Viterra, Inc. F3Q08 (Qtr End 07/31/08) Earnings Call Transcript

Sep.10.08 | About: Vanguard Total (VT)

Viterra, Inc. (NYSEARCA:VT)

F3Q08 Earnings Call

September 10, 2008 1:45 pm ET

Executives

Colleen Vancha - Investor Relations & Corporate Affairs

Mayo M. Schmidt - President, Chief Executive Officer, Director

Francis J. Malecha - Chief Operating Officer

Thomas Birks - Chairman

Doug Wonnacott - Senior Vice President - Agri-Products

Rex J. McLennan - Chief Financial Officer

Analysts

David Newman - National Bank Financial

Robert Winslow - Wellington West Capital

Orin Baranowsky - BMO Nesbitt Burns

Cherilyn Radbourne - Scotia Capital

Bill MacKenzie - TD Newcrest

[Richard Pattersol - Heathbridge Capital]

Gerry Hannochco - Genuity Capital Markets

[Roberta Rathkin - Reuters]

Winston Lee - Credit Suisse

Operator

Welcome to Viterra’s third quarter conference call. (Operators Instructions) I would now like to turn the meeting over to Colleen Vancha.

Colleen Vancha

Our financial and accompanying financial statements were issued this morning and copies are available on SEDAR as well as posted to our website. We do ask you read those reports in their entirety as we will only be summarizing results today.

Investors are cautioned that today’s discussion and responses to questions may contain forward-looking statements. Such statements are based on certain assumptions that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied. Additional information about these assumptions and factors can be found in our disclosures under the section entitled “Forward-Looking Information.” The information presented today is current as of today’s date and will not be updated.

As the acquisition of Agricore United as of May 29, 2007 it’s important to note that last year’s three-month and nine-month results include contributions from the pool for both periods for June and July results for Agricore United as well as one month of contributions from those assets that we sold to [Dari] and Cargill on June 30.

I would like to invite Mayo Schmidt, President and CEO of Viterra, to provide an overview of our results. We’ll follow his commentary with a question and answer session. Our corporate management team is with us today and will join us in that discussion.

Mayo M. Schmidt

It’s my pleasure to present to you Viterra’s results for the third quarter and the first nine months of fiscal 2008.

The May to July period is the strongest for Viterra as our front line staff work harder to provide the products and services our farm customers need to grow their crops. Our grain merchants are kept busy matching the needs of the destination customer with commodities available on the farm. Our port terminals are working together to meet the export commitments, and I would say it’s been an exceptionally busy year. Viterra’s products are in great demand and we’re fortunate to have the expertise and the integrated asset base to execute. The pipeline model that we employ throughout our operations allow us to squarely focus on our key business drivers leveraging the expertise and market position to deliver superior financial results.

Our financial performance has been exceptional. Quarterly sales rose to $2.2 billion bringing year-to-date sales to $5.1 billion, more than double last year. Quarterly EBITDA was up $119 million to $273 million and for the nine months $432 million more than twice the level of last year. Viterra’s net earnings for the quarter were $167 million or $0.71 per share. On a year-to-date basis we earned $242 million or $1.13 per share. That compares to $116 million or $1.05 per share last year. Cash flow was $261 million for the quarter, $383 million or $1.79 per share for the nine months. That is an increase of over $211 million compared to last year.

We’ve achieved total synergies of $87 million to date through our integration of AU and Saskatchewan Wheat Pool. Our agri-product segment has extracted an additional $8 million in revenue synergies and as a result we now expect growth synergies of $104 million. We are confident that we will deliver the full benefit ahead of schedule by the middle of fiscal 2009.

It’s also important to note that given our solid financial performance, our consolidated tax loss carry-forwards have declined $63 million. Based on current expectations we now expect those loss carry-forwards to be fully utilized by the end of fiscal 2009.

We are operating in a demand driven market. Certainly a factor in our earnings growth can be attributed to our larger network of assets. However our results also reflect the continued strong demand for agriculture products worldwide and the efficiencies that we’ve been successful in bringing to bear here at home and through our pipeline management strategy. It’s clear our programs are working. Market share for the quarter was 45% and over 43% on a year-to-date basis, solid evidence that we are providing the competitive pricing and values that our farm customers have come to expect. At the same time we have continued to generate strong grain margins. For the quarter we earned $34.47 per ton reflecting operational efficiencies and more revenue associated with handling, cleaning, drying, freight incentives and blending.

