CALGARY, ALBERTA--(Marketwire - Aug. 6, 2008) -
ALL AMOUNTS ARE STATED IN U.S.$
Agrium Inc. (TSX:AGU) (NYSE:AGU) announced today its highest ever quarterly earnings, with net earnings for the second quarter of 2008 of $636-million ($4.00 diluted earnings per share) more than double the previous quarterly earnings record of $229-million ($1.70 diluted earnings per share) achieved in the second quarter of 2007. The recent UAP acquisition is estimated to have contributed approximately $0.70 diluted earnings per share for the reported period of May 5 to June 30, 2008. Net earnings for the first six months of the year were a record $831-million ($5.24 diluted earnings per share), almost four times the previous first half record of $218-million ($1.63 diluted earnings per share) set in 2007.
"Agrium's exceptional second quarter earnings are a result of strong performance across all business units and the outlook for all our product lines continues to strengthen. I am especially pleased with the contribution from our UAP acquisition. The timing of this acquisition couldn't be better given continued strength in the industry fundamentals. This quarter's results are a reflection both of the quality of our assets and the benefit of diversifying throughout the agricultural value chain," said Mike Wilson, Agrium President and CEO.
"We anticipate continued strong demand for our products and services that help farmers around the world improve both crop quality and yield. Specifically, the outlook for the second half of the year remains solid with corn, wheat and soybean prices at two to three times historic levels. This should support crop input demand and continued strength in the nutrient markets benefiting our Retail, Wholesale and Advanced Technologies businesses."
Similar to last year, we intend to provide earnings guidance for the second half of the year when we release our third quarter earnings.
KEY RESULTS AND DEVELOPMENTS
- Agrium's EBITDA reached $1,035-million for the quarter and $1,376-million for the first half of 2008 due to higher realized seed, chemical and nutrient prices, supported by solid Wholesale production and sales for all major products and improved Retail margins and ESN volumes. Hedge gains accounted for $161-million ($0.68 diluted earnings per share) net of non-controlling interests in the second quarter of 2008, while stock-based compensation expense for the quarter was $115-million ($0.49 diluted earnings per share). Net of these two factors our earnings would have been $3.81 diluted earnings per share. Our June 11, 2008 earnings guidance assumed we would realize approximately $0.16 diluted earnings per share in hedging gains and $0.21 diluted earnings per share in stock-based compensation expense.
- Agrium Wholesale EBITDA in the second quarter was an all-time high at $682-million due to exceptional crop nutrient pricing and margins for all three major nutrients. Gross margins on a per tonne basis more than tripled for potash and phosphate versus the same quarter last year. Agrium's Retail EBITDA more than doubled to $431-million compared to the same period last year. Our legacy Retail operations reported a 69 percent increase in EBITDA year-over-year. UAP's EBITDA was $177-million, 25 percent higher than the same reported period last year, and their EBITDA for the first half of 2008 was approximately $260-million. Agrium Advanced Technologies EBITDA was 50 percent or $5-million higher than last year reaching $15-million, due to increased ESN sales volumes.
- In July, Agrium announced that it successfully concluded the purchase of a 70 percent equity position in Common Market Fertilizers S.A. ("CMF"), one of Western Europe's largest fertilizer distribution companies, which will further expand our Purchase For Resale business. CMF has annual nutrient sales volumes of 2 to 2.5 million tonnes and operates through subsidiaries across much of Europe.
- Agrium is currently in discussions with the Egyptian government pertaining to the government's decision to force the relocation of the EAgrium nitrogen project. The options proposed by the Government include a merger of EAgrium with an existing fertilizer company, relocation and/or a buy-out of EAgrium's shareholders. We expect to be in a position to provide further information by early September, 2008.
MANAGEMENT'S DISCUSSION AND ANALYSIS
August 6, 2008
The following interim management's discussion and analysis (MD&A) updates our annual MD&A included in our 2007 Annual Report to Shareholders, to which our readers are referred. No update is provided where an item is not material or there has been no material change from the discussion in our annual MD&A.
