions. Number one, could you give an update on the phosphate side of the business, what you're looking at in terms of an average rock crop? And just remind us in terms of what percent you're integrated on in rock at this point versus last year's crop?

Charles Victor Magro

Sure, Michael. So we are on third-party imported rock now and there's some nuances to the contract that Ron Wilkinson will share with you.

Ronald A. Wilkinson

Sure. The imported rock is for our Redwater facility only. Our Conda facility is on its own rock. So roughly half of our phosphates is on imported rock. The contract is really linked to the price of finished phosphate. But what I will say is there's a lag. So the phosphate we're buying today is on a previous price with about a quarter lag. And then there's additional lag as we work that rock through our production and then inventory. So you're probably going to see a 4 to 6-month lag on the cost of our rock as it goes into the cost of products sold versus where we bought it.

Michael Picken - Cleveland Research Company

Okay, that's helpful. And then shifting over to the seed side of the business. You had mentioned in your prepared remarks that you received the benefit from getting more rebates. Can you sort of talk about kind of how the seed market is evolving, especially in light of some uncertainty in terms of how many acres are going to go into each crop and put that into context with respect to the amount of grower payments, the increase that you're seeing. And if you could divide that up between seeds, chemicals and fertilizer, that would be helpful.

Charles Victor Magro

Michael, we'll just pass that question over to Tom Warner.

Thomas E. Warner

Michael, as far as the uncertainty in the acres of corn and soybean, specifically, there should be -- we're putting a supply for corn or beans, whether we plant 90 million acres of corn or 94 million acres of corn, and the same with soybeans. So I don't really see the issues there. Again, there's still a lot of -- the acres will be determined next 6 weeks. Did that answer your question, did you want something on pricing as well?

Michael Picken - Cleveland Research Company

I was asking more about in terms of like volume. Are guys, farmers ordering more. Are they further ahead on seed or fertilizer versus chemical purchases?

Thomas E. Warner

I'm sorry. As Chuck mentioned in his opening comment, our prepay is up this year over a year ago, 6% or a little over 6%. We're really seeing probably more of the dollars focused towards fertilizer of this year than seed or chemicals, but not a significant change from year-over-year.

Charles Victor Magro

Michael, it's Chuck. What I would say on the other question on moisture, this is the benefit of being right across the value chain and specifically in Retail being in all the regions. We have the most diverse Retail portfolio there is. And we're on over 50 crops around the world. So when you look at that, we have a very balanced and stable portfolio. And if you have some pluses and minuses in the different regions, usually that works its way out. But the general characteristics that we've seen right now is prepays are up and last year was a record and prepays are up over last year. So I think that's a good news sign for just the overall sentiment of the market for the spring season.

Operator

Your next question comes from the line of Jacob Bout at CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

I had a question on your Retail EBITDA target of the $1.3 billion. I know you mentioned that you're still confident in that number. I guess my question is more on the mix side of things. And if we go back about a year ago, I guess, you were talking about Australia being roughly 8% to 10% improvement and then it was kind of 1/3, 1/3, 1/3 between tuck ins, organic growth and Viterra contribution. If you think about your target right now, how has that mix changed in your mind?

Charles Victor Magro

Great question, Jacob. Richard?

Richard L. Gearheard

Well, I think, it's very similar. The Viterra is probably about 35% of it. We still have -- since we did decrease in Australia this last year, we still think that we'll have the 8% type improvement, a little bit of efficiency projects and probably bring Australian efficiency up to 10%. Fairly 1/3, 1/3, 1/3 between seed, Loveland product, the proprietary products and tuck-in acquisitions is where we're headed, and that's consistent with what we've told at the Investor Day several months ago.

Jacob Bout - CIBC World Markets Inc., Research Division

And how concerned are you about the projections about the USDA about lower U.S. farm income going into 2015 and in corn pricing at the kind of mid-$3 range?

Richard L. Gearheard

Well, I don't -- I guess, today, I don't see that happening. Anything is possible. It's also possible for us to have some poor growing conditions this year and have it shoot the other way. So at this point, it's just kind of rolling the dice.

Charles Victor Magro

Yes, Jacob, it's Chuck. I guess we looked at that, and our view is 2015 is a long ways away and there's a lot that could happen between now and then. What we know right now is that as we enter the spring season, it's still early, but the grower sentiment is positive and we think that they're going to do everything they can to maximize yields.