We have spoken over the last several quarters about opportunities that exist during periods of volatile commodity prices. Even though we saw commodity prices retreat somewhat during the quarter and prices are nearly double versus historic levels, volatility remained high and allowed us to apply our merchandising expertise to deliver strong results. This illustrates that it’s not just higher prices that create additional margin potential. It is volatility and the company’s position at both ends of the value chains that are key.

On a year-to-date basis the gross margin per tonne was $32.22 including approximately $1.50 per tonne of synergies. We are leveraging the company’s logistics expertise to take advantage of rail efficiencies and ocean freight opportunities. We expect gross margins per tonne for the year to be in the $30 to $32 range.

In the agri-products segment sales during the quarter increased $422 million to $1 billion. For the first nine months Viterra’s agri-products business sales reached $1.4 billion. Fertilizer sales increased by $297 million in the third quarter bringing the total to date to $784 million. Fertilizer prices strengthened on tight world supplies, significant reductions in exports from China, and heightened demand from India, Brazil and the US domestically. Higher commodity prices drove greater demand as producers purchased additional volumes to maximize the yield potential of their crops.

Seed sales were $113 million, an increase of $78 million over the three months ended July 31 of 07. We experienced higher selling prices for cereal seed and more canola seed sales, a factor increased demand for hybrid varieties and an increase in canola acreage. For the nine months, seed sales reached $173 million. Our position as the leading seed provider allowed us to contract over 1 million acres of identity preserved wheat and durum. Growers agree to purchase our seed and agri-products and deliver their commodity to us at the end of the growing season. We then secure the necessary demand from our end user. This is an example of the pipeline model driving results.

Favorable growing conditions and strong commodity prices encourage farmers to apply more crop protection products as well. Sales prices increased because of global supply and demand pressure particularly those for herbicides used to control weeds.

Sales in the agri-food processing segment for the quarter were up 11%. For the nine months sales increased by 23% to $144 million. Both Prairie Malt and Can-Oat achieved solid demand for their products. Prairie Malt continued to benefit from improved margins through the quarter due to higher selling prices. Can-Oat margins also improved through the third quarter due to higher volumes and favorable yields.

On the feed side of our business, sales reached $421 million reflecting higher sales values. This quarter’s results also included a loss related to our exit from the hog business.

Operationally we’re now in the midst of harvest season. Current production estimates suggest the crop could be 10% to 15% larger this year but it’s too early to be definitive about crop quality. That will be dependent upon weather conditions over the coming weeks.

Certainly we expect demand for our products to remain strong. Even though there is prospect for larger production in other areas of the world, food stocks are low and there remains a significant food deficit. World carry-out stocks at the end of 2008 year are projected to fall to the lowest level since 1982 with the stock to use ratio at a record low of 18.7. In the US and Canada the stocks level are the lowest in modern times. Even though stock levels are expected to rebuild in 2009, the ratio is still forecast to remain the second lowest on record. This should support prices for the coming year at levels second to only those seen in 2008.

The growing demand for protein around the world is expected to translate into continued strong demand for agriculture commodities. This coupled with the demands of the bio-fuel market is very positive for our industry.

Producers believe that the market will remain robust for some time. A strong illustration of this is the status of free payment. Typically little product is prepaid at this time of year. For instance, at July 31 last year Viterra received just $3 million in prepaids. This year at the same time Viterra had over $89 million of prepayments, a reflection of the producer commitment to fall agri-products purchases. Producers will continue to invest in their crops in an effort to reap the benefits of strong market fundamentals.

As many of you know the company is in the midst of a labor dispute with the grain service union with a number of their members picketing the Regina office. The company has implemented its contingency plans and to date the strike action has had minimal impact on operations. We have been told that the union intends to disrupt operations at Saskatchewan country facilities during the harvest. Again to date their actions have had no material impact. We are confident in our contingency plans and our ability to operate effectively through this busy season.

Management remains firmly committed to controlled strategic growth. We’re seeking opportunities for geographic diversification of our core business as well as diversification through downstream value-added food and industrial processing. Our focus is on assets that will allow us to be a leader as one of the top three players in the industry. We intend to leverage our core competencies by expanding into regions where we can access production with similar export profiles so that we will continue to maximize full pipeline margins. Our preference is to buy versus build. As a consolidator we do not intend to create additional capacity in mature industries. We can acquire the expertise and have access to immediate earnings and by applying our best practices we will create incremental value. We are focusing on regions that offer political stability and ease of access from a commercial and cultural perspective. There are opportunities to create value. We are being aggressive yet highly selective. We believe that our disciplined approach will allow us to put shareholders’ money to good use and deliver superior returns on capital over the long term. Our timing is good. The balance sheet is strong. Our cash position is ideal. We do look forward to extending our reach to provide value to all of our stakeholders.

