Strong Australian operations drive Viterra's earnings

by World Grain Staff
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CALGARY, ALBERTA, CANADA — Viterra Inc. announced on June 9 that its second quarter net earnings rose to 79.6% to C$33 million or C$0.09 per share for the quarter from C$18 million or C$0.05 per share generated in the same period last year. For the first six months of the fiscal year, net earnings were C$133 million or C$0.36 per share, an increase from C$29 million or C$0.08 per share in the comparable period of fiscal 2010.

Viterra sited strong contributions from its Australian operations as a main driver of the company’s success. For the second quarter ended April 30, EBITDA increased 37% to C$128 million compared to C$93 million in the same quarter last year. Year-to-date EBITDA was C$339 million versus C$183 million during the same period in fiscal 2010.

Viterra noted that in North America, solid contributions from grain handling and marketing and the new pasta and oat processing businesses acquired in the second half of fiscal 2010 also increased EBITDA for the quarter and year to date. While results were strong, cool and wet weather in Western Canada delayed seeding and has moved a portion of the company’s agri-product sales and earnings into the third quarter.

"Our continued success in generating year-over-year earnings improvements reflect strong market fundamentals, the benefits of Viterra's integrated business model and our continuous focus on operational efficiencies,” Mayo Schmidt, Viterra's president and chief executive officer said. “From a strategic perspective, our geographic diversification has delivered to expectations, with our Australian operations accounting for almost half of Viterra's EBITDA to date. With significant origination and infrastructure in North America and Australia and an expanded international grain presence, Viterra is meeting the growing demand for key agricultural ingredients around the globe."

Consolidated sales and other operating revenues for the quarter increased 33% to C$2.7 billion compared to C$2 billion in the second quarter of fiscal 2010. For the first six months ended April 30, 2011, revenues increased 36% to C$5.2 billion, compared to C$3.8 billion in the same period of fiscal 2010. These increases reflect strong commodity prices, record shipments through the southern Australia operation and solid results from the pasta and oat processing businesses purchased in the latter half of fiscal 2010. These factors also increased gross profit over the prior year to C$324 million (2010 - C$270 million) for the quarter and to C$736 million (2010 - C$546 million) for the first six months of the year.

The Grain Handling and Marketing segment generated C$122 million in EBITDA for the quarter compared to C$74 million in the second quarter of last year. On a year-to-date basis, EBITDA was C$320 million compared to C$183 million a year earlier. The majority of these increases relate to Viterra's Australian operations that contributed C$66 million in the quarter (2010 - C$22 million) and C$180 million (2010 - C$86 million) for the first six months of the fiscal year on stronger shipments, additional storage and handling revenues and increased domestic merchandising margins. North American quarterly EBITDA of C$58 million versus C$44 million last year benefited from increased merchandising and blending opportunities, an increase in higher margin pulse sales, as well as additional shipments through the Prince Rupert Grain terminal. The International Grain group had an EBITDA loss in the second quarter of C$2 million as a result of global events including the earthquake and tsunami in Japan and political unrest in the Middle East, which caused extreme commodity price volatility. The group mitigated the impact of these events by employing effective risk management and hedging strategies to reduce positions consistent with the company's risk tolerance levels. EBITDA results from the International Grain group for the first six months totaled C$31 million.

In Viterra's Agri-products segment, EBITDA for the second quarter was C$21 million down from the C$30 million reported a year ago due to timing differences caused by late seeding in North America. For the first six months of the fiscal year, EBITDA was C$30 million compared to C$18 million in fiscal 2010, a result of strong fertilizer pricing.

The Processing segment's EBITDA was C$23 million for the second quarter and on par with the same period last year. Viterra's North American food processing contributed C$15 million, while the company's Australian malt and global feed operations contributed C$7 million and C$2 million, respectively. On a year-to-date basis, the segment's EBITDA was C$64 million, compared to C$46 million a year earlier. The new pasta and oat processing businesses added C$30 million while the company experienced weaker year-over-year results from Viterra's Australian malt operation, canola processing and feed operations due to short-term challenges in each of these industries.

Viterra generated quarterly cash flow provided by operations of C$94 million or C$0.25 per share compared to C$51 million or C$0.14 per share in the second quarter of last year. This brings the year-to-date cash flow provided by operations to C$279 million versus C$111 million during the same period in fiscal 2010. Free cash flow doubled, rising to C$53 million (2010 - C$26 million) for the quarter and C$197 million (2010 - C$59 million) for the first six months of fiscal 2011.

In South Australia, the company expects shipments to remain strong given the significant crop in storage, the favorable commodity pricing environment and strong demand. To complement the 8.5 million tonnes, which were received into our system during the first half of fiscal 2011, there was approximately 1.2 million tonnes of carry-in stocks from fiscal 2010. Viterra currently estimates carry-over stocks into fiscal 2012 for the company’s Australian system to range between 2 to 3 million tonnes.

In North America, according to the Canadian Grain Commission (CGC), Canadian bulk grain exports for the six major grains (which excludes corn and rye), for the first nine months of the crop year (Aug. 1 to May 1), were 20.8 million tonnes, compared to the 21.4 million tonnes exported during the same period in crop year 2010. Export strength is anticipated to continue. This is due to strong demand created by supply difficulties in other grain growing regions, robust global pricing for commodities and the continuing drawdown of western Canadian carry-over stocks.

The company now estimates that CGC marketings will be about 31 to 32 million tonnes for the 12 months ended October 31, 2011.

The company confirms its global pipeline margin per tonne guidance of C$33 to C$36 per tonne, which will include a full year of gross profit contributions from the International Grain group.

From a regulatory perspective in Canada, the majority conservative government recently announced it intends to provide western Canadian producers with marketing choice for wheat, durum and barley, which will eliminate the Canadian Wheat Board's (CWB) monopoly control and allow it to coexist with the grain trade. Current indications are that the Government will introduce legislative changes which will take effect as of August 2012. However, it is early in the process and few details are available on how this outcome will be achieved.

Viterra is supportive of the government's direction and is confident in the company’s ability to operate effectively in an open wheat and barley market, to serve the needs of farmers, other industry participants, and the new CWB. Viterra believes it has the necessary expertise today to provide these additional services to the industry. The company said it is committed to working with the government, industry and the CWB to ensure the Canadian grain industry remains a vibrant and competitive source for agricultural products, and it intends to actively participate in the process to promote an orderly transition with positive, sustainable change for the benefit of the western Canadian agricultural industry.

The company expects stable contributions from the processing segment for the remainder of fiscal 2011 and the combined annual food processing margin to range between C$90 to C$110 per tonne.

Strong demand for whole grain, nutritional food ingredients and healthy, economical pasta products, is expected to support continued solid results from the oat and pasta processing businesses.

Continuing challenges in malt will remain due to excess capacity and sluggish beer sales in North America and Europe. The company believes its Australian malt margins will remain compressed, below pre-recession levels, for the remainder of fiscal 2011. However, the company remains confident in the long-term outlook for this industry.

In addition, margin challenges in canola and feed products are expected to continue in the near term. Viterra noted its management is taking steps to mitigate the effects of these issues.
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