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Executives

Richard Downey – Senior Director, IR

Mike Wilson – President and CEO

Richard Gearheard – SVP and President, Retail

Kevin Helash – VP, Marketing and Distribution

Ron Wilkinson – SVP and President, Wholesale

Tom Warner – VP, Retail

Chris Tworek – VP, Supply Management

Bruce Waterman – SVP, Finance and CFO

Analysts

Don Carson – Merrill Lynch

Costas Coranthanos [ph] – Goldman Sachs

Mark Connelly – Credit Suisse

Jacob Bout – CIBC World Markets

Brian Yu – Citigroup

Steve Burn – Merrill Lynch

Brian MacArthur – UBS

David Silver – JPMorgan

Paul D'Amico – TD Newcrest

Fai Lee – RBC Capital Markets

Agrium Inc. (AGU) Q2 2008 Earnings Call Transcript August 6, 2008 11:30 AM ET

Operator

Good day, everyone, and welcome to today's Agrium Incorporated Conference Call. Following today's remarks, we will conduct an electronic question-and-answer session. Instructions on how to pose your questions will be given at that time. As a reminder, this conference is being recorded. Now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Downey, Senior Director of Investor Relations. Please go ahead, sir.

Richard Downey

Thank you, operator. Good morning everyone, and welcome to Agrium's 2008 second quarter conference call. On the phone with us today is Mr. Mike Wilson, President and CEO of Agrium. He is joined by our CFO, Mr. Bruce Waterman, as well as other Agrium officers to review and discuss our results.

As we conduct this conference call, various statements 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. Securities Commissions, to which we direct you.

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

Mike Wilson

Thank you, Richard and good morning to everyone online. It’s with great pleasure that I will discuss our all-time record second quarter results this morning, with excellent earnings and operating performance from our Wholesale, Retail, and Advanced Technology businesses. I will also provide an update on how we continue to deliver on our growth strategy of investing across the value chain, through our recent acquisition and integration of UAP retail, and our investment in international distribution through Common Market Fertilizers. And finally I will touch on the very positive outlook for all of our key drivers, and the exceptional position that it places all of our product lines and businesses. These opening remarks will be a little longer than usual as I would like to go into as much detail as possible for you.

Our second quarter net earnings were $636 million, or $4 per share, an over three-fold increase over our any previous quarter. We also generated a record $1 billion in EBITDA this quarter, and for the first half of the year the figure was almost $1.4 billion. All three of our business units performed exceptionally well on a year-to-year basis, with EBITDA from our Advanced Technologies division increasing by 50%; Wholesale EBITDA was more than double the previous year's level at over $680 million; and Retail EBITDA was almost three times larger than last year, reaching $431 million.

As pleased as we are with our financial performance in the second quarter, and the first half of this year, we are just beginning to show our true earnings potential. Every one of our business units is growing, and profitability across all product lines continues to strengthen.

Moving to results by business unit, our Retail business unit reported $431 million in EBITDA for the second quarter, and gross profit of $667 million. This was due both to the acquisition of UAP's retail business, and a 70% increase in EBITDA from our legacy operations this quarter over the same period last year. UAP retail operations also had a solid spring season, with EBITDA up about 25% over the similar two-month period last year. If we had owned UAP from the beginning of 2008, we estimate our total Retail EBITDA would have been about $515 million for the first half of this year.

Crop nutrient gross profit more than doubled to $335 million in the second quarter of this year as a result of increased selling prices and the contribution from the UAP acquisition. Gross profit for crop nutrients from our legacy retail operations increased 62% over the same period last year. Our margins as a percent of sales for crop nutrients rose to 27% this quarter, compared to 24% in the second quarter of last year. In fact, our legacy Retail margins on crop nutrients improved by a full six percentage points versus last year. The higher margins were partly associated with an increase in product inventory value, given the significant increase in virtually all crop nutrient prices in the first five months of the year.

Our crop protection gross profit quadrupled to $223 million, versus $52 million in the second quarter of last year. The majority of this increase was due to the addition of UAP's crop protection business, given their greater emphasis on this segment of the market. However, gross profit from our legacy Retail operations increased almost 50% over the same period last year. Average margins on crop protection products increased over eight percentage points, compared to the same period last year, to reach 26% this quarter. We have seen significant increases in prices and margins for many crop protection products, as a result of strong demand and tightening supplies.

For the second quarter, seed sales increased $179 million, and gross profit increased $34 million. Our legacy Retail seed business again delivered strong growth in revenue and gross profit for the quarter, growing seed revenues by 20%, and gross profit by over 50%. Organic growth of this business continues to be very strong for us. The acquisition of UAP further enhances this rapidly growing business, making us the largest seed retailer in the U.S., with annual sales exceeding $700 million. We will continue to focus on further expanding our seed business.

Our South American Retail operation reported another strong quarter, with growth in sales and gross profits across all segments. Compared to the same quarter last year, gross profit increased 137% due to both higher sales and margins, despite dry conditions this year. Year-to-date, South American Retail has generated slightly higher contributions than all of 2007, with the spring planting season still to come. Argentine farmers will begin their spring season next quarter, and we anticipate solid results from this region again in the second half of '08. In addition to crop nutrient sales from Retail of 1.5 billion this year, Agrium sales of crop protection products, seed, and services, surpassed 1.4 billion for the first six months of the year, making us the clear leader in providing crop inputs to growers in North America.

Moving to our Wholesale business unit, EBITDA from our Wholesale operations was $682 million for the quarter, and exceeded $1 billion for the first half of this year. Once again, our marketing group achieved substantial quarter-over-quarter increases in selling price and margins per ton for all nutrients backed by solid operating performance at our manufacturing and distribution facilities.