2008 Second Quarter Operating Results
NET EARNINGS
Agrium's second quarter consolidated net earnings were $636-million, or $4.00 diluted earnings per share, compared to consolidated net earnings of $229-million, or $1.70 diluted earnings per share, for the comparable quarter of 2007. EBIT improved by $609-million over the second quarter of 2007. This improvement in EBIT was made up of the combination of an increase in gross profit of $689-million offset by an increase in expenses of $80-million.
Consolidated gross profit in the second quarter of 2008 was $1,261-million compared to the second quarter of 2007 gross profit of $572-million. This increase in gross profit, reported in all three business units, was driven by increased realized selling prices and margins attributable to a tight nutrient supply/demand balance. During the quarter we completed the acquisition of UAP Holding Corp. (UAP), a large distributor of a full range of crop protection products, nutrients, seeds and services in the United States and Canada. UAP's contribution to Retail gross profit from the date of acquisition was $257-million.
Expenses have increased $80-million versus the second quarter of 2007, primarily driven by the following items:
- ($188)-million increase in gains on non-qualifying derivative positions, the majority related to our energy hedging program as well as an additional $75-million (before non-controlling interest) on derivative instruments associated with the Egypt Nitrogen Project;
- $103-million increase in stock-based compensation expense mainly due to an increase in our share price from $62.11 at March 31, 2008 to $107.54 at June 30, 2008;
- $93-million increase in Retail's selling expenses as a result of increased sales activity, including sales resulting from the newly acquired UAP business; and,
- $45-million increase in Royalties and other taxes driven by increased potash sales margins year-over-year.
BUSINESS SEGMENT PERFORMANCE
Retail
Retail's second quarter net sales were $2,506-million compared to $1,147-million in the second quarter of 2007. Gross profit was $667-million, a $389-million increase over the $278-million gross profit earned in the same quarter last year. EBIT was $409-million compared to 2007 second quarter EBIT of $142-million.
Retail's second quarter results are not directly comparable to previous quarters as a result of the UAP acquisition for which earnings are reported from May 5, 2008. The UAP acquisition contributed $257-million and $165-million in gross profit and EBIT for this period, respectively, representing an increase of over seven percent in gross profit and a 20 percent increase in EBIT compared to the similar nine week period in May to June of 2007. Agrium's legacy retail operations gross profit rose by 47 percent or $132-million over the same period last year, while EBIT increased by 72 percent to $244-million.
The increase in net sales and gross profit in the second quarter of 2008 versus the same quarter of 2007 was attributed to:
Crop nutrient sales increased $592-million and gross profit increased $176-million to $1,250-million and $335-million, respectively, primarily due to increased selling prices and the contribution from UAP's business. Crop nutrient margins rose to 27 percent in the second quarter of 2008 from 24 percent in the second quarter of 2007. Agrium's legacy margins increased by over six percent and UAP's margins were up slightly. Crop nutrient sales volume increased 36 percent over the same quarter of last year due entirely to the UAP acquisition. Legacy Retail fertilizer sales volume was down approximately 18 percent compared to the same period last year primarily as a result of wet weather conditions throughout most of the U.S. Corn Belt, lower corn acreage and favourable weather conditions in the fall of 2007 allowing optimal application rates at that time. We anticipate strong demand this fall due to high grain prices and an expected increase in corn acreage next year.
Crop protection sales increased almost three-fold to $860-million and gross profit increased over four-fold to $223-million compared the same quarter last year, with the addition of UAP accounting for $559-million in sales and $145-million in gross profit. Margins improved significantly for both UAP and Agrium legacy operations. Increased sales and gross profit was due to the UAP acquisition and inventory appreciation on certain crop protection products that are in tight supply. Crop protection product margins were 26 percent for the second quarter of 2008 versus 18 percent for the second quarter of 2007.
Seed, services and other gross profit increased by 63 percent year over year, which was due to increased profitability on seed sales. Seed sales increased $179-million and gross profit increased $34-million to $309-million and $49-million, respectively, primarily due to the UAP acquisition. Second quarter seed sales for our legacy retail operations also continued to grow with a 20 percent increase over the prior year.
