Mr. Chuck Magro reports
AGRIUM'S SOLID FIRST QUARTER RESULTS DRIVEN BY STRONG OPERATING PERFORMANCE
Agrium Inc. is releasing its 2016 first quarter earnings results, with net earnings attributable to equityholders of Agrium of $2-million (two cents diluted earnings per share), compared with $12-million (eight cents diluted earnings per share) in the first quarter of 2015. The reduction in net earnings was driven by weaker selling prices across all nutrients. This was largely offset by excellent results achieved from the retail operations and strong wholesale operational performance.
Highlights:
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First quarter adjusted net earnings were $7-million or five cents per share (1).
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Retail achieved the second-highest EBITDA
(as earnings (loss) from continuing operations before finance costs, income taxes, depreciation and amortization)
for the first quarter, with strong margins across all major product lines.
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International retail delivered strong results, with South America achieving record first quarter EBITDA and Australia reaching record first quarter in local currency.
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Wholesale continues to achieve impressive operational performance. This quarter, nitrogen margins remained strong despite much lower benchmark prices.
- Agrium acquired 27 retail locations through acquisitions in Canada and the United States, adding expected annual incremental EBITDA of over $11-million.
- The company achieved a 6-per-cent reduction in consolidated selling, general and administrative costs, compared with the same period last year, demonstrating the continuing results of its operational excellence initiative.
- The annual guidance range for 2016 has been revised to $5.25 to $6.25 diluted earnings per share due to the weak outlook for nutrient prices.
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Agrium will be hosting an investor day on June 8, 2016, in Toronto. For full details and to register for the event, please visit the company's website.
"Agrium's first quarter results once again highlight the resilience of our business model," commented Chuck Magro, Agrium's president and chief executive officer. "Our retail business achieved impressive first quarter EBITDA, with strong margins across all major product lines. Our wholesale business unit continued to demonstrate excellent operating performance and capitalized on our extensive competitive advantages," added Mr. Magro.
(1) A first
quarter effective tax rate of 29 per cent was used for adjusted net earnings and per-share calculations. These are non-IFRS (international financial reporting standards) measures, which represent net earnings adjusted for certain income (expenses) that are considered to be non-operational in nature. The company believes these measures provide meaningful comparison with the earnings of other companies by eliminating share-based payments expense (recovery), gains (losses) on foreign exchange, and related gains (losses) on non-qualifying derivative hedges and significant non-operating, non-recurring items. These should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with IFRS and may not be directly comparable with similar measures presented by other companies.
Market outlook
Agricultural and crop input markets
U.S. grower margins and grower sentiment have improved over the past month. This was a result of U.S. new crop corn futures having increased by approximately 5 per cent from the lows at the beginning of April, while new crop soybean prices have increased by 16 per cent since early March and are now at the highest level since December, 2014. As a result, growers' prospective 2016 cash margins are up from 2015 levels, the first year-over-year improvement in two and four years, respectively.
The United States Department of Agriculture's (USDA) prospective plantings report estimated that U.S. growers intend to plant 93.6 million acres of corn, which would be an increase of 5.6 million acres or about 6 per cent from 2015 levels. Agrium believes corn acreage expansion this year will be closer to 5 per cent, as soybean prices have strengthened in response to damaging rains during harvest in Argentina.
According to the most recent USDA forecasts, U.S. acreage of corn, soybean and cotton could increase by over six million acres, supporting crop input and services demand in 2016. However, in Canada, it is expected that pea and lentil acreage will expand by almost two million acres, which could negatively impact Western Canadian demand for nitrogen this year.
The spring season across North America began early, which tends to support higher acreage levels, as well as the premium for North American crop nutrient prices. This has been most evident on nitrogen products. It also tends to bring forward timing of crop protection product applications. In Western Canada, there are some regional concerns about dryness as precipitation has been below normal the past two months.
The value of the U.S. dollar has weakened relative to most other global currencies since the beginning of 2016, but non-U.S.-currency values still remain weak on a historic basis. A relatively weak currency shields non-U.S. growers from the impact of low global crop prices and has supported relatively high crop acreage outside of the U.S. This is primarily why Brazil had such a strong acreage of second crop corn this year, which supported stronger-than-expected crop nutrient shipments in Brazil to start 2016.
Nitrogen outlook
North American nitrogen prices increased beginning in February, 2016, driven by a relatively early start to the spring application season, combined with relatively low volumes of offshore imports.
In January to February, 2016, U.S. offshore imports of urea were down close to 40 per cent, compared with the same period of 2015.
Due to the poor 2015 fall application season in the U.S. and the high corn acreage intentions for 2016, projected by the USDA, U.S. spring nitrogen applications are expected to be historically high.
Nitrogen projects in North America are expected to continue to ramp up in 2016, which is expected to keep buyers tentative entering the fill season in the second half of the year.