I thank you, and that concludes my remarks.

Colleen Vancha

We can now turn to the question and answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Newman - National Bank Financial.

David Newman - National Bank Financial

A couple of quick questions on the guidance. Obviously the crop has a prospect of looking pretty good here in terms of volume and also in terms of the quality, but it is a little bit late in the season. What sort of risks are we looking at here? How many days of good weather and it does look like we’ve got the prospects of fairly decent weather right now, how much do we need to get this crop in the bin?

Francis J. Malecha

I think if we have three good weeks of weather and you don’t get rains in between, that does kind of slow you down because the later in the season the longer it takes to recover from a rain, would go a long way in getting the crop in the bin.

David Newman - National Bank Financial

And given historic precedent, what do you envision right now? What’s your company perspective on where it might end up being given the typical seasonal weather patterns and of course we’ve not seen that more recently. But as you look out what do you think the crop could be subject to some frostbite or what do you think?

Francis J. Malecha

I think we’re probably far enough along on the crop development where frost would have a minimal impact on quantity; maybe a slightly higher impact on quality. But I think minimal. The biggest issue as I see it would be rain and if we get that open three weeks of weather, then I expect that we’ll have about an average quality crop.

David Newman - National Bank Financial

In terms of handle for next year, do you sort of forecast around 14 million tonnes thereabout is what you think you could probably handle?

Francis J. Malecha

We don’t forecast our shipments but what I would say is we are going to have a bigger crop. We have strong markets. We’d expect the grain to move, farmers to take advantage of these markets and sell the grain, and we’re still expecting a strong margin opportunity.

David Newman - National Bank Financial

Just switching gears on the gross margin for Tom. Obviously it came in a little higher than expectations. Your guidance has been moved up a little bit. If you strip out and you looked into next year, what would be the normal or base case sort of margin assumption we should use? I think it’s been around the mid-20s before. Is there something that you’re seeing operationally now that would lead you to believe that maybe it’s towards the $27.00 to $28.00 range now if you strip out some of the pricing volatility?

Thomas Birks

I think you have to back off of our current number for next year but it should be higher than kind of that traditional or historic level. I think you’re in the range, kind of in that $26.00 to $27.00 range is probably as accurate as one can get right now knowing that we still have risks with the crop.

David Newman - National Bank Financial

On the labor front, obviously there’ve been some rumors and some comments made that perhaps the labor strike could expand to the ports. Do you see that happening at all? Do you have contingency plans for the ports as well?

Thomas Birks

We have contingencies and plans in place across in our entire business and we don’t anticipate that we’ll have an impact at the port facilities that would materially impact our operations.

David Newman - National Bank Financial

You’ve got two major elections coming up. Canadian Wheat Board obviously you’ve got their elections coming up and you’ve got the federal elections coming up. Any color on when farmers might be freed from their voluntary servitude to the Canadian Wheat Board?

Mayo M. Schmidt

That’s an interesting way to put that David. I would say we are like you, carefully watching to see what those results are. And you make two good points. One is that there’s an election going on at the Board of Directors of the Canadian Wheat Board and as I understand that right now the majority by one is one the side of pro-monopoly and there are four positions that are up for re-election, I believe is the number. So that is yet to unfold. And then of course the conservative government has made their position clear and when the election is done and if there’s a majority, I suspect that they will look back to what their position was and consider their next step.

We look at it like this. Clearly we think there are advantages in our system to having more influence over the movement of the rail equipment because obviously we’re operating the origin and the destination, and having other parties participate in that pipeline does not create efficiencies. We think we can continue to maximize those as we’ve done and we’ve proven we’ve been able to. We think that there’s more opportunity for Western Canadian producers and for the industry to have a deeper involvement and experience in the transportation sector. What those outcomes could be, you’ll have to predict and we’ll have to wait and see.

Operator

Our next question comes from Robert Winslow - Wellington West Capital.

Robert Winslow - Wellington West Capital

The $34.47 gross margin per tonne in the handling division for the quarter, can you break out how much of that was related to trading gains for us please?

Mayo M. Schmidt

We don’t have that breakout for this quarter.

Robert Winslow - Wellington West Capital

Could you hazard a guess?

Mayo M. Schmidt

I would say probably fairly consistent with what’s been happening all year.

Robert Winslow - Wellington West Capital

So about $5.00 or $6.00? I think that’s what it was last quarter.

Mayo M. Schmidt

I think you might be a little high there.

