It is my pleasure to report on 2005, which was an excellent year for Agrium by a number of measures. Our record 2005 earnings and cash flows were propelled by yet another year-over-year improvement across virtually all our product and business lines. We again received important public recognition for our corporate governance practices as well as our human resources programs. Furthermore, our continued emphasis on environmental, health and safety measures and actions delivered another year of improved results on this critical front.
It was also an important year of growth for the Company, with four acquisitions over the past 14 months. The largest acquisition was the Royster-Clark retail business, which is expected to increase our total retail sales to close to $2-billion.
The dedication shown by our employees and the trust that you, the shareholder, have placed in Agrium have been key to our success in 2005. Our excellent results led to a significant increase in our share price. As of mid-February 2006, our share price had increased by 52 percent since the start of 2005 and was more than double the previous five-year average.
Our 2005 Performance in Review
Our exceptional 2005 financial results were supported by record returns for our retail, nitrogen and potash businesses. The highlights included:
- Our Retail operations earned $113-million in EBITDA in 2005, up almost 15 percent over last year and the ninth straight year of record earnings. Our U.S.-based retail operations continue to deliver the highest margins of any publicly-traded agricultural retailer in the business and we look forward to applying our successful business model to the Royster-Clark retail operations in 2006;
- Our potash gross profit rose by almost 50 percent in 2005 due to the continued increase in potash prices. Potash accounted for over 25 percent of our North America Wholesale gross profit in 2005. We are in the process of expanding our potash capacity by almost 20 percent, which should come on-stream by the third quarter of 2006;
- Nitrogen markets were also very strong. Our average nitrogen margins were $84 per tonne, up 17 percent over last year. Our international focused facilities accounted for about half of our nitrogen gross profit, while our Western Canadian facilities accounted for the large majority of our gross profit from our North American nitrogen sales; and
- Phosphate prices increased again in 2005, but higher production costs for Agrium and for the sector as a whole resulted in our margins being slightly lower than in 2004. Agrium's average phosphate margins continue to exceed the industry average.
Agrium Throughout the Value Chain
Agrium is the only publicly traded fertilizer and agricultural retail company that is involved across the entire agricultural value chain. With our recent retail acquisitions, our retail business has become the largest retailer in the U.S. in terms of direct-to-grower sales.
We have also further increased our diversification by expanding our products and sales in the growing and environmentally friendly value-added specialty fertilizer segment. This unique position enables us to look across the value chain when searching for and evaluating potential growth opportunities. It also provides us with a greater opportunity to make countercyclical investments than our peers, many of whom tend to focus on a particular nutrient or market segment.
Agrium's 2005 Scorecard
As a result of our strong performance, we generated $450-million in cash from operations and put this cash to good use. We retired $301-million of long-term debt and preferred securities and repurchased almost $100-million of common shares. We also made significant progress in our growth strategy on a number of fronts and have maintained a healthy balance sheet in the process.
It was an active year in terms of growth for Agrium. At this time last year I indicated the potential for capacity expansions at three of our existing facilities. We proceeded with two of these three projects in 2005:
- Expansion of our patented process controlled release urea production capacity by 150,000 tonnes, which was completed in January 2006.
- We are in the process of expanding our potash capacity by almost 20 percent, or 310,000 tonnes, which is expected to be completed in the third quarter of 2006.
- At our Profertil facility, we are actively evaluating a possible debottleneck and adding 500,000 tonnes of UAN nitrogen solutions capacity. Demand for UAN solutions has shown a noticeable increase in Argentina over the past few years.
We also have been successful in growing the Company through acquisition by identifying and completing some critical diversification projects in 2005 and early 2006:
- We acquired Royster-Clark in February 2006 through a successful unsolicited offer which was ultimately supported by a large majority of their unitholders and their Board of Directors. Royster-Clark is one of the largest agricultural retailers in the U.S., with reported revenues in excess of $1-billion and EBITDA of $65-million in 2005. It also has significant associated fertilizer distribution and some wholesale assets.
- We further grew our retail business with a net addition of 14 retail centers in South America in early 2006 and 11 new farm centers in the U.S. Corn Belt and the Eastern U.S.
- We announced the acquisition of Nu-Gro specialty fertilizers in late 2005, which closed in early 2006. Nu-Gro is a manufacturer of conventional slow release and professional turf products with four production facilities, annual revenues over $80-million and average margins of about 24 percent. Nu-Gro brings strong customer relationships and a number of widely recognized brands, complementing and expanding Agrium's existing controlled release product offerings. The specialty fertilizer segment is one we intend to continue to grow, given its stable earnings profile and significant growth potential.
- We acquired the fertilizer distribution assets of Imperial Oil Ltd. with over 190 Western Canadian locations in the summer of 2005, which provides improved access to high return markets.
Another key issue identified in last year's report was the future of our Kenai, Alaska nitrogen facility. While the uncertainty over the future of the facility is still with us, we were able to secure sufficient gas to keep the facility running until November 2006. This positive outcome is a result of a lot of hard work and support from many different groups. Most importantly, I would like to thank the employees at the Kenai, Alaska facility for the commitment and dedication they have shown. I also would like to acknowledge the invaluable support provided by both State and Federal political leaders, particularly Alaska's Governor, Frank Murkowski, and the co-operation of all the Cook Inlet gas suppliers.
Kenai provided a significant contribution to our 2005 results. We expect it will continue to provide a significant contribution to our bottom line again in 2006, even with a higher gas price and a somewhat lower level of production. We remain committed to working with local gas suppliers to attempt to secure economic gas supplies that would allow the facility to continue to operate beyond 2006. We are also looking at potential longer-term solutions for the facility including the possibility of working with partners to develop coal gasification as a possible long-term feedstock.