Our nitrogen business contributed $246 million in gross profit in the second quarter, 50% above the same quarter last year. Nitrogen margins increased by $93 per ton to over $200 a ton. Average sales prices rose by $80 per ton, compared to the first quarter of '08, while average cost per ton rose by $48. Domestic sales volumes for nitrogen products were similar to last year with slightly higher urea and UAN sales, offsetting slightly lower ammonia volumes associated with the wet and late spring. Margin on domestic sales were also significantly higher than international sales this quarter. International sales volumes were impacted by production outages at Profertil, as a result of both gas supply disruptions, and associated technical challenges at the facility. There is a possibility that we may need to bring forward a planned 2009 turnaround into the second half of '08.

Our phosphate gross profit almost tripled to $96 million. Phosphate margins were $354 per ton this quarter, representing a $250 per ton increase over the second quarter of '07. Our sales volumes in the second quarter were slightly lower than last year, but were unchanged from previous year on a six month basis. Our phosphate cost of production rose by $46 per ton, or 11% versus the first quarter of '08, due primarily to slightly higher costs of sulfur and ammonia. At the same time, our competitor's costs in the southern U.S. increased by over $100 per ton.

For potash, our gross profit and per ton margins were more than triple last year's levels. Gross profit for the quarter was $184 million, and margins were $330 million per ton. Our realized sales prices increased $133 per ton, and $247 per ton versus the first quarter of '08 and the same quarter of '07, respectively. Our sales volumes surpassed the 1 million tons in the first half of the year, representing a 155,000 ton increase over the previous year.

Our Purchase for Resale business contributed $29 million in gross profit this quarter, up significantly from $6 million the previous year.

From an operating perspective, we successfully executed significant planned maintenance turnarounds throughout June and July at five of our North American production facilities. All were completed safely, on a timely basis, and within cost expectations, which is a tremendous accomplishment given the current tight labor and high inflation environment in Western Canada. The maintenance schedules were further complicated by a delayed and extended spring season in our core markets, and our sales manufacturing and distribution teams were able to deliver strong performance in the midst of these challenges.

Our Advanced Technology business contributed $15 million in EBITDA in the quarter, an increase of 50%, or $5 million versus the same quarter last year. These results were primarily fueled by increased sales of ESN, which were up over 60% on a year-to-date basis, as a result of further significant optimization of ESN operating rates at the Carseland facility.

Beyond the substantial improvement in the fundamentals of our base business, we continue to deliver on the implementation of our growth strategy. The acquisition of UAP just a few months ago has already yielded excellent results, contributing $0.70 per share, or approximately $177 million in EBITDA for the May 5th to June 30th period. We began integration activities immediately following the close of the acquisition. We have established a strong senior management team for North America, recently named all supervisory field management personnel, and have consolidated our administrative functions into one primary office in Greeley, Colorado. I would like to welcome all the UAP employees to Agrium, and thank all of our employees for continuing to provide superior service to customers through the crucial spring season. We believe we can still obtain the majority of $20 million in synergies identified for '08 despite the delay in the closing of the deal, and we remain confident that we will be able to capture all of our targeted $80 million in synergies in 2009.

In July, we concluded the purchase of a 70% equity position in the Common Market Fertilizers, one of Western Europe's largest fertilizer distribution companies. CMF has annual nutrient sales volumes of 2 to 2.5 million tons, and operates throughout much of Europe. The acquisition also provides access to significant distribution assets throughout Europe and further expands our global nutrient footprint to over 18 million tons of annual volume through our Wholesale, Retail, and Advanced Technologies distribution assets.

On a different note, as you know, the Egyptian government halted construction of our joint venture nitrogen project in April, and the Egyptian People's Assembly voted to recommend the relocation of the project to an unnamed location. We are currently considering all options. To date, discussions have not resulted in an agreement, but we would expect to provide further updates over the next few weeks. Given the ongoing negotiations with the government, we have no other information available at this time.

However, I will mention that there have been numerous local Egyptian media reports and blogs. They have intentionally made false accusations pertaining to the safety and environmental impact of the Agrium facility. What is clear is that Agrium has been operating nitrogen fertilizer facilities within North America and internationally for over 50 years without any serious environment or health or safety issues to the general public. The facility planned for Egypt has the latest systems and processes to make it a leading edge, world scale facility, that would be welcomed anywhere in the world.

Turning to the outlook, we will issue second half guidance at the time we report our third quarter. However, it is clear that the market fundamentals will be very strong in the second half of '08 and into '09. Over the past three months, domestic and international urea prices have risen dramatically. North American gas prices have declined. India remains an active buyer of urea, and there are reports out of China that the current fertilizer export tax may further increase. Likewise, the tight global supply/demand balance for potash has resulted in prices continuing to move higher, with domestic potash prices increasing by $250 per ton, and international spot prices currently in excess of $1,000 per ton. The phosphate demand from many in Brazil has intensified, and kept prices at levels well over $1,000 per ton. Record farm incomes for grain producers are anticipated as per acre returns remain extremely attractive to farmers. There is strong economic incentive for farmers to pursue higher yields through the use of high quality seed, balanced crop nutrition, application of crop protection products, and the implementation of new technologies such as ESN. This strength in grain prices, nutrient prices and virtually all other crop input products will continue to benefit all of our businesses.

This remains a story about food, and the world wants and needs more food production, and our businesses play an integral role in improving yields, and the nutritional value for all crops. Inventories of corn, soybean, and wheat are on a stocks used ratio, are at historic low levels, and demand for major grains is at an all-time high, and will continue to grow. Recently it seems investors have become more focused on a correction in grain prices from the unprecedented high levels reached this spring during the time of flooding in the US corn belt. We have always maintained we don't need, and do not require $8 corn price to support the strong global nutrient demand. In fact, we think corn prices in the $5 to $6 range represent healthy returns for farmers, which in turn supports strong long-term demand for crop inputs.