Robert Winslow - Wellington West Capital

So I guess then the normalized rate for this quarter which had more board grains would be about $30, so that would still be a little bit higher than the $26.00 to $27.00 you just suggested on the previous question. So I guess there are some other factors in there. Maybe you could just kind of walk us through that again. I know this gets asked every quarter but just help me. I’m trying to model the longer term margin potential here.

Thomas Birks

I think if you look at the year that we’ve just had with gains and our operations blending and how we handle the grain, our inventory management, all those types of things, are they going to be repeatable at the same level? I think that’s where we have a question. Like I said earlier we don’t know what the quality of the crop is. We do think though that there’s going to be a slight impact for example in [inaudible] quality and that’s a very good product for us to handle and our margins on it. So I think those are some of the reasons why you see probably a kickback and I think also we won’t see the same volatility in the commodity prices that we’ve seen over this past year.

Robert Winslow - Wellington West Capital

Right. It’s tough to call the volatility for sure.

Thomas Birks

The markets are volatile still right now but we think [inaudible] time, once the production for the year is in the bin crops in the North and Southern Hemispheres maybe some of that volatility comes out.

Robert Winslow - Wellington West Capital

Right. And again, on the quality, is it fair to say that if quality is not so good that gives you opportunities on the blending side to drive higher margin? Is that right?

Francis J. Malecha

Sure. There will be some opportunity there.

Robert Winslow - Wellington West Capital

The last thing for me is just on M&A. Obviously you’ve got some dry powder of $440 odd million from that equity raise and we haven’t seen an announcement yet. I know you’re working hard on it, getting some of your crops to going. Could you tell us, has your hat been in the ring on any deals that you just haven’t been able to work out, you’ve lost out to other bidders, or is it just that you haven’t actually been able to find any that you’re close to? And the reason I’m asking is when you raised the money back in May-June, I’m wondering how much of it was opportunistic and how much of it was, “Hey we need the money now because we’ve got something we want to acquire imminently.”

Mayo M. Schmidt

We’ve been very active at the table on a few opportunities. I think there are a couple things that are going on right now and of course we see the commodity correction that’s taking place and it probably all begins in a sense with oil when you think about the geopolitical events, the Middle East, the hurricanes in the Gulf. We really have a disconnect here between the commodities such as oil and fertilizer and the fact is that with oil prices coming down and natural gas coming down, it’s driving greater margins on the fertilizer side and grain margins of course as you see have been very strong. There is no weakness in the pricing yet what we do see to some degree early on is kind of peak multiples on peak earnings. So we’ve been very conscientious about that in terms of being a patient and disciplined buyer.

We’re going to I think find transactions, more than one plural, over time that add shareholder value with the discipline that we’ve used. We have looked at projects and we’ve seen projects trade that we have simply made a determination that we would not pay the kind of values that were paid. And I think if you look at the companies today, and there are quite a number of ag companies particularly on the fertilizer side, and you see the reductions that they’ve experienced between 20% and mid-30% of their market caps has been rather significant. So I think we look at this as long term and stable growth.

In 07 we raised over approximately $1 billion at $8.00 and the shareholders have been substantially rewarded. And we’ve raised in 08 some capital as you’ve indicated at $14. And we think over the long term with discipline and the opportunities which we see in the market place which we think are significant, the shareholders are going to be rewarded as well because as we all know this is a strong long-term investment; not a one month turnaround. So we have confidence in the position we’re in and we’ll continue to look at some opportunities. There are opportunities that we’re reflecting on even at this time.

Robert Winslow - Wellington West Capital

Just a follow up to that. I’m wondering if you can tell us on the privates that you might be looking at, the non-public companies, I’m wondering if the valuations they’re looking for are fairly sticky? I mean public companies get revalued every day. We see it in the stock market. But I’m wondering if sticky valuations on the private side might hinder you or you might take a little bit longer than we expect to get something across the goal line?

Mayo M. Schmidt

We’re looking at opportunities right now. I think it’s simply a case of the businesses that we’re looking at are typically platform businesses that operate in the same business structure that we do where we believe we’re the best in the world at what we do and we can export that talent to new opportunities and take their level of performance up and through this combination produce some results for the shareholders. I don’t think that there’s particular mix between private and public that I would begin to define for you at this time. I think whatever the structures are, there are opportunities right now. I don’t think I would confine it to a certain timeframe. I mean right now obviously it’s a little difficult because the market place is in a lot of turmoil and there’s a big commodity correction taking place. We realize that and the targets that we’re looking at realize that. And I think you just continue to have a watchful eye and we’re active in discussions and we’ll be looking forward to making an announcement when we have the opportunity.