Chinese urea exports were down by 1.5 million tonnes in first quarter of 2016, from first quarter 2015 levels, due to strong domestic demand in China and low export urea prices to begin 2016. Chinese urea production levels in the first quarter of 2016 were relatively flat compared with the same period of 2015, but did decline about 10 per cent from the high levels in the fourth quarter of 2015.
Indian urea imports were lower in the first quarter of 2016, than they were a year ago. However, India recently called a tender for imports for its 2016/2017 year. While imports are expected to decline from record 2015 levels, they are expected to be historically high, particularly if the monsoon season is above average, as projected by the India Meteorological Department.
Potash outlook
A number of factors combined to pressure the North American potash market in the first quarter, including the poor fall application season, which created a bottleneck in the supply chain with potash being stored in warehouses rather applied in the fall, and above-average offshore imports of potash.
While first quarter 2016 North American offshore imports of potash were down close to 50 per cent from 2015 levels, they were still above any other year since 2011. U.S. potash prices are below other global import levels, which are expected to continue to pressure imports relative to 2015 levels.
Brazilian potash demand has been a positive surprise to start 2016, with first quarter imports up over 20 per cent from the first quarter of 2015. The uncertainty over the Brazilian political and economic situation will be a source of uncertainty for the remainder of 2016.
China has yet to sign 2016 potash supply agreements, which continues to add uncertainty to the global potash market. Chinese import volumes will be an important driver of the potash market in the second half of 2016.
The Indian government announced modest changes to the nutrient-based subsidy (NBS) for potash in 2016/2017, which improves the import economics and should support improved import demand in the second half of 2016.
Phosphate outlook
North American phosphate demand is projected to be relatively strong in the spring of 2016, due to the poor fall application season and relative stability in prices, which have increased from the January, 2016, lows.
Chinese phosphate exports have declined compared with 2015 levels, in part because of lower import demand from India.
Similar to potash, the changes in the NBS for phosphate in India appear positive for second half diammonium phosphate demand, but most analysts expect reduced demand in 2016, from 2015 levels.
2016 annual guidance
Based on the company's market outlook, Agrium expects to achieve annual diluted earnings per share of $5.25 to $6.25 in 2016, compared with its previous estimate of $5.50 to $7. Agrium has lowered the guidance range due to a challenging pricing environment for all nutrients and expectations for a stronger Canadian dollar, partially offset by lower natural gas costs and continued strong performance by the retail business. It is issuing earnings guidance of $4 to $4.30 diluted earnings per share for the first half of 2016.
The company has reduced its estimate of potash production to 2.3 to 2.4 million tonnes.
Retail crop nutrient sales tonnes for 2016 are now expected to be from 9.8 million to 10.3 million tonnes. The slight widening of the range from the company's previous estimate is due to a forecasted increase in U.S.-planted corn acres.
The company's estimates for the Canada/U.S. foreign exchange rate and NYMEX for 2016 have been updated based on current market conditions.
This guidance, and updated additional measures and related assumptions, are summarized in the guidance table. Guidance excludes the impact of share-based payments expense (recovery), gains (losses) on foreign exchange, and non-qualifying derivative hedges and significant non-operating, non-recurring items. Volumetric and earnings estimates assume normal seasonal growing and harvest patterns in the geographies where Agrium operates.
2016 ANNUAL GUIDANCE RANGE AND ASSUMPTIONS
Low High
Diluted earnings per share (EPS) (in U.S. dollars) $5.25 $6.25
Guidance assumptions
Wholesale
Production tonnes
Nitrogen (millions) 3.5 3.7
Potash (millions) 2.3 2.4
Retail:
EBITDA (millions of U.S. dollars) $1,075 $1,175
Crop nutrient sales tonnes (millions) 9.8 10.3
Other
Operational tax rate 28% 27%
Sustaining capital expenditures (millions of U.S.
dollars) $500 $550
Total capital expenditures (millions of U.S. dollars) $800 $900
Canada/U.S. foreign exchange rate $1.31 $1.36
NYMEX gas price ($/mmbtu) $2.65 $2.05
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars, except per-share amounts)
Three months ended
March 31,
2016 2015
Sales $2,725 $2,872
Cost of product sold 2,171 2,288
Gross profit 554 584
Expenses
Selling 414 430
General and administrative 55 67
Share-based payments 4 45
Earnings from associates and joint ventures (5) -
Other expenses (income) 11 (33)
Earnings before finance costs and income taxes 75 75
Finance costs related to long-term debt 52 37
Other finance costs 18 19
Earnings before income taxes 5 19
Income taxes 2 5
Net earnings 3 14
Attributable to
Equityholders of Agrium 2 12
Non-controlling interest 1 2
Net earnings 3 14
Earnings per share attributable to equityholders
of Agrium
Basic and diluted earnings per share $ 0.02 $ 0.08
We seek Safe Harbor.
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