For example, Slide nine in our presentation shows that margins for corn and soybean farmers remain more than three times historic levels even at today's higher fertilizer prices. And the sensitivity of farmers' cash margins to higher fertilizer prices is very low. A $100 increase in all three crop nutrient prices would only lower corn cash margins by $30 per ton. Using a typical cash margin model, fertilizer prices would have to average over $2,000 per ton, before higher nutrient prices would push cash margins back to historic levels at a $6 corn price. We use corn as an example, because it is the most intensive user of crop nutrients. The majority of Western Canadian farmers produce wheat and canola, and the order of magnitude in size or the increase in margins has been similar to the increase in corn and soybean margins in the US.

Given this positive outlook for crop nutrients, crop protection products, and seed, the outlook for all of Agrium businesses are excellent. We continue to believe Agrium is in a unique position to benefit from these strong fundamentals, and with our diverse asset and earnings base that crosses the entire agricultural value chain. In addition to the strong market fundamentals, we continue to grow our business through strategic acquisitions, and leveraging our unique and expanded asset base.

We transformed this Company through a combination of seven acquisitions, two brownfield expansions, organic growth of our seed and private label businesses, and by leveraging and expanding our distribution capabilities. For example, we have doubled the retail business twice in the past three years, with excellent returns on our Royster-Clark acquisition, and anticipate delivering over $100 million in annualized synergies from UAP. In potash we have expanded our capacity by 300,000 tons, and have secured the ore reserves that could potentially double to triple our capacity in the next decade. And our Advanced Technology business is a world leader in polymer-coated fertilizer technologies, and will continue to grow as our technologies are implemented and adopted.

With those opening comments, operator, I would like to now open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions) Our first question comes from Don Carson with Merrill Lynch. Please state your question.

Mike Wilson

Good morning, Don.

Don Carson – Merrill Lynch

Thank you. Good morning. Couple of questions for Richard Gearheard. On the Retail side, how much of your profit was based on sort of astute inventory positioning, both on the fertilizer and crop chemicals side, and will you be able to replicate that? And can you comment a bit on the outlook for the fall, what kind of demand you are seeing from growers as they try and lock in their input cost to match their forward sales of grain? And then finally, a UAP specific question. What impact if any did writing up the inventory have on your reported profits from UAP?

Richard Gearheard

Well, let's start with the first one, we did have a pretty good uptick on nutrient margins. And I would say probably in the range of 4% to 5% of our margins on fertilizers this year were due to inventory appreciation that we haven't seen before. I mean, it was an incredible spring in that respect. The glyphosate increase in particular, probably added – that’s a tougher one to predict in that we are not looking at that, only that chemical by itself. But in the $20 million to $25 million range. This fall, we do expect very strong demand. We are not having a – we historically do not have a strong prepaid for the fall. We have some, but it is still, we are not locked in very – on a high level for this fall, but that I wouldn't interpret as an indication of the fall business. The corn acres should be up next year. I would expect the fall season to be up. The difficult spring we had this year will remind people they need to get as much done in the fall as they could possibly can. And let's see, there was one more.

Don Carson – Merrill Lynch

Yes, just on UAP acquisition accounting, if there's an inventory–?

Richard Gearheard

We did not have to write up the inventory for UAP.

Don Carson – Merrill Lynch

Okay. And then just a follow-up on your inventory position as you go into the fall, I know you had commented earlier this spring that you are having a tough time getting the potash you wanted, just wonder if you could comment on your inventory position as you go into the fall season?

Richard Gearheard

Well, we are very comfortable with our fertilizer inventory position going into the fall. It’s higher volume than we have had in the past, and I think our fertilizer buyers had excellent judgment, and they were backfilling throughout the spring, so I don't expect a delivery problem.

Don Carson – Merrill Lynch

Okay. Thank you.

Mike Wilson

Thanks, Don.

Operator

Our next question comes from Costas Coranthanos [ph] with Goldman Sachs. Please state your question.

Mike Wilson

Good morning.

Costas Coranthanos – Goldman Sachs

Good morning. Congratulations on the quarter, guys. First of all, a couple of quick questions. Can you please elaborate on the concerns about the possibility of demand distraction in potash and phosphates? Actually you mentioned if I read the press release that you might expect U.S. farmers to apply less phosphate, but expect to make up the volume in higher acreage.

Mike Wilson

I don't remember putting that in our press release. The good farmers will use appropriate amounts of all NPK, and they will use the best fungicides and seed. There are a few farmers who do look at their cost position and cut back, but we don't expect a huge cutback as a result of that. Richard, do you want to comment?

Richard Gearheard

Well, fertilizer remains an outstanding return on investment, and so as you said, Mike, the good – the progressive growers are going to continue to want to get that higher return on investment.

Costas Coranthanos – Goldman Sachs

Okay. Thanks. And then on nitrogen, you mentioned that you locked about 75% of your needs for the second half, which means you have an idea of where you expect prices to be in the second half of '08. Where do you forward sell urea and ammonia?

Mike Wilson

The way the prices move, it’s always difficult to try to figure out where they are going to be in the future, but I will get Kevin Helash to comment on that.

Costas Coranthanos – Goldman Sachs

Thanks.

Kevin Helash

Yes, it’s very difficult to predict. We are in unchartered waters today with where the prices are for all commodities. I would say that we don't expect to see a major change from where we are at today going into the second half. But of course things are moving around all the time. Where did we sell at our nitrogen into the second half? Our philosophy continues to be to sell small blocks of tonnage forward as we analyze the market. So into the second half we have got stuff sold anywhere from $600 type of urea all the way up to current prices.