Retail expenses increased by $122-million to $258-million primarily due to higher selling expenses associated with the increases in sales. Selling expenses as a percentage of net sales were approximately eight percent, which was lower than the second quarter of 2007 due to the addition of the UAP business. Our legacy retail operations selling expenses as a percent of sales were similar to last year's level.
Wholesale
Wholesale's second quarter net sales were $1,397-million compared to $890-million in the second quarter of 2007. Gross profit was $582-million this quarter, an increase of $305-million compared to the same quarter last year. EBIT was $647-million, an almost three-fold increase compared with a second quarter 2007 EBIT of $232-million. These exceptional results were primarily due to the significant increase in realized crop nutrient prices across all product lines.
Nitrogen gross profit was $82-million higher than the second quarter of 2007, due to higher realized sales prices for all nitrogen products. Nitrogen cost of product sold increased $78 per tonne over the same period last year primarily due to higher North American gas prices and the inclusion of $15 per tonne in depreciation expenses for the second quarter of 2008. Domestic nitrogen sales volumes were similar to last year with some reductions in ammonia volumes, as a result of wet weather that delayed the spring season, offset by an increase in UAN solutions and urea sales volumes. International nitrogen volumes decreased by approximately 152,000 tonnes versus the same quarter last year as the Kenai nitrogen facility is no longer in operation and our Argentine facility was down 41 days during the quarter due almost equally to mechanical issues and gas supply disruptions. Nitrogen margins on a per tonne basis were up more than 60 percent over the same period last year, or by more than $78 per metric tonne to $196 per tonne in the second quarter of 2008. Domestic ammonia and urea margins were almost equal to one another this quarter on a per tonne basis.
Agrium's overall natural gas cost was $7.36/MMBtu in the second quarter of 2008 versus $5.79/MMBtu in the second quarter of 2007, due to higher North American gas costs. The U.S. benchmark (NYMEX) natural gas price for the second quarter of 2008 was $10.80/MMBtu versus $7.56/MMBtu in the same quarter last year. The AECO (Alberta) basis differential averaged $1.58/MMBtu lower than NYMEX for the second quarter of 2008.
Phosphate gross profit was an all-time record of $96-million, almost triple last year's levels. Realized sales prices were over 80 percent higher than last year, which more than offset an increase in cost of product sold and a slight decrease in sales volumes. Phosphate sales volumes were down versus the same period last year due to a planned turnaround at Conda. Cost of product sold increased by about $139 per tonne over the same quarter in 2007, with $31 per tonne of the increase due to the addition of depreciation expenses this quarter in addition to significantly higher sulphur costs. Cost of product per tonne increased approximately 11 percent over the first quarter of 2008, while the benchmark Tampa Florida sulphur prices increased 79 percent over the same period. Gross margins for phosphate reached $323 per tonne, more than triple the same period last year.
Potash gross profit more than tripled to a record $184-million, $133-million higher than the second quarter of 2007. The year-over-year increase in gross profit was due to a combination of average realized prices more than doubling last year's levels and a seven percent increase in sales volumes. Our cost of product sold was $22 per tonne higher than the same period last year, with most of this increase due to the $9 per tonne depreciation expense included in the cost of goods sold and higher maintenance costs.
Wholesale's operating expenses decreased by $110-million in the second quarter of 2008 versus the second quarter of 2007. The decrease was primarily due to an increase in net gains on non-qualifying derivatives of $142-million, including realized and unrealized gains on our energy hedging program and our 60 percent interest in derivative instruments associated with the Egypt Nitrogen Project. This is partially offset by an increase in royalties and other taxes of $44-million driven by increased potash margins, and increased stock-based compensation expense of $19-million.
Advanced Technologies
Advanced Technologies' second quarter 2008 sales were $107-million compared to $81-million in the second quarter of 2007. Gross profit was $20-million in the second quarter of 2007, or $2-million higher than the second quarter of 2007. EBIT was $11-million versus $7-million for the comparative period. These increases were primarily due to higher ESN sales volumes which are up 67 percent quarter-over-quarter and on a year-to-date basis.