Operator

Our next question comes from Orin Baranowsky - BMO Nesbitt Burns.

Orin Baranowsky - BMO Nesbitt Burns

I just want to continue on on the acquisition line of questions. I wonder if you can give us some thought into your thought process on your priorities in terms of either by business lines or by geographies, where you’re most pressing I don’t want to say need but where you’re looking the hardest to expand your business would be?

Mayo M. Schmidt

Sure Orin. I’d be happy to address that. Really what we’re looking at is look at our business like a platform business where we have a pipeline system that we operate and take margin at every position along that pipeline. And as we look at opportunities that are both upstream and downstream, we think that if we can acquire other platform businesses it’ll be businesses that share the same destination customers, that have geographic diversification, that through the combination create scale on the balance sheet, create obviously a lower cost of capital, but we’re also looking at particular channel businesses I would call them.

And that might be as you think about our Can-Oat, we’re the largest industrial oat miller in the world. We are the premier miller of oats in terms of our processing companies that buy the oats form us, the cereal companies. Highly thought of. And those are the kinds of businesses we want to be in. We like to think about businesses that are scalable beyond the first step. So we’re not just thinking about a particular target as an acquisition. We’re thinking beyond that to say “What are the second, third opportunities that exist beyond the first step?” So I think platform, I think channel, I think geographic diversification.

Canada is rather limited for us right now. I think the US offers strong significant opportunities. Europe and Australia are also optimistic areas. They’ve got related cultures, language; rule of law is good in those countries. We’re also making some trading inroads into other countries. If you look at China, India, we’re major suppliers. And I think as a third step ultimately we’ll develop some relationship to processing there as well. But that won’t be the first step.

Orin Baranowsky - BMO Nesbitt Burns

So maybe not additional oat milling but maybe additional grain processing capabilities?

Mayo M. Schmidt

Yes. Grain, oilseeds, and you think about, there’s wheat milling, there’s durum milling, there’s corn milling, there’s oat milling, there are a number of different areas and especially crops that we’re involved in. We’re in the malting business; we’re in the fertilizer business. We just need to pick our time. We’ve looked at businesses in those areas and I think we all know in the market one has traded recently at a significant number of times prior to the correction in the market. So we’re being very deliberate and very diligent about how we proceed.

Orin Baranowsky - BMO Nesbitt Burns

But if I were to take from what your earlier prepared comments when you talked about political risks, we wouldn’t likely see you going into the Russian or the Ukrainian market given the current circumstances?

Mayo M. Schmidt

No. You want to think about it as if we’re active in China, in India, Ukraine is going to be a big supplier but we’re also conscientious about how we protect our assets and our shareholders’ investment, so those would not be the first steps that we take. It wouldn’t mean that we wouldn’t buy and sell product in there through open letters of credit through qualified banks or lenders but in terms of putting assets on the ground or putting a billion dollars on the ground in China or India, we’re not in a position where we think that’s in the best interest of our shareholders at this time.

Operator

Our next question comes from Cherilyn Radbourne - Scotia Capital.

Cherilyn Radbourne - Scotia Capital

First couple of questions on the grain handling segment. I guess the thing that struck me a little bit about your results was just how good the volumes were in the grain handling segment in light of what we’ve seen in the rail car numbers. And you talk in the MG&A about improved market share in board grains which is typically hard to achieve based on the allocations system. So I’m just wondering if that reflects an increased participation in the tendering system?

Francis J. Malecha

It wouldn’t have occurred because of an increase in tendering. The one thing I will draw your attention to on market share is it might go up and down quarter to quarter and there’s a lot of timing issues that happen. I wouldn’t read too much into a tendering figure.

Cherilyn Radbourne - Scotia Capital

Just thinking about the size of the grain handling opportunity for next year, clearly we appear to be looking at a crop coming in that’s going to be sort of 10% up year-on-year but we do have very low on-farm inventory. So if you combine those two things, do you expect the pool of grain that’s available to handle next year to be up on balance relative to this past year?

Francis J. Malecha

I think it will be up slightly, yes.

Cherilyn Radbourne - Scotia Capital

I wonder if you could make some comments as to how we should think about the margin potential in the agri-products segment for next year, just given that your margins in fertilizer manufacturing this year have been unusually good and clearly you would have enjoyed some substantial price appreciation on your fertilizer inventory this year. Is there anything that you can say as we try to model going forward?

Doug Wonnacott

It’s very true that we certainly have enjoyed significant appreciation over the course of this year. As we look into next year we don’t see the same type of appreciation being available to us. However on the assumption that commodity prices continue at their high levels, we certainly expect to see fertilizer usage continue at high rates and as such, we would expect prices to remain high. We also enjoy widening manufacturing margins here as a result of some softening in natural gas and continued high prices on the finished products.