Mike Wilson

The only other comment I will make on second half pricing is there is a real wild card out there right now on China with its export tariffs. If they do go to the 185, 175 level that is being discussed, that will continue to keep upward momentum, at least pressure on pricing. I am not sure the price will go up further, but it should support it.

Costas Coranthanos – Goldman Sachs

Okay. Thanks. And one housekeeping question for Rich. In Wholesale, you reported gross profit of $582 million, but the EBIT was $647 million. So what’s included in the EBIT that causes that discrepancy?

Ron Wilkinson

It’s Ron Wilkinson. The big change there would be the hedging gains on natural gas that go below the gross profit line.

Mike Wilson

Hopefully that answers your question.

Costas Coranthanos – Goldman Sachs

Yes, that was like $100 plus million, so the difference (inaudible) from $582 million to $647 million.

Richard Gearheard

I will walk you through that after the call, Costas.

Costas Coranthanos – Goldman Sachs

Okay. Thanks, Rich. Thanks guys, appreciate it.

Operator

Our next question comes from Mark Connelly with Credit Suisse. Please state your question.

Mike Wilson

Good morning, Mark.

Mark Connelly – Credit Suisse

Good morning, thank you, just two things. I wonder if you could give us any sense of what the trends are in terms of value added services for your traditional Retail operations, whether you are seeing a change either in demand, profitability, or the competitive landscape. And second, I wonder if you could give us a little more color on what’s happening with crop protection in terms of what you are seeing in pricing and volume, how much impact the weather had, and what you are expecting the rest of this season to look like for crop protection chemicals?

Mike Wilson

We have both Richard Gearheard and Tom Warner from our Retail division. Richard, Tom, one of you want to comment on the value added services and crop protection?

Richard Gearheard

Tom, why don't you go ahead on that?

Tom Warner

I feel the again the better managers, the bigger farmers right now are coming to us more than they have in the past. We have had a – again, they are swinging for the fences with the prices even as they are today, so customer service look good this year. I think look good going forward.

Richard Gearheard

As far as the chemicals, we have been seeing this trend the last several years, particularly on the fungicide, preventative fungicide treatments, and that’s been pushed a little later because of the extremely wet spring season that we had in the Midwest. But that is hitting a lot in July right now. But that’s continuing as well as a lot of the chemicals being petroleum based, you are seeing general price increases as well. And as Tom said, swinging for the fences, no one is going to scrimp on any of the inputs that’s going to increase yield.

Mark Connelly – Credit Suisse

Right. So at this point you are not seeing any change in trend, just weather pushing it back a little bit?

Richard Gearheard

Right. And the trend is up with the fungicides. I mean, it’s been up each of the last three years.

Mark Connelly – Credit Suisse

Okay. Okay. If I could squeeze one more in, just a question on UAP. When you announced that deal you said you were going to go slow in terms of integrating and changing platforms. Obviously you are confident you are going to get the synergies, which is good. I am just curious whether there has been any meaningful change in thinking about shifting the format of UAP operations closer to the Agrium format?

Richard Gearheard

Well, I don't think we ever said we were going to be slow. I mean, we wanted to be very timely and take the time where we needed to, and the implementation of the IT technology is probably the slowest part. But as far as – no, we have not changed on our initial thoughts on the UAP model. Those facilities that have higher volume, lower service, lower expenses, we continue to think that’s a very valid model on the customer base they serve. Those facilities that do treat the market the same way that the legacy Agrium Retail does will be the same way that we are doing it, and we possibly will change slightly there, but not much.

Mike Wilson

Mark, it is Mike here again, I am very pleased with the way that the UAP integration is coming in. We picked up some excellent people, and we have the advantage of having done the Royster integration not that long ago. So our team is moving very rapidly on this integration. And we will be pleasantly – hopefully everybody will be pleasantly surprised with the results.

Mark Connelly – Credit Suisse

Okay. That’s helpful. Thank you.

Operator

Our next question comes from Jacob Bout with CIBC World Markets. Please state your question.

Mike Wilson

Hi, Jacob.

Jacob Bout – CIBC World Markets

How are you. Some questions on the potash side. Just in the cash cost, $102 in the quarter, if we see Canadian dollar where it is currently at, and gas prices where they are at, is that $100 a ton basically a normalized rate?

Mike Wilson

And what’s the question? Is that a statement or a question?

Jacob Bout – CIBC World Markets

That’s a question.

Mike Wilson

Ron?

Ron Wilkinson

What I would say, Jacob, is that directionally it’s in the ballpark. There is probably a little movement around it, but I think as we mentioned before, we are doing a lot of development work in what we call the South Block, which is the new area of the mine. That is adding to our costs, and we are doing some catch-up on some rehab areas. As you might know, our mine is the deepest mine of all the mines in Saskatchewan, so our rehabilitation costs, in terms of keeping our access ways open, and our conveyor ways open is a little higher than some of the competition.

Jacob Bout – CIBC World Markets

Okay. That kind of backs into my next part of the question here, just on your expansion plans for potash. Just (inaudible) why haven't we seen an immediate ramp-up to 3 million tons? You think it would make a pile of sense that – where it looks like we are going for potash pricing at $1,000 a ton. And then maybe you can talk a little bit about your greenfield potash, what you are looking at right now for explorations both in Saskatchewan and Manitoba? And maybe talk a little bit about your drill program?

Ron Wilkinson

Let me start with Vanscoy, and our expansion there, and yes, we are very anxious to expand further given the current prices and margins. We have just had approval of some $20 million, I will call it pre-spending, to lock up some critical equipment, and get ourselves in front of the queue. And we are progressing with, I will say, the first phase of getting to 3 million tons per year. We expect that to come on line late 2011, early 2012. And it – really the reason we are not immediately going to the 800,000 tons is the development of that South Block. That is the limiting factor. And we are very focused on making sure we develop that new section of the mine in the right way that maximizes the remaining reserves of the site.