Operator

Our next question comes from the line of Tim Tiberio with Miller Tabak.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Shifting to your global footprint. I was wondering if you're seeing any material impact in your Retail operations in Argentina as a result of the currency developments recently. And then, the second question is, also looking at Australia. Obviously there's major drought pressure in Queensland. And whether that impacts some of your operational improvement timelines or your expectations for the business in 2014.

Charles Victor Magro

Richard?

Richard L. Gearheard

Okay. On Argentina, it's not just the recent happening on their currency, it's been going on for probably 2 years and it's been steadily -- their peso has been steadily eroding versus U.S. dollar and it has hurt us. We have transferred some of our business into Uruguay, Chile and in Brazil, and we're picking up in those areas. But quite frankly, the largest concentration of our facilities down there is in Argentina. We'll probably just have to wait out the current presidential power that they have going on for 2 more years. And it'll be touch and go until then I'm sure. On Australia. Australia has a dry area every year. Queensland, you're right. Particularly the north -- western part of Queensland is dry. It's still the rainy season, there's still time for -- in the next 6 weeks for them to get moisture and to resume if they're planting, replanting primarily in their fall season. So it's not -- people aren't wringing their hands yet, but obviously, if they didn't get rain between now and the next 6 weeks, it would be a tougher situation. The South, Southeast is very good. The West is not quite as wet as it was last year, but it's probably okay. One thing good about that, they have such good crops in the West that the farmers are very financially healthy.

Charles Victor Magro

So Tim, it's Chuck. The other thing I would add is of course, there are these headwinds that Richard has described. But some of the improvements and a good portion of the improvement is really what we can control. And for us, it's really a focus on efficiencies removing some costs and really getting our higher proprietary margin products into these locations. So we are concerned about some of those headwinds from a market perspective, but I think we've got a decent plan that a lot of it is in our control to really deliver on these objectives. It would have help to have a tailwind instead of a headwind, but I think certainly focusing on what we control, we're going to see some improvement.

Operator

Your next question comes from the line of Mark Connelly with CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Two things. You mentioned Loveland only very briefly. But as you think about Dyna-Gro and the strong growth you're having there, can you keep that performance up within your existing system? And I wonder if you could address Loveland a little more too in that same regard. The second question is about ESN. How much concern about run-off is helping the ESN market? Or maybe I should say that more intelligently. We're hearing people say that time release fertilizer is a way to reduce farm run-offs and obviously, that's becoming a bigger issue in the Midwest. So is that helping ESN sales meaningfully?

Charles Victor Magro

Mark, thanks for the question. We'll pass the LPI and Dyna-Gro to Dave Tretter.

David J. Tretter

Mark, on the question of Loveland, we think that we'll be able to continue to increase our proprietary products. We've moved into Australia, certainly with the Viterra acquisition. Both those markets are relatively new for our Loveland product line. Every year, it continues to grow both in our legacy business, as well as the new markets that we're in too, so we feel very good about that growth over time. As far as Dyna-Gro, as our seed business grows in total, we expect Dyna-Gro to continue to be a constant part of that growth. We will always feel that we need to sell, at least 2 brands of seed to fit the farmers' needs, and Dyna-Gro is certainly going to a part of that.

Charles Victor Magro

And Mark, on your question for ESN, I'll just have Andrew Mittag answer your questions on ESN.

Andrew K. Mittag

Mark, as we look at ESN sales, over the last 3, 4 years, we had growth rates of over 20%. We've been very successful. And as we market the product, we of course, talk about the run-off issue, we talk about volatilization, we talk about all of the environmental aspects that are positive for the product and beneficial to the farmer.

Charles Victor Magro

And I would add, Mark, we are seeing increased interest for ESN around the world as well, specifically in Asia and Europe. And the other thing that we're getting a lot of interest in with ESN is it could be used as a replacement for ammonium nitrate; it is a safer product. So there's a lot of drivers for ESN, a lot of it have to do with run-offs, but there are some other drivers for it that should be interesting for this product over time. So we think it's got a really nice future in Agrium.

