Viterra Inc. (TSX:VT) (ASX:VTA) ("Viterra") today announced exceptional first
quarter financial results with EBITDA of $211 million compared to $90 million in
the same quarter last year.
Results were driven by Viterra's Australian operations. South Australia
harvested a record crop during the quarter and contributed $116 million to
EBITDA compared to $67 million one year ago. In North America, strong quarterly
fertilizer pricing and sales, and contributions from the pasta and oat
processing businesses acquired in the second half of fiscal 2010 also increased
EBITDA.
All segments posted earnings improvements. Net earnings rose to $100 million
compared to $11 million in the first quarter of 2010.
Financial Highlights
(in thousands - except per share items) Three Months
ended January 31, Better
2011 2010 (Worse)
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Sales and other operating revenues $ 2,470,537 $ 1,784,525 $ 686,012
Gross profit and net revenues
from services 411,622 276,093 135,529
EBITDA (1) 211,263 89,768 121,495
Net earnings 99,623 10,653 88,970
Earnings per share $ 0.27 $ 0.03 $ 0.24
Cash flow provided by operations (1) 185,260 60,147 125,113
Per share $ 0.50 $ 0.16 $ 0.34
Free Cash Flow (1) 143,882 32,282 111,600
(1) See Non-GAAP Measures in Section 11.0 of the attached Management's
Discussion and Analysis
"Viterra had a strong first quarter, reflecting the value