With respect to the greenfield, both in Saskatchewan and Manitoba, we currently have an active drilling program. We have committed over $50 million this year on that project. And we are moving as quickly as we can to understand our reserves and the quality of the potash in them. And hopefully by the end of the year we have made a decision as to where we would site a new greenfield mine.

Jacob Bout – CIBC World Markets

How many holes are you drilling this year?

Ron Wilkinson

We are talking in the neighborhood of about 50 holes, if I recall.

Jacob Bout – CIBC World Markets

And then last question, just on nitrogen. You talk about locking in 75% of your natural gas requirements in the second half of the year. Is this across all of Agrium, and what type of pricing are you looking at there?

Kevin Helash

Jacob, this is Kevin. I would say that we have some gas bought ahead of our sales. Q3 we essentially have that block of business wrapped up for all products. We are working on Q4. I mean as I said earlier, as we are moving through the months we are taking pieces of business throughout. So you can kind of go back to the end of the second quarter, and kind of look at pricing for whatever product you want, and that is about where we would be selling going into Q3. Q4 we are looking at for nitrogen prices, and what you are seeing in the rags [ph] today. Potash we have got a bit of a mix between current price and the old price. Does that answer your question?

Jacob Bout – CIBC World Markets

I was referring more to natural gas.

Kevin Helash

On the natural gas, what I would say is that for the most part, as we are selling nitrogen forward, we are locking in the gas to line up with our margin expectations. So we are looking at more of a margin management piece, and pure buying – trying to hit the lowest part of the gas curve.

Jacob Bout – CIBC World Markets

Alright. Thank you.

Operator

Our next question comes from Brian Yu with Citi. Please state your question.

Mike Wilson

Good morning, Brian.

Brian Yu – Citigroup

Good morning. Thanks. My question, I am going to circle back to the earlier question regarding phosphate. And I think (inaudible) in the press release says there is a potential for reduced application rates in North America, and I want to see if there is anything specific you are seeing (inaudible) to make that statement, or is this just a potential risk that you are saying [ph] in the release?

Ron Wilkinson

Well, it always is a potential risk. Tom, Richard, are you seeing anything? I haven't heard of anything significant.

Tom Warner

This is Tom. Where you have corn, soybeans, and wheat, we are not seeing much pullback there. It’s where you have say vegetables, and maybe a little bit of cattle feeders, hog producers, that is where the biggest squeeze is. This price is not going up like the big acre crops. So, that is where the pushback in phosphate.

Brian Yu – Citigroup

Okay. And switching topics to Profertil, it looks like there has been some issues, and you are highlighting that is could persist into the second half of this year. Can you discuss more what caused you to pull in a '09 turnaround into this year?

Ron Wilkinson

Brian, it is Ron Wilkinson. With Profertil, we had a number of start-ups and shutdowns associated with gas, and that has created some mechanical issues around the ammonia unit. And the one issue that we are concerned about that may cause us to advance the turnaround is we have some catalyst leakage from our ammonia converter, which tends to plug downstream equipment, and forces a subsequent shutdown to, I will say, remove the catalyst and restart. And at some point here, that problem is going to get bad enough that we need to, I will say, bite the bullet, and replace the converter basket and the catalyst. We have got all the plans in place. We have got the equipment in place and it is just a question of when do we make that call. Our preference would be to run all the way through to early next year, and take the turnaround at that point. But we have put the contingency plans in place.

Brian Yu – Citigroup

Okay. And last one on phosphates, I understand you have a sulfur cost advantage, what about the ammonia side, given what we are seeing in the marketplace?

Ron Wilkinson

Great question. As we are seeing international ammonia prices rise significantly, and our own gas costs drop, we have an increasing ammonia advantage in our phosphate business.

Brian Yu – Citigroup

Do you produce your ammonia in Redwater? What about Conda?

Ron Wilkinson

Conda essentially we are typically sending Redwater ammonia down to Conda, so it would be Redwater cost plus freight.

Brian Yu – Citigroup

Okay. Thank you.

Operator

Our next question comes from Steve Burn with Merrill Lynch. Please state your questions.

Kevin Helash

Hi, Steve.

Steve Burn – Merrill Lynch

Hi. Kevin, you talked a little bit about some urea price trends. Can you talk a little bit about ammonia? In the corn belt in the last few months, the price has gone – the spot price has gone from say $700 to $1,000. But in Western Canada we are seeing some $1,400 to $1,600 a ton prices. Are those being realized in your forward sales at this time?

Kevin Helash

Yes, that’s a good question, Steve. The U.S. market I would say tends to price ammonia and urea separately whereas in Canada we tend to price all of the nitrogens in context to one another, depending on a premium, or a discount, depending on the nutrient value. Ammonia typically trades at a discount in Canada between $0.08 and $0.10. In the U.S. it’s been trading at substantially higher than that. The U.S. price has come up. I think that what you are going to see is a continuing delta between the Canadian and the U.S. price. We will probably see a slight difference as you get along the border, like in North Dakota to Manitoba and into Saskatchewan. So it is kind of difficult where you are pegging your $1,000 U.S. ammonia, but it definitely will trade higher in Canada than in the U.S.

Steve Burn – Merrill Lynch

And are the ag economics strong enough in Western Canada to sustain those level of nitrogen prices?

Kevin Helash

I will answer that question, Steve, by saying that we have essentially all of our ammonia for the second half sold forward, and we have already started taking some business for the spring of '09. So, obviously, our customers are thinking it is a wise investment. Our farmers in Western Canada are going to have a very, very good year because if you recall way back when, when they were buying their fertilizer for spring, they were at prices substantially less as what you are seeing here, and I think a good amount of them locked in their forward grain prices for this fall. So cash on farm for this fall in Canada should be very, very good.

