DBRS Confirms Agrium at BBB, Trend Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debt rating of Agrium Inc. (Agrium or the Company) at BBB with Stable trends, reflecting the Company’s position as one of the world’s leading agricultural retailers, as well as an important primary producer of nitrogen, potash and phosphate-based fertilizers.

The Company has deepened its business profile with a number of acquisitions, particularly in its Retail unit, as well as through internal expansions in its Wholesale unit that are nearing completion. The rolling-in of Agrium’s Advanced Technologies unit into its Wholesale unit and the disposal of the Company’s lawn and turf business in mid-2014 had only a minor impact on the Company’s overall business profile.

Agrium’s financial metrics weakened again in 2014, as earnings before items considered by DBRS as non-recurring and operating cash flow continued to erode from record levels in 2011, debt levels rose to fund expansion projects and dividends increased. Higher gross profit in the Company’s Retail unit, fueled by acquisitions and supplemented by efficiency initiatives and more proprietary product sales, was more than offset by declining contribution from its Wholesale unit.

Agrium generated net free cash flow deficits in 2013 and 2014 as earnings and operating cash flows trended downward from record levels in 2011, while capital expenditures and dividends ramped up. Combined with $1.4 billion in share buybacks since 2012, debt has increased and the Company’s financial metrics have deteriorated to levels currently weak for its ratings.

Agrium’s 2014 capital expenditures were a record at $2.0 billion, but are expected to decline in 2015 and beyond to a run rate of less than $1.0 billion as major projects are completed, providing the Company the opportunity to reduce its net free cash flow deficit and debt growth. Added productive capacity and any cyclical upswing in earnings in the Company’s Wholesale unit are expected to provide the opportunity to restore key credit metrics to levels more in line with Agrium’s ratings.

DBRS expects Agrium’s earnings to be largely flat to modestly higher in 2015 compared to 2014, as margin pressures in the Retail sector, driven by diminished farm incomes due to low crop commodity prices, are more than offset by higher sales volumes as the Company’s expansion efforts in potash and nitrogen products ramp up and due to stable-to-modestly increasing prices for Wholesale unit products. Agrium is expected to be particularly challenged in placing potash volumes that will largely have to be shoehorned into mature American and Canadian markets due to its constrained export capacity in 2015. The relative strength of the U.S. dollar is expected to help margins on Agrium’s non-U.S. primary product production.

Agrium’s credit metrics are expected to stabilize in 2015 with an outlook for flat to modestly higher operating cash flow, but with lower capital expenditures resulting in a moderation of debt growth. That said, the Company also has an incomplete discretionary normal course issuer bid outstanding, which may require up to $775 million in funds if fully executed in 2015.

Over the longer term, the Company’s expansions are expected to ramp up earnings potential, but crop prices, farm economics and weather issues are expected to continue to drive fertilizer prices and to provide upward/downward pressure on Agrium’s earnings. Reduced expansion expenditures and added productive capacity are expected to contribute to debt reduction and an improved financial profile as fertilizer prices improve, subject to discretionary increases in shareholder payments and acquisitions.

Accordingly, Agrium will need to be judicious in its spending choices to avert any negative rating action due to persistence of its currently cyclically weak credit metrics.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Mining Industry (September 2014) and Rating Companies in the Industrial Products Industry (January 2015), which can be found on our website under Methodologies.