Other
EBIT for our Other non-operating business segment for the second quarter of 2008 was a loss of $95-million compared to a loss of $18-million for the second quarter of 2007. The increase in the EBIT loss of $77-million quarter-over-quarter is mainly due an increase in stock-based compensation expense of $84-million driven by our increased stock price at June 30, 2008 in comparison to March 31, 2008.
FINANCIAL POSITION AND LIQUIDITY
Cash used in operating activities was $317-million in the second quarter of 2008, of which $1,184-million was an increase in operating non-cash working capital over the first quarter of 2008. Agrium's second quarter working capital position is not directly comparable to the previous quarter as a result of growth in the Retail business unit and the working capital associated with the newly acquired UAP business. The operating non-cash working capital change does not include the effect of opening non-cash working capital of $623-million acquired in the UAP acquisition. Excluding the effect of this opening working capital, our inventory levels decreased and our accounts receivable increased from the prior quarter due to significantly increased sales and selling prices in the period. We paid down our trade accounts payable balance, and also reduced seasonally-driven prepaid sales liabilities in Retail and Wholesale in comparison to the first quarter.
Cash used in investing activities was $2,849-million for the second quarter of 2008. The acquisition of UAP resulted in a net cash outlay of $2,741-million. In addition, $115-million was spent on capital expenditures in the quarter.
Cash provided by financing activities was $1,582-million during the quarter. This consisted of an issuance of long term debt, comprised mainly of UAP financing credit facilities of $1,024-million and an increase in bank indebtedness of $542-million used to finance the UAP acquisition and the associated increase in working capital. We continue to not utilize our accounts receivable securitization facility.
In comparison to the second quarter of 2007, our consolidated non-cash working capital has increased by $1,630-million. UAP contributed $1,169-million of the increase, including $1,311-million in accounts receivable, $967-million in inventory and $1,163-million in accounts payable. The remainder of the growth in non-cash working capital is primarily driven by the increase in selling prices year-over-year.
Business Acquisition
On May 5, 2008, Agrium acquired 100 percent of the outstanding shares of UAP Holding Corp., a large distributor of a full range of crop protection products, nutrients, seed and services to growers across North America. Results of operations of the acquired business have been included in the consolidated financial statements from the date of acquisition, in the Retail business unit. The preliminary allocation of fair value to assets acquired and liabilities assumed will change as additional information regarding fair values becomes available.
On completion of the acquisition, we repaid UAP's long-term debt of $396-million, short-term debt of $246-million and current liabilities of $28-million. The acquisition was financed from cash on hand, proceeds from an offering of common shares in December 2007, drawings on existing revolving credit facilities, and bank loans.
Bank loans drawn to fund the acquisition totaled $1,015-million, are unsecured and are repayable $55-million on May 5, 2009, $500-million on November 5, 2009, and $460-million on May 5, 2013.
Egypt Nitrogen Project
During the quarter, the Egyptian government halted construction of the Egypt nitrogen project and the Egyptian People's Assembly voted to recommend the relocation of the project to an unnamed location. Our activities in Egypt are carried out by a subsidiary, known as EAgrium. The options proposed by the Government include a merger of EAgrium with an existing fertilizer company, relocation and/or a buy-out of EAgrium's shareholders. We are currently discussing these options with the Egyptian government. To date, discussions have not resulted in an agreement and the net impact of this matter on our financial results cannot be reasonably determined. EAgrium's obligations with respect to the Egypt nitrogen project are on a non-recourse basis to Agrium. Accordingly Agrium's maximum exposure to EAgrium, net of non-controlling interests, is not expected to exceed approximately $280-million plus cumulative realized and unrealized net hedging gains of $45-million.
Forward contracts and interest rate swap contracts related to construction and financing of the project no longer qualify for hedge accounting given the decision by the Egyptian Government to halt construction of the Egypt nitrogen project. As a result, cumulative realized and unrealized net hedging gains of $75-million have been recognized in earnings of which $30-million have been credited to non-controlling interest.