Steve Burn – Merrill Lynch

And given what you just said about your forward sales, is it fair to assume that you won't realize this $1,400 or $1,500 a ton ammonia price until early in 2009 in Western Canada?

Kevin Helash

Yes, we have been selling blocks of ammonia as we have been selling blocks of urea. So yes, a big chunk of our fall has already been priced. So we are looking more for some spot business, and that is setting the stage for '09.

Steve Burn – Merrill Lynch

And then lastly, on the cost side of the equation, you said that your natural gas is fully booked for the third quarter. Should we expect your gas costs average for the third quarter to approximate the price that you marked it at, at the end of the second quarter as part of that unrealized hedging gain?

Kevin Helash

I will actually let Chris Tworek take a shot at that one.

Chris Tworek

Yes, I am not sure I totally caught what you were getting at in the question. Could you maybe just restate the question for me a little?

Steve Burn – Merrill Lynch

It looks like for the amount of gas you had hedged and the hedging gain you took in North America, it’s over $3 per million BTU of delta between what the forward strip was at, at the end of the quarter and where your gas position was locked in. Is the gas cost to be realized in your third quarter results – will they represent the price that you marked it up at, since you already recognized the gain?

Chris Tworek

Okay. I understand. Well, obviously you have to take a look at which way the gas market will travel, and where it will end up at the end of the third quarter. As you know, gas, in particular, is very volatile, so what we have – in the last few weeks we have come off a high to a seasonal low. But we are going into seasonally what is a high period due to hurricanes and sort of the fear of winter. So on a probalistic term, you are more likely to see the same kind of pricing at the end of the third quarter that you saw at the end of the second quarter, and that basically would suggest to you that we would see prices fairly close to what we saw at the end of the second quarter if the usual seasonal factors kick in, in the gas markets.

Mike Wilson

But the bottom line, Steve, is if gas does stay down, we will have hedge losses in the third quarter. The good news is most people discount when we get the gain, and discount when we get the loss.

Ron Wilkinson

And I would add that that gas profile goes out not just for the third quarter, but through our corporate buying program, which is up to five years out.

Steve Burn – Merrill Lynch

Okay. Thank you.

Bruce Waterman

And one – it’s Bruce here – one comment on our corporate program. We have callers around the majority of that corporate program, so we are actually protected on the down side.

Mike Wilson

Gas is so complicated, we all have an opinion on it.

Operator

Our next question comes from Brian MacArthur with UBS. Please state your question.

Mike Wilson

Hey, Brian.

Brian MacArthur – UBS

Hi, how are you? Just wanted to go back to the Egyptian facility again, and just make sure I understand this. There is $243 million of non-recourse debt at the end of the six months. I assume that is the part that we repaid except for the $8 million in the third quarter. Is that right?

Mike Wilson

Well, our total exposure there is around $282 million is what we have communicated at the last conference call.

Brian MacArthur – UBS

Right. But then there is also the debt that you've been putting on with Egypt that you are paying back. I'm just trying to figure out exactly what the financials look like if we take Egypt out?

Mike Wilson

You want to comment, Bruce?

Bruce Waterman

Yes, it is Bruce here, Brian. We have paid back all the debt to our lenders on the project. And our exposure – the maximum exposure we would have would be the amount of equity that would be required to put in, and that is roughly the $280 million. We haven't put in all of that, but we are at about – we have put in substantially all of that. Over and above that, we have some hedge gains, which have been largely previously realized, which from an accounting point of view we recognized. But our exposure from an equity point of view is about that $280 million. Does that answer your question or–?

Brian MacArthur – UBS

Right. Okay, well let me ask it a different way then. What is the non-recourse debt at the end of June 30th, that’s $223 million, if it’s not all Egypt?

Bruce Waterman

Oh, I see. Yes. I am sorry. We repaid that subsequent to June 30th.

Brian MacArthur – UBS

Right. But that's all Egypt, right? There is nothing else in there.

Bruce Waterman

That's right. Sorry, all of the non-recourse debt at June was Egypt, yes.

Brian MacArthur – UBS

Okay, great, thanks. My second question goes to Argentina. And I am just trying to sort of get a feel for opportunity costs. You have obviously talked about challenges at Profertil. Can you just talk about how the gas – whether the gas price has changed because of that or whether it is still under those favorable terms, and secondly, whether you expect or see any caps on pricing in Argentina as we go into the season?

Ron Wilkinson

Brian, it is Ron Wilkinson. On the gas question, we are paying essentially our contract prices on the gas. There is some spot volumes that we supplement with Profertil that can move around, but going forward, we don't anticipate any major change in our natural gas cost. With respect to the price cap, the agreement with the government was that it would be in place through the wheat season, which is ending about now. And we are in discussions with the government on the go-forward pricing. Obviously, at the time the price cap was set, the Black Sea benchmark was considerably lower than it is today. So the $410 price cap is about half of what landed urea is in Argentina. So obviously we are trying to push that number up, but at this point in time we don't have any news to share on that.

Brian MacArthur – UBS

And just if we go back, given that Arbitras [ph], obviously given that your volumes aren't maybe what you thought they were, do you have total flexibility about where you send the volumes on those plants? In Profertil, does it all have to go to Argentina first, before it can go to Brazil or somewhere else, or how does it work?

Ron Wilkinson

Typically I will say we are morally obligated to supply all we can to Argentina for the fall and spring seasons. So that should take us through about October into November, and then we will be free to export urea.

Brian MacArthur – UBS

Great. Thank you very much.

Operator

Thank you. Our next question comes from David Silver with JPMorgan. Please state your question.

Mike Wilson

Good morning, David.

