While the fertilizer sector is already under pressure since the breakup of the Belarusian Potash Company (BPC) last summer, which led to steep decline in prices, transportation problems during the unusually cold winter only added to the headaches of the industry. Despite these challenges, Agrium's diversified business model compared to its North American peers protects it from broader agriculture market headwinds in 2014.
Earnings beat despite negative preannouncement
Following the company's negative preannouncement in April, Agrium's quarterly results provided little relief to investors. A late spring season, logistical challenges, plant operational issues, and lower fertilizer prices all negatively affected the company's quarterly results.
Agrium reported first quarter operating EPS of $0.07, beating consensus estimates of $0.05 by 40%. Despite the seasonal and operational challenges, the results came in much better than the consensus estimates and last month's preannouncement, when Agrium said it expects first quarter earnings of "just above breakeven."
More than the quarterly results, it's the second quarter guidance that attracted investors' attention. The company expects second quarter EPS to be in the range of $3.85-$4.35, below the adjusted consensus estimates of $4.87. However, the range includes an estimated $0.35 impact from lower production and higher costs related to the boiler problems at Carseland. I think it is quite likely that the management team is being conservative and setting low expectations in an uncertain agriculture environment.
Strong retail business
While the company's wholesale business is expected to remain challenged until year-end, due to an extended turnaround at the Redwater plant in the third quarter and downtime at Vanscoy as part of the expansion program, the retail segment continues to post encouraging results.
Agrium's international retail business, one of the weaker businesses since the company purchased Landmark in 2010, performed better in the quarter with record results in Australia. The segment's international profitability increased more than 6% year over year and working capital is showing a smaller-than-normal seasonal build, increasing confidence in Agrium hitting 2015 retail targets.
Going forward, the company's Viterra acquisition in particular should help 2Q/3Q results within retail, which is another reason to believe management is perhaps being conservative in its guidance.
Capital projects to support organic earnings growth
A number of capital projects, including Vanscoy, Borger, and MOPCO, in Agrium's whole business are set for completion over the next 12-18 months, supporting organic earnings and free cash flow growth into 2016. The company's Borger expansion, which will add a new urea production unit of about 610,000 tons, is on budget and set to start by the end of 2015. Moreover, the expansion program at MOPCO in Egypt has also restarted following an extended shutdown. Agrium has 26% ownership stake in MOPCO. The company expects the first expansion to come online by year-end, with the second phase operational in 2015, in total resulting in another 340,000 tons of urea attributable to Agrium.
Locked in attractive margins
Agrium has locked in roughly 20% of its natural gas needs during 2016-2018 at $3.50 per mmbtu, which is $1.50 or 30% lower than the average gas price paid in the first quarter. This is a solid operational decision to secure cheap feedstock, which will help de-risk the company's Borger, Texas expansion. Well executed long-term gas hedges coupled with industrial nitrogen contracts, which have a fixed margin, have helped AGU lock in attractive margins for about a third of its North America nitrogen business.
Agrium is a global leader in farm retailing. While the company's wholesale business continues to face challenges in 2014, the company's diversified business model protects it from the broader agriculture market headwinds in 2014. As the new projects come online, the company's 2015 and 2016 prospects particularly look bright. Meanwhile, the continued rationalization of the company's retail footprint across North America should continue to enhance operating performance and working capital improvements throughout the balance of 2014.
The expectations for material improvements in Agrium's retail business remain fairly low, which I believe in the intermediate to long-term will be a key driver of the stock, particularly when wholesale's operational issues are behind Agrium. In the meatime, the company's high dividend yield of 3.2% should keep investors interested.
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