Agrium has record year with $1.3 B net income; 4Q impacted by $261 M write-down

Agrium Inc. reported a record annual net income of $1.32 billion ($8.34 per diluted share) on sales of $10.3 billion for the year ending Dec. 31, 2008, versus 2007’s $441 million ($3.25 per share) and $5.5 billion, respectively.

Fourth-quarter net income was down from the year-ago due to some $261 million in write-downs, mainly for inventory valuations. Net income was $124 million ($.79 per share) on sales of $1.98 billion, versus the year-ago $172 million ($1.24 per share) and $1.49 billion.

“Our fourth quarter margins were excellent again this quarter, even with the challenges of reduced sales volumes and write-downs in inventories due to the unprecedented changes in phosphate and nitrogen prices over the past four months,” said Mike Wilson, Agrium president and CEO. “We ended 2008 with earnings that were three times our previous record, and our strong balance sheet and positive earnings outlook places us in an excellent financial position for the future.”

For the year, Wholesale gross profits were $1.8 billion on sales of $4.7 billion, versus 2007’s $874 million and $2.8 billion, respectively. Fourth-quarter profits were $283 million on sales of $982 million, compared to the year-ago $343 million and $908 million, respectively. Some $121 million of the $261 million in write-downs came from the Wholesale sector.

The Retail segment more than doubled gross profits for the year at $1.4 billion on sales of $5.5 billion, up from 2007’s $676 million and $2.5 billion, respectively. Retail results are not directly comparable to year-ago levels, as Agrium acquired UAP in May 2008. Fourth-quarter profits were $228 million on sales of $1.02 billion, versus the year-ago $179 million and $555 million, respectively. Some $93 million of the write-downs came from this sector due to changes in valuations of future purchase commitments. Agrium said nutrient sales volumes in its legacy North American operations declined 46 percent compared to year-ago levels due to the deferral of applications in the fall into 2009.

Agrium noted strong performance in its Retail crop protection business, with the new UAP assets playing a major role. Seeds profits were down in the fourth quarter due to reduced demand for wheat seeds.

Wilson says Agrium can deliver strong results in 2009. “We believe the reduced crop nutrient use experienced over the past four months is not sustainable and that it will ultimately impact grain production and support crop prices and crop input demand.” Wilson noted that Agrium has been in the crop input business for over 75 years and has never experienced a situation like the one that developed in the past four months.

Wilson estimated that nitrogen volumes were off 35 percent this past fall, with phosphate and potash down almost 50 percent.

“…unless we see a rally in corn prices in the next few months, we anticipate that U.S. growers will likely decrease corn acreage slightly, to 83-85 million acres this spring, in favor of soybeans, primarily in regions outside the core of the U.S. Corn Belt,” Wilson told analysts. “This would still place corn acreage at historic high levels, and it would ensure that there will be sizeable increases in corn acreage the following year, due to the resulting reduction in corn inventories.”

“The nitrogen market has been the first to show considerable improvement over the past month, and margins appear favorable heading into the spring. We’re experiencing strong orders for nitrogen in our Wholesale business, and we are anticipating that farmers will attempt to apply optimal nitrogen rates in the spring, supporting all three business units.”

Agrium noted that The Fertilizer Institute reported urea inventories at the end of December were 83 percent higher than the previous five-year average. However, it also said that U.S. urea imports were estimated to be off 30 percent in the fourth quarter, and some 10 percent of global urea capacity has been curtailed. Agrium expects strong U.S. spring demand as well as good demand from India, and says China has re-imposed prohibitive export tariffs.

For the fertilizer year, Wilson estimates phosphate and potash use could be down 30 percent, having been down 45-50 percent in the fall for the Retail segment.

Agrium noted that TFI reported North American potash inventories in December as 22 percent above the five-year average. However, it also said contract renewals at prevailing spot prices in both Japan and South Korea supported prices though the end of the year and into 2009.

Agrium said that at least 30 percent of global DAP/MAP capacity was offline at the beginning of 2009. It noted that TFI reported that U.S. DAP/MAP inventories at the end of December were 86 percent higher than the previous five years, and that U.S. DAP/MAP production was off 41 percent in the fourth quarter.

“Our production has been throttled back to around 50 percent,” said Wilson, referring to potash. “We have not laid off anyone at this point. We have not shut in our plant totally at this point. But if sales don’t strengthen, we will likely do that.” Although production has been at the 50 percent rate for the past 60 days, Wilson said the company is building inventory at current rates. While there were some Canpotex volumes moving in January, the domestic market is “pretty much dead,” added Ron Wilkinson, senior vice president, and president of Wholesale. Agrium estimates global potash operating rates are off 30 percent.

More of Agrium’s nitrogen plants are running. Exceptions include one unit at Sacramento and the Redwater #1 ammonia plant. The Borger, Texas, plant resumed production this week. “Everything else is flat out,” said Wilkinson. “We are restricted a little bit on feed stock supply at our Joffre plant in Alberta here. On phosphate, Redwater’s running flat out. We have Conda somewhere around 80 percent and our expectation is that will ram up to full rates in the next week or two.” He also noted that the Argentine Profertil facility is at full rates.

In other news, Agrium said it took a $45 million write-down net of non-controlling interest to its $295 million EAgrium investment in the fourth quarter. Under its current agreement in Egypt, Agrium owns 26 percent of MOPCO, with the share exchange completed Jan. 26, 2009. MOPCO has commenced commercial operation at its 675,000 mt urea facility and plans to construct two additional urea trains on its existing site subject to financing, which is not assured in the current environment.