David Silver – JP Morgan

Hey, hi. I have a couple of questions. I think I would like to start with kind of how you guys did this quarter. So the published number is $4, but of course you mentioned the UAP deal only closed May 5th. So, I don't know how you may have had it, but either on a net income basis, or EPS, or an EBITDA basis, what was the total contribution from UAP this quarter, assuming the deal closed let's say March 31st instead of May 5th? Do you have any thoughts on that?

Mike Wilson

We obviously have the data from May 5th through. I don’t know, Richard, do you have any – if we had had the whole quarter with UAP?

Richard Gearheard

Well, let's see. On an EBIT number for the May 5th number was 165 EBIT, $165 million. Had we had it for the full three months, it would have been $221 million on the EBIT, and EBITDA is not much higher, I mean, there is not much that – EBITDA would be $13 million, $14 million higher than the $221 million. $235 million EBITDA for the full second quarter.

David Silver – JP Morgan

Interesting. All right. And then for Bruce again on UAP, I was kind of just wondering if you have kind of a final purchase price for that? So I know there are true-ups and everything, and when I look on the cash flow statement I see $2.741 billion. I mean from your – from Agrium's perspective, what was the total price paid for UAP?

Bruce Waterman

I think the price we have disclosed, David, is the price. We haven't finalized exactly the allocation, and we will probably do that by the end of the third quarter or into the fourth quarter. So there may be some movements between the categories, but the total should not change.

David Silver – JP Morgan

Okay. And then back to Bruce here. I guess you have a couple of big swing factors here, one was the unrealized gain on the gas hedges, and then also your stock-based compensation, both were very high numbers in the second quarter. And my sense is that they are both going to reverse to a significant extent during the third quarter. Can you give us some idea as to what the change in the mark-to-market looks like, or how to think about it for the third quarter, and also how to think about the change on your stock-based compensation line?

Mike Wilson

I will let Bruce respond, David, but I hope you are wrong on stock, and that the stock does go back to where it belongs.

Bruce Waterman

Well, if you took, say the end of July gas price forward curve, we would reverse substantially all of the gas hedging gains that we recorded in the second quarter, so that would reverse if it stayed at this level. Of course, if it stayed at this level I think long-term we would be quite happy. But – and we will see, as Chris mentioned, what the actual price is at the end of the third quarter. On stock compensation, if we were around the $80 versus the $107 we were at the end of the second quarter, we would reverse about $55 million, so somewhere in that range.

David Silver – JP Morgan

Okay. And I had to wait a while, but I meant to say initially to Mike, that I think you guys had a good year this quarter.

David Silver – JP Morgan

One last question for I guess maybe if Tom, and Richard could chime in on this, but August 12th there is going to be a pretty big USDA crop report that I think we are all watching, and just to stick with corn, I mean the USDA is projecting, or they said 87 million acres planted, 148 or so bushels per acre, and we have had some private forecasters come out recently with higher numbers. I think with your enlarged retail presence now, I mean, I think you guys are probably better than the – have a better view of what is going on in the field than the forecasters, but when you guys sit down and think about how the current crop is developing, and what a likely yield forecast is, I mean, what are you guys thinking about August 12th, and what the USDA may report as an up-to-date corn yield forecast?

Richard Gearheard

Tom, that sounds like one you should answer.

Tom Warner

Right now I am sitting in Grinnell, Iowa. I drove across here this morning, and the corn has just made a remarkable turnaround in the last three weeks. It looks good, planes are flying everywhere. You would think you are at O'Hare Field here in Grinnell, Iowa. But, there are holes out there that are significant. I think on August 12th I think we will find probably slightly less acres, David, but I think the yields I think what they are going to report is probably at what they have predicted a month ago, upper 140s to 150 range. I think the acres planted though, will be down slightly.

David Silver – JP Morgan

So overall the production, the size of the harvest may be a little bit lower than what the USDA is currently forecasting in your view due to I guess abandoned acreage, is that right?

Tom Warner

I think acreage will be down, the yields – right now if the weather progresses the way it has been doing, don't have an early frost, I think yields will hang on into that near 150 range, upper 140s. But that is a big question, and depending where you are in the corn belt. Soybean on the other hand I think will be heavily challenged in yield.

Mike Wilson

We are seeing people like Dohns [ph] come out and talk I think 152, 153. I guess from my perspective, at 152, 153, inventories are still going to go down, and we are going to see more corn planted next year.

Tom Warner

I definitely agree.

David Silver – JP Morgan

Very good. Thanks a lot.

Operator

Our next question comes from Paul D'Amico with TD Newcrest. Please state your question.

Mike Wilson

Hi Paul.

Paul D'Amico – TD Newcrest

Hi guys. Just trying to clarify this. And sort of talked about in different ways, but in terms of the forward sales, if I heard it correctly, ammonia the whole second half is now done, so my question on that would be, what time period did that really get done? And then if you could actually go into urea and phosphate in terms of how much is forward sold at this point?

Ron Wilkinson

Okay, Paul. A bit of a tough question. We have been selling second half ammonia probably starting in the middle of Q2. So as I said, when we – typically when we take out some urea to sell, we will take out ammonia at the same time. So we have kind of feathered it out so I would take starting prices in mid-May, early June, kind of out until sort of last week, those are sort of the prices you will see for us in the fall. Urea, we have got this third quarter wrapped up, and those prices again are in the similar timeframe, sort of mid-May, what you would see sort of in the New Orleans benchmark up until probably, I would say, mid-600, something like that for the third quarter. Today, we are looking in the fourth quarter at the current market. Phosphate is the same story. So it’s kind of – as we are moving through, and customers are looking to purchase, we take blocks out to the market. When those blocks get subscribed, we take out another block, and as we have been moving through the second quarter and into this quarter, every block has had a higher price.