Operator

Your next question is from the line of Kevin McCarthy of Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

How would you characterize your earning sensitivity if 1 million acres were to shift in the U.S. market out of corn into soybeans or vice versa? I guess USDA is at 92 million as of yesterday, in the middle of your range of 90 million to 94 million. Just trying to understand whether or not a shift there is very meaningful to you. If you have any thoughts along those lines.

Charles Victor Magro

Richard?

Richard L. Gearheard

Well, from a Retail perspective, first of all, there's 1 million acres out of corn. Most likely, that would be in the South and Southeast. That could easily go into cotton which is a very high input crop as well. And so I don't see that -- I see it as a minimal change, and it could even be a plus in certain markets.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

No one caught cotton being more palatable for crop protection chemical demand, Richard?

Richard L. Gearheard

Yes. But it's also a big consumer of fertilizer as well.

Charles Victor Magro

And just on the wholesale side of the business, Ron. Any comments?

Ronald A. Wilkinson

Yes, we wouldn't really see any kind of material impact from that kind of shift, Kevin.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then second question, if I may. Appreciate your exclusion of the glyphosate grass in your midmonth updates. It looks like there was a sharp decline in the fourth quarter, but a bit more stable over the last month or 2. Can you comment on your outlook for Chinese asset? And then more importantly, what impact do you think that could have or not have as the selling season progresses this year?

Charles Victor Magro

Dave Tretter?

David J. Tretter

Kevin, this is Dave. We see that -- looks like the glyphosate price are going to be relatively stable going into the first and possibly the second quarter. Most folks have their glyphosate purchased, ready to go on the ground to start this spring. There really is not a lot of movement going on in China. So things look real stable over there at this point.

Operator

The next question comes from the line of Joel Jackson of BMO Capital Markets.

Joel Jackson - BMO Capital Markets Canada

You had a really good pickup in gross margin and crop nutrient in Q4. You talked about being specialty and some proprietary blend to help boost the margins, maybe from your Tetra acquisition. Can we talk about the sustainability of keeping of some of that margin pickup going in crop nutrients in '14?

Charles Victor Magro

Richard?

Richard L. Gearheard

Well, I would say couple of things. We had, particularly compared to 2012, 2013 had very little nutrients inventory appreciation. So when we -- the way we did combat that is with a lot of our proprietary products that either are applied with the fertilizer or go on fully applied in summer. The -- I would say, this year, we had a little bit of inventory appreciation -- appears inventory appreciation in the nutrient inventory. So that should help. And then, our biggest growth area in the Loveland proprietary products is in the nutrient area. And so we would see that continuing. And as Dave mentioned earlier, some of those markets where we are relatively new: Australia and Canada, we should also be picking that up as well.

Joel Jackson - BMO Capital Markets Canada

Okay. And I want to ask a question on your potash business. So your 2 Canpotex partners had very strong, like 35% volume pickup in both their offshore and domestic potash business in Q4. Both your businesses, offshore and domestic, were flat. Canpotex allocations probably affect the export business, but can you talk about what's going on, why you had flat volumes while your 2 main competitors were up significantly in Q4?

Ronald A. Wilkinson

It's Ron Wilkinson, Joel. On the Canpotex thing, you're right. Our allocation went down in the second half. The other factor there was that at the end of the third quarter on a Canpotex basis, we actually overallocated. This doesn't work all perfectly from quarter-to-quarter and our allocation through the first 3 quarters is high and so on a corresponding basis, it was all in the fourth quarter. And it just reinforces the importance of completing our expansion and getting our allocation back up. On the domestic side, first of all, our mine and mill ran really well during the quarter so certainly production wasn't an issue. And we built up some inventory, which we think will support good sales through the first half here. And we do look at things on the fertilizer year.

Operator

And next question is from the line of Andrew Wong of RBC Capital Markets.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

It looks like your Retail results were quite as strong and same-store sales were nice year-over-year. Can you help us understand how much of that was from market share gain? And how much of that was from your existing customer base?

Charles Victor Magro

Richard?

Richard L. Gearheard

Well, if you look in the quarter, it would have been almost exclusively due to the Viterra acquisition. If you look at it on a same-store basis, our volume -- our revenues were down roughly 10%. On a full year basis, our revenues were down about 2%. Now if you normalize the fertilizer -- fertilizer prices are down significantly versus the previous year, we were up slightly on a volume basis.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

So it looked like that was 5% on a normalized basis, right? And that's with prices staying flat. So is that. . .