During July, 2008, EAgrium repaid all but $8-million of outstanding project-related non-recourse long-term debt. Repayment of the remaining debt is anticipated in the third quarter of 2008.
International Accounting Standards
International Financial Reporting Standards - The CICA's Accounting Standards Board has published its strategic plan for convergence of Canadian generally accepted accounting standards with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The changeover date for Canadian publicly accountable enterprises is January 1, 2011 and will require restatement of comparative figures. We are currently completing an analysis of the impact of the transition from Canadian GAAP to IFRS on our consolidated financial statements. Upon completion we will develop our IFRS changeover plan, which will include project structure and governance, resource planning and training, and a phased plan to assess accounting policies under IFRS.
SELECTED QUARTERLY INFORMATION
(Unaudited, in millions of U.S. dollars, except per share information)
2008 2007 2006
------------- ----------------------- -----------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Net sales $3,870 $1,107 1,426 989 2,034 821 899 821 1,816
Gross profit 1,261 392 533 305 572 188 231 196 397
Net earnings (loss) 636 195 172 51 229 (11) (62) 1 142
Earnings (loss) per
share
-basic $4.03 $1.24 1.25 0.38 1.71 (0.08) (0.47) 0.01 1.08
-diluted $4.00 $1.23 1.24 0.38 1.70 (0.08) (0.47) 0.01 1.06
The agricultural product business is seasonal in nature. Consequently, quarter-to-quarter results are not directly comparable. For purposes of comparison, fertilizer sales volumes are best measured on a half-year basis, corresponding to the post-harvest application and the spring planting application seasons.
NON-GAAP MEASURES
In the discussion of our performance for the quarter, in addition to the primary measures of earnings and earnings per share, we make reference to EBITDA (earnings before interest expense, income taxes, depreciation, amortization and asset impairment). We consider EBITDA to be a useful measure of performance because income tax jurisdictions and business segments are not synonymous and we believe that allocation of income tax charges distorts the comparability of historical performance for the different business segments. Similarly, financing and related interest charges cannot be allocated to all business segments on a basis that is meaningful for comparison with other companies.
EBITDA is not a recognized measure under GAAP, and our method of calculation may not be comparable to other companies. Similarly, EBITDA should not be used as an alternative to cash provided by (used in) operating activities as determined in accordance with GAAP.
OUTLOOK, KEY RISKS AND UNCERTAINTIES
Grain and oilseed prices have been volatile over the past few months given the weather challenges in the U.S. this spring and the tight global grain markets. Grain prices have pulled back from highs reached earlier this spring but major crop prices remain two to three times historic levels. Given that global and U.S. grain inventories remain very tight, grain prices will continue to reflect growing conditions and yield potential for both U.S. and global crop production. The United States Department of Agriculture (USDA) June World Agricultural Supply and Demand Estimates (WASDE) projected global grain and oilseed stocks-to-use ratios would decline to thirty-five year lows in 2008/09. The USDA forecasts U.S. corn production will be down about ten percent this year and that domestic use and exports are projected to exceed production by 780 million bushels, resulting in ending stocks dropping by 48 percent to 833 million bushels. Soybean supplies are also forecast to remain relatively tight in 2008/09. Though the 2008/09 crop is a few months from being harvested, the stage is set for intense competition for seeded area among major crops in 2009. Globally, Argentine farmers received good news recently as the Senate rejected the proposed increase in the export tax on soybeans.
Market developments in the global nitrogen market have been very positive over the past four months, with U.S. urea prices having more than doubled since the start of the second quarter and trading at record levels. North American natural gas prices rose significantly in the second quarter and were $13.35/MMBtu as of June 30, 2008, but have subsequently declined. We have locked in approximately 75 percent of our natural gas requirements for the second half of 2008. U.S. urea inventories at the end of June were reported by The Fertilizer Institute (TFI) to be 20 percent lower than in June 2007. The tightness in U.S. nitrogen supplies has been caused in part by reduced imports. Strong demand from India and other regions of the world, combined with the export tariff on urea exports from China, has resulted in a very tight global market. The export tariff is expected to continue at least through the end of the third quarter and may be extended into next year. A risk to the nitrogen market, and other nutrient markets, continues to be uncertainty around the size and duration of the Chinese export tariff and/or the size of the future import requirements by India.