Cherilyn Radbourne - Scotia Capital

One last question. One of the things I’ve come across in some of the trade press is just some commentary by the large Japanese trading houses that they’re looking to increase their direct grain purchases in part by actually investing in grain storage in target markets. Do you see that as a threat or an opportunity for Viterra?

Thomas Birks

We haven’t seen that in Canada. I think some of the trading companies have been purchasing land. I think there was one that purchased land in South America and certainly they have positions in grain handling assets in the US. Will that continue? It may but generally it tends to be a partnership and they will usually take a minority interest most of the time. So I think it would be a potential opportunity for us if they were looking in Canada but we just haven’t seen that in the market place up to this point.

Operator

Our next question comes from Bill MacKenzie - TD Newcrest.

Bill MacKenzie - TD Newcrest

Most of my questions have been answered, but maybe just two. First on the theme of acquisitions and the balance sheet. If it takes a little bit longer to get an acquisition done given if you want to be a little bit patient in this commodity sell-off here, would you consider any other uses of capital like buying back stock? I mean you just issued a lot of stock but it was at significantly higher levels than where the stock’s at right now. Would you refocus your cash deployment plans given what’s happened with the stock at all or are you going to just stick with the status quo?

Rex McLennan

Clearly our M&A strategy is continuing to prosecute that and we’re firmly of the belief that we will have good opportunities to earn more than our cost of capital by investing in new business opportunities. So consistent with that approach, we wouldn’t have any reason to be looking at buying back stock or implementing a dividend program. That’s not to say that at some stage of the company’s plans that would not be considered, but given our current strategy it’s not something that we’re considering. And I recognize your question as a hypothetical one but the reality is that we’re in the midst of looking at business opportunities and we’re firmly of the belief that we’ll find them.

Bill MacKenzie - TD Newcrest

Going back to the margin per tonne discussion, is it possible to get any additional disclosure on maybe looking back over the last three quarters the variance in the margin per tonne would be in your business right now between board grains and non-board grains?

Francis J. Malecha

I think if you look at the, if I understand the question right, margins on board grains, they’ve been very consistent throughout the year. On the non-board grains there’s been more opportunity because of the volatility of the market and we’ve been able to take advantage of that. So I think increases year-over-year will tend to be much more on the non-board grains. Although on the board side, we do capture some of those blending gains and certainly pick up the efficiencies on the rail side to the degree that we can. So there’s a little bit of an increase there.

Bill MacKenzie - TD Newcrest

I certainly appreciate that the vast majority of the lift has happened on the non-board side. I’m just wondering on the board side, is $1.00 or $2.00 a tonne or is it higher than that in terms of how much the margins may have gone up on that side of the business from things that you mentioned? Are those reasonable numbers to think about?

Francis J. Malecha

I think you’re talking about like 10% or so; it’s probably reasonable.

Operator

Our next question comes from [Richard Pattersol - Heathbridge Capital].

[Richard Pattersol - Heathbridge Capital]

Just expanding on Mr. MacKenzie’s question on the buy-back, have you filed the regulatory approval for that - I know it’s not in the short-term plan - but do you have the process in place? And sort of a link question, either for buy-backs or insider buying, are you guys blacked out given the corporate development and the strike action, etc. at the moment?

Rex J. McLennan

We don’t have any filing at present such as a normal course issue or bid. We don’t have that in place nor are we contemplating it. In terms of blackout periods, we do have fairly extensive blackout periods for insider trading that recognize the flow of information and the lengthy periods of time it takes to put together financial information for quarters. So for a fairly substantial part of the year, the insiders are blacked out from trading.

[Richard Pattersol - Heathbridge Capital]

Normally it’s two days after or something, but there’s a blackout not because of other things you’re working on?

Colleen Vancha

I think it’s fair to say that if there are specific blackouts related to special projects, that would be information available to the executive management team on those projects. Generally in the organization the trading window opens a couple of days after the quarter and the general population can trade. But those who are working on professional projects are treated in special circumstances. We couldn’t comment on whether there’s a blackout as of right now for that reason enough.

[Richard Pattersol - Heathbridge Capital]

I’m not sure I fully understood the answer to David Newman’s question about if we have three weeks of dry weather, does that sort of break the back in terms of the time race for the crop?

Francis J. Malecha

Yes.

Operator

Our next question comes from Gerry Hannochco - Genuity Capital Markets.