Richard L. Gearheard

Yes, yes.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

Okay. And then I guess, just as a follow up. You mentioned on your comments that you had some strong growth from the services segment and that's expected to continue. So as the sales grow in this segment, can we expect the margin level to remain sustainable?

Charles Victor Magro

Tom Warner?

Thomas E. Warner

Would you repeat the question, please? I'm not sure I heard exactly.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

So the Services segment, as it grows, can we expect the margin level to remain sustainable?

Jason Newton

Yes, the services really, Andrew, going to be -- they're just high margin revenues, so they will continue to be high. The thing is, Andrew, is we don't allocate operating expenses to the sale or application services. And technically, they probably aren't that high, but we have the operating expenses appearing down the operating area, and so we always report very high margins for our services.

Charles Victor Magro

And Andrew, it's Chuck. What I would tell you is that certainly part of our strategy in growth area is in the area of precision agriculture. I mentioned in my remarks that we are on 10 million acres. We're seeing this as a solid growth across most of the U.S. and hopefully now soon to be in Canada. It allows us to sell high-margin products to get more value for the services that we apply, as well as the pull-through of the commodity fertilizers. So it is an area that's a strong focus. We're putting a lot of energy into it. I think our Precision Ag offering, we go under the banner today of NutriScription HD, it's as good as any, it's a full service offering and it is an area of complete focus for the Retail businesses just to get more value creation from our Precision Ag offering.

Operator

Our next question is from the line of P.J. Juvekar of Citi.

P. J. Juvekar - Citigroup Inc, Research Division

Chuck, everyone is trying to get into precision planting or Precision Ag. The seed companies are investing aggressively. The machinery companies are central to Precision Ag, so what is the role of the retailer? And is there a risk that the role gets marginalized as everybody else tries to get in?

Charles Victor Magro

P.J., it's a great question and we're spending a lot of time working with partners in the area and talking to growers. My view is that no one company can do this alone. It's too complex. And if we go off on multiple fronts with different company programs, we're going to confuse the grower. When you look at the CPS and our Agrium Retail business, the advantage we have is we're in contact with 0.5 million growers around the world. We have more information and more contact than anybody else. And I think, that is what's needed. We have over 1,000 agronomists that are working in the field every day. Precision Ag is not a new phenomenon, it's been around for many years. We've, I think, honed our program quite well. But some of the new products that other companies are talking about we're actively looking at them and seeing if we can create more value for the grower by partnering with them. But I would tell you right now that this is an interesting area. It's going to evolve over time. I don't think it's going to be revolutional. I think it will be evolutional. But certainly, it is a space where we think we can drive productivity improvements for the grower, which is a good thing. And you'll see Agrium continue to get stronger in the space. But I don't think that it's necessary for companies to necessarily have to compete with one another. I think it's going to require the entire supply chain to kind of collaborate so that the grower sees value.

P. J. Juvekar - Citigroup Inc, Research Division

And then quickly a question on seeds. You talked about seed rebates. Did you book all the rebates in 4Q? And then in terms of seed pricing, did you see any discounting towards the end of the year from smaller players that had written down their seed inventory?

Charles Victor Magro

Tom?

Thomas E. Warner

Yes, P.J., we have seen some discounting into fall. I think it's a market share, a race. But nothing, nothing too much. A little more than last year, but we feel pretty confident margins of last year going to be pretty steady through to spring season.

Operator

Our next question comes from line of Christopher Parkinson of Credit Suisse.

Christopher S. Parkinson - Crédit Suisse AG, Research Division

You talked about this in the release -- in your release. But can you just touch on a little more on the ramp-up of Viterra throughout 2014 and into 2015? What you've seen thus far at a very early stage and then also what you expect over the longer term? Then also do you still expect your synergy guidance to be heavily weighted next year?

Charles Victor Magro

Christopher, I'll pass that over to Kevin Helash who runs our Canadian Retail business.

Kevin R. Helash

Christopher, I'd say, the integration of Viterra has gone extremely well. We've got our organizational structure in place. We're well on the path of moving our proprietary seed and crop protection products into the entire organization. And certainly, do not see any issues achieving our stated synergies.