Paul D'Amico – TD Newcrest

I appreciate that. And Mike, just sort of a bit of a macro picture here. In terms of the China export tax, and I know it's something that is just stated as a something kind of – something that exists out there, but given the outlook that you have got, what risks do you really think export tax represents? Like what sort of situation would you need for it to actually really be a risk, given what is in front of you?

Mike Wilson

Well, from our planning perspective, we assume China was going to export 2 to 2.5 million tons in the fourth quarter. And I think the world needs that. So, if the risks are more from a fertilizer point of view on the positive side. We thought they would go back down in – earlier in the year when we were putting our plan together, we thought they would be go back down, and they would be exporting 2 to 2.5. India needs it. And other parts of the world need it. If they do go up to the 185%, 175% tax, either price has to come up of nitrogen, or they won't be exporting a lot. So I am not sure it is really a risk from our point of view because we had always planned on it coming out. So it is a net positive.

Paul D'Amico – TD Newcrest

Right, now I appreciate that. I was more wondering if the risk applied if the 185 turned out to be wrong, back to 35 or so?

Mike Wilson

Well, if it went back to 35, you would see them export that 2.5 million tons, and there could be some pressure down. But as Richard said, we are expecting a strong fall season and that might counter it.

Paul D'Amico – TD Newcrest

And last question, on the Egypt, there are three options being listed here in terms of what is being proposed. And my understanding is the relocation probably is not one of the real realistic options. In terms of the other two, whether it be merged – EAgrium be merged with an existing company, or there will be a buyout, is there any preference to one or the other? Is there any simplicity to one versus the other?

Mike Wilson

Well, as we said, we are looking at all options that range from negotiations with the government to international arbitration to seek our value, get our return on value. The preference is the one that gives us the most value, and we are in discussions with them. Don't really want to get into the comments or details as to what we are discussing. But I am hopeful that we can reach an agreement with the Egyptian government and continue to have a presence in Egypt.

Paul D'Amico – TD Newcrest

Okay. Thanks, guys.

Operator

Thank you. Our final question for today comes from Fai Lee with RBC Capital Markets. Please state your question.

Mike Wilson

Fai.

Fai Lee – RBC Capital Markets

Hi, thank you. In the context of trying to understand the Retail, and the stability of the business going forward through a cycle, and Richard's comments earlier, if I am thinking about EBIT this quarter, if you get a full quarter from UAP, and you back out the inventory gains, are we looking maybe around a run rate of around $330 million, is that kind of close to what your expectations are?

Richard Gearheard

Are you talking about for the quarter?

Fai Lee – RBC Capital Markets

Yes, for the quarter.

Richard Gearheard

Well, I guess I would have to do a little math here but it sounds like you have done it. If you have taken out the like 4% or 5% on the nutrient margins, and $20 million to $25 million on glyphosates, and then took the full EBIT for UAP and Agrium legacy, then yes.

Fai Lee – RBC Capital Markets

Okay. Yes, that was the number I was coming up with. I wanted to double check that. In terms of the phosphate pricing, I just wanted to confirm like we are seeing I guess market prices closer to $1,200 per metric ton. Should we expect a catch-up given the realized price with what 790 in Q2 into Q3?

Kevin Helash

Yes, this is Kevin. Yes, we are going to be seeing prices closer to the market. The phosphate prices, as you are aware, have leveled off as of late. So as we move through time our pricing does catch up to the spot market, and as we move into the second half our prices will equate closer to where you are seeing prices today.

Fai Lee – RBC Capital Markets

Okay. And on Profertil, if you had to accelerate the turnaround, do you have a sort of timeframe of how many weeks you will be down?

Ron Wilkinson

It is Ron Wilkinson, Fai. We are anticipating about 45 days of downtime should we accelerate the turnaround.

Fai Lee – RBC Capital Markets

And is that any different than if you had to do it in 2009?

Ron Wilkinson

No, it is the same time.

Fai Lee – RBC Capital Markets

Okay. Great. And the last question I had with respect to the change in working capital this quarter, maybe Bruce can answer this. In the press release it mentions that the change does not include the opening balance, but I was a little confused on what was driving the big change then?

Bruce Waterman

Well, it is Bruce here. The big change obviously is in the huge run-up in pricing, so that the big change in our working capital largely relates to Retail where the decision was made to make an investment in inventory, which has turned out to be a very good investment.

Mike Wilson

And then you have got UAP on top of that, obviously.

Bruce Waterman

Right. So if you look at the increase in our working capital, it is largely related to Retail. And if you just looked at the end of the quarter, it is UAP, and then our legacy Retail also made some very good purchases.

Fai Lee – RBC Capital Markets

Right. But what I am actually referring to is like I understand it is Retail, but on your cash flow statement it's about close to $1.2 billion negative, but in your press release it mentions that it does not include the opening balance for the UAP acquisition?

Bruce Waterman

That is because in the period what we did is it is actually an acquisition, and so it is not reflected – the addition of the initial working capital from UAP is not an operating item. It is actually in our investing line, the acquisition net of cash acquired. So if you look at our cash flow statement, and you see the 2.741, that includes the working capital we acquired, and then the change from that point would be in our operating statement.

Fai Lee – RBC Capital Markets

Okay. And would you expect to get this back in future quarters, I guess that is the more important question?

Bruce Waterman

I am sorry.

Fai Lee – RBC Capital Markets

Would you expect to get the $1.2 billion back some point in the back half of '08?

Bruce Waterman

When we sell it, I would expect to get a lot more than that back.

Fai Lee – RBC Capital Markets

Okay. Thanks.

Bruce Waterman

Thank you.

Richard Gearheard

Thank you.

Mike Wilson

Thanks, operator. That is all the time we have for today. Give us a call if you have got any further questions on line, and we will talk to you again for the next quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: Agrium Inc. Q2 2008 Earnings Call Transcript
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