Gerry Hannochco - Genuity Capital Markets

Maybe a question for Rex here. Just with the company looking at acquisitions and you’ve got some cash on the balance sheet here, what do the credit markets look like right now and how are the bank relationships looking. If you’re looking at making an acquisition say for something more than $440 million, what do you think you’re ability to finance that would be?

Rex J. McLennan

That’s a fair question. We’re obviously in a very strong financial position now, upwards of $500 million in cash with short-term securities and we have some undrawn credit capacity as well in the Turner facilities that were negotiated in May. As a general answer to your question about access to capital, because of the strength of the company and its financial performance and very strong credit metrics, we are at the very upper end of the non-investment grade rated credits and we are investment grade rated by DBRS in Canada and on positive outlook by S&P. The financial community views Viterra as being in a very solid position to finance opportunities that make sense for the company and we don’t feel that we have any real constraints for opportunities that make sense for the company and that are accretive. So all in all I’d say we’re in good shape from a financial perspective.

Gerry Hannochco - Genuity Capital Markets

No issues from your lenders on the agricultural space?

Rex J. McLennan

No.

Operator

Our next question comes from [Roberta Rathkin - Reuters].

[Roberta Rathkin - Reuters]

I have a question about timing of acquisitions. I know Mr. Schmidt you had talked earlier in the year about hoping to be able to announce something by November or by the end of calendar 2008. Do you feel that that timing is still possible given the kind of correction you’re seeing in the market?

Mayo M. Schmidt

Well, one, as I mentioned we are very active. I think that the potential does exist at this point in time. Of course we don’t have anything that we’re in position to talk about so I think the timing is going to obviously be determined and dependent upon the particular transaction. We have of course with the number of businesses that we operate in and a very strong business planning group within the company and use of strong financial advisors that we’ve used for the last eight years, we feel very confident that we’re going to have a good look at a number of good projects and we hope to get something across the finish line in that period of time by the end of the calendar year.

[Roberta Rathkin - Reuters]

The projects you mentioned that you had looked at and ultimately rejected or stood back on, I sort of missed that. Was that because of price specifically?

Mayo M. Schmidt

As I was mentioning, peak multiples on peak earnings and I think we’ve seen in the past six months a few buyers have been caught in situations where they’ve paid peak multiples on peak earnings. And we’ve seen of course the significant change in the market place and the turmoil and I don’t think it’s treated them well in that period of time. The project we looked at we showed the discipline to pass on a couple opportunities that we thought were overpriced from our point of view and what we thought the opportunity looked like.

[Roberta Rathkin - Reuters]

And you sort of hinted about but I wasn’t sure if you were referring specifically to the fertilizer plant at Bell Plains?

Mayo M. Schmidt

It’s just one of many that I think have been in the lineup. There are quite a number that have traded in the last six months.

[Roberta Rathkin - Reuters]

I sort of got lost in the explanation about the platform, the pipeline and the channel. I wondered if you could just sort of explain that to me again.

Mayo M. Schmidt

Just indicated that in our business where we operate from seed, chemical, fertilizer to the grain production or the pipeline as it will from the customer selling all the inputs to the destination customer delivering over 300 shiploads of grain around the world is a platform business. And then more of the channel might be a distinct business within that which our internal business origination of the grains and the chemicals and the fertilizer that supply those grains, then would go to our Can-Oat milling business, would go to our malting company, would go to our feed manufacturing company. So those are some of the channel businesses which operate within that pipeline but are a little more of a bolt-on or a little more independent so to speak but do rely upon the pipeline for their supply chain.

[Roberta Rathkin - Reuters]

Lastly I wanted to ask, you talked about the market downturn and the market being in turmoil. I’m wondering if you can sort of describe how that’s affected your own company, your stock? I know that just looking at a charge it’s gone down over the past three months and down sharply yesterday, but is there any sort of commentary you can provide about that and how it relates to sort of the overall commodity market or if it does?

Mayo M. Schmidt

This really goes back to my earlier comments to expand on those is that as you can see year-over-year and quarter-to-quarter, this business is performing extremely well and it’s based on very solid fundamentals of how we operate the business, how we execute on the efficiency of our system and the pipeline management that we have. Clearly there’s a big commodity correction taking place, probably in a way led by oil. We just don’t think that this action does not support the global fundamentals particularly as I mentioned when you think about fertilizer, gas and oil prices are coming down which means we have greater margins in our fertilizer business because we use natural gas at 80% of the cost factor in manufacturing urea. So it’s just the two don’t fit together so when we think about it, we’ve not seen any weakness in the price of the fertilizer. We continue to see strong and robust in all of our core businesses without any weakening or softening. So we continue to have a lot of confidence in the business. Demand is outstripping supply. We still have deficits and as I mentioned in my earlier remarks, the world is still out-consuming what we can produce and we’ve got the fertilizer cranked up both in volume and in prices. And of course there are still some crops that are out. Australia has yet to get over the hump. They needed some rain to have a really good crop so the jury’s out on that one. And we’ve got to get our crop in.