Global and North American potash prices have also continued to rise, as production has not been able to keep pace with escalating demand. North American potash inventories have tightened significantly over the past couple of months and were reported by TFI to be 30 percent lower at the end of June than for the same period in 2007, and 41 percent below the five-year average. Import demand has been strong to date; for example, Brazil's imports were up over 12 percent from 2007 through May at 2.4 million tonnes. An uncertainty in the potash market is how global potash users will respond to the unprecedented high level of global prices, although in most regions of the world the focus is expected to continue to be on optimizing crop yields. There is also a risk that potash markets could tighten further if an extended strike were to occur at certain non-Agrium Saskatchewan potash mines.
Global phosphate prices remained strong in the second quarter, following the 80 percent increase in prices experienced in the first quarter of 2008. Indian import demand has been important to world markets as India accounted for a large majority of U.S. DAP exports in June. Industry analysts believe there may be pent-up demand elsewhere that will need to be filled going forward, particularly from Latin America. U.S. phosphate inventories have fallen 19 percent in the past two months and are 18 percent below the five-year average, due to strong export demand. Fall demand is expected to be robust for phosphates, notably in South America where some planting of summer crops will begin in Argentina in a couple months. There is a potential for reduced application rates in North America, which may be offset by an expected increase in corn acreage. There is also a risk that any short-term slow down in India's import demand may not be matched by an increase in other destinations.
Forward-Looking Statements
Certain statements in this press release constitute forward-looking statements. Such forward-looking statements involve known and unknown risks and uncertainties, including those referred to in the management discussion and analysis section of the Corporation's most recent annual report to shareholders, which may cause the actual results, performance or achievements of the Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. A number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, weather conditions, crop prices, the future supply, demand and price level for our major products, future gas prices and gas availability in key markets, future operating rates and production costs at Agrium's facilities, the exchange and tax rates for U.S., Canada, Argentina, and Egypt, the rate of inflation in Western Canada in particular and in other regions in which we operate facilities, domestic fertilizer consumption and any changes in government policy in key agriculture markets, including the application of price controls and tariffs on fertilizers and the availability of subsidies or changes in their amounts, the potential inability to integrate and obtain anticipated synergies for recent or new business acquisitions as planned or within the time predicted, including the timely integration of the UAP acquisition, as well as risks the success and timing of negotiations of any possible recovery of Agrium's losses and any possible litigation under the project agreements and possible non-compliance with international investment treaties, changes in development plans, capital construction costs, construction progress, and potential delays in building the Egyptian facility and related infrastructure, availability of equipment and labor, performance of other parties, political risks, including civil unrest, actions by armed groups or conflict, general economic, market and business condition, Egyptian governmental and regulatory requirements and actions by governmental authorities, including changes in government policy, changes in environmental, tax and other laws or regulations and the interpretation thereof. Agrium disclaims any intention or obligation to update or revise any forward-looking information as a result of new information or future events.
OTHER
Agrium Inc. is a major Retail supplier of agricultural products and services in North and South America, a leading global Wholesale producer and marketer of all three major agricultural nutrients and the premier supplier of specialty fertilizers in North America through our Advanced Technologies business unit. Agrium's strategy is to grow across the value chain through acquisition, incremental expansion of its existing operations and through the development, commercialization and marketing of new products and international opportunities. Our strategy places particular emphasis on growth opportunities that both increase and stabilize our earnings profile in the continuing transformation of Agrium.
A WEBSITE SIMULCAST of the 2008 2nd Quarter Conference Call will be available in a listen-only mode beginning Wednesday, August 6th at 9:30 a.m. MT (11:30 a.m. ET). Please visit the following website: www.agrium.com.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008
AGRIUM INC.
Consolidated Statements of Operations
(Millions of U.S.