Charles Victor Magro

And Christopher, it's Chuck. What I would tell you is the target is $100 million of EBITDA by the year 2015. We feel very comfortable with that number with what we've seen. In fact, there's some really interesting parts to that business that they've got of course the canola seed business that looks very intriguing for us. So we're liking what we see when it comes to looking at that business, as well as some other parts in the Viterra acquisition that could be applied across the rest of our Retail footprint, but we really need to operate them for a year to really understand the strategic value that could be used across all of Retail. So far, we just we like what we see. I think, it's going to be a great acquisition in addition to Retail.

Christopher S. Parkinson - Crédit Suisse AG, Research Division

Perfect. And just switching hemispheres very quickly here. You recently also made some significant changes on the management in the Landmark business within the last half a year. Can you just comment on any potential new strategies you have in the region versus the past, the competitive environment? And just any expectations for a relative improvement going forward?

Charles Victor Magro

Richard?

Richard L. Gearheard

Well, we have placed a very successful general -- North American General Manager in charge as Managing Director of Landmark. I think he can take it to the next level of how to exactly extract the margins on nutrients and chemicals, and we're already seeing that. He's already achieved some significant cost reductions as well. Other than that, I really don't think we've had major management changes other than the very top slot.

Charles Victor Magro

Yes, Christopher, the only thing I'd mention is, of course, we did announce that we moved Jeff Tarsi, who many of you know, into the role of looking after all of our international operations. And we thought that, that would help get a focus in some of these areas and really drive the metric delivery that we've committed to. So with the management change that Richard referenced in terms of Australia Managing Director, the addition of Jeff Tarsi, we're feeling that we've got enough management horsepower now to really look at those international Retail businesses and deliver on the metrics.

Operator

Our next question is from the line of Mark Gulley of BGC Financial.

Mark R. Gulley - BGC Partners, Inc., Research Division

Yes, I want to dig a little bit deeper with respect to Vanscoy. Now that you've layered in another layer of cost escalation, how has that affected the IRR on that project? And what percent complete are you. And what I'm getting to there is, how confident are you that there won't be another layer of cost escalation?

Charles Victor Magro

Ron?

Ronald A. Wilkinson

Mark, it's Ron Wilkinson. Fair question. First of all, on the economics, we're seeing still, with the added cost, our expectations are a return over 10% on an IRR basis. And we're both -- we're nosing on 65% complete on construction. So we are fairly well down the path. And I think we'll become more confident as we come out of winter here. At this point, this is our best estimate. We've got a huge focus on contractor productivity going forward. And we'll -- we are -- obviously there's some risk there, but we're confident we can hold it at this number.

Operator

Our next question is coming from the line of Jeff Zekauskas with JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Can you talk about your private label seed pricing in 2014? Will be it be up very much? Or flat with the previous year?

Charles Victor Magro

Tom Warner?

Thomas E. Warner

Sure. Jeff, our Dyna-Gro seed pricing will be just slightly above our 2013 numbers. We'll cut the line with the national brands on prices. So it will be up just slightly .

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay, great. And then for my follow-up, can you talk about the impact of the high seas at the Moroccan ports that seem to be delaying shipments by OCP, sort of, what effect do you believe they're having on the phosphate market?

Charles Victor Magro

Ron?

Ronald A. Wilkinson

Yes, it's Ron Wilkinson. Obviously, in the short term, that has tightened the phos market. I'm hearing that, right now, actually the weather is doing good, but there may be some more storms in the forecast. Certainly, from our rock point of view, it's not impacting us at all. But it has caused some short-term tightening on the phosphate market.

Charles Victor Magro

I think that's all the questions in the queue. I'd just like to close by saying Agrium is uniquely positioned to capitalize on improving market conditions we are currently experiencing in the early part of the year. Our Retail business is the leading ag Retail business in the world and it's poised for another solid quarter. Our Wholesale business should benefit from increased volumes and margins in 2014 as market conditions rebound. We have great growth prospects with the ability to grow wholesale production by about 20% in the next few years and a clear path towards growing Retail's EBITDA by 30%. And finally, our capital allocation priorities are clear. We plan to continue to grow our dividend as our free cash flow grows. Thanks for listening.

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