Operator

Our next question comes from Winston Lee - Credit Suisse.

Winston Lee - Credit Suisse

As you think about downstream potential or the potential to acquire downstream businesses, being upstream has been a nice place. But downstream there have been more inflation pressures. And I wonder as you look forward, what’s your view on the appetite for you? Is it increasing because of the potential shift that you see in margins for downstream businesses overall because of inflation or does it just kind of not matter in terms of your portfolio? I guess what I’m asking is, is there more of a case to get more downstream now that there might be some compression still from inflation and more attractive opportunities to buy?

Rex J. McLennan

I think that the businesses we’re looking at are very well performing businesses. I think it’s just simply a case that we think that they fit in our pipeline model, they fit in our optional origin program with destination customers, and we also think that we have the opportunity to export our systems, our technology, our expertise to the businesses that we operate in to increase yields, increase performance of the business and ultimately to feed the world. So it is all a very vast integrated pipeline that’s rather fragmented if you look at the US and Australia particularly. And we’ve been the catalyst for consolidation in Canada and we intend to use those talents in other markets as we’re able to.

Winston Lee - Credit Suisse

As you think about the link between food and fuel and oil prices coming down, I think you said it’s better for your fertilizer business if natural gas is down. What does that do to your commodities like your grain handling business as you look forward? If let’s say overall oil just stays where it is today and natural gas kind of stays at the same level, do you think that’s a net positive for you?

Mayo M. Schmidt

Certainly it’s a net positive from the record high prices we’ve had. We talked about the impact on fertilizer margins from natural gas and then if you look at 50-mile transportation, that goes into our businesses and with fuel surcharges being added as the price has gone up, we would expect some of those to come off as the oil prices decline.

Winston Lee - Credit Suisse

I just had a question on your term facility. I think you’ve got a November deadline there before you can fully utilize it. Does that impact the way you view any opportunities or does it not matter?

Rex J. McLennan

No, it doesn’t really matter. I mean we do have a mid-November timeline on the undrawn portion of that facility. Of course we have either the opportunity to draw the funds down or to seek waivers to extend the term. Either option is open to us but it doesn’t affect our timing on any particular transaction that we might be looking at.

Winston Lee - Credit Suisse

Rex, do you guys have any aspirations right now for what might be long-term returns on capital for you?

Rex J. McLennan

We always have the aspiration of course to generate an after-tax return on our assets that exceeds our cost of capital and by significant margins. So any opportunity we look at investing in has to have the expectation of generating returns in excess for the cost of capital and the extent to which that the amount of that excess clearly is going to be related to the nature of the opportunity and the risks inherent and the potential of it. So it’s more than just a simple exercise of looking at the economics. We have to look more broadly at everything that the opportunity brings us.

Operator

Our next question comes from Orin Baranowsky - BMO Nesbitt Burns.

Orin Baranowsky - BMO Nesbitt Burns

Just a follow up to Gerry’s question on your debt facilities. I wonder if you could talk about if you have a target range for top end for what you’re looking at in terms of where you could go on the acquisition side; how far you could take your debt facility from where you are currently?

Francis J. Malecha

Our target debt to capital relationship is in the 30% to 40% range and we’re currently around 25% and obviously are carrying a sizable cash position, in excess of $500 million. As we said, we do have fairly significant opportunity to fund our business activities. I wouldn’t put a specific number on it but if you think about our target debt to capital ratio in that context 30% to 40% and we’d be looking at carrying EBITDA to interest expense relationships that would be within the investment grade category for credits in excess of four or five times. And if you look at our credit metrics across the spectrum, at the coverage ratios as well as the capitalization ratios, we’re clearly in a very strong position going forward and don’t see our balance sheet as posing any particular constraint on what we’re looking at. Having said that, we’re going to maintain the discipline to make sure that our balance sheet is strong and that we continue to target credit metrics that are in the investment grade category and make sure that we’re not in a position where we can’t respond to opportunities when they exist.

Operator

There are no further questions registered at this time.

Colleen Vancha

Thank you very much everyone for joining us today. We’ve recorded this call and it can be replayed. Dial 1-800-408-3053. The pass code is 3268714. Thanks very much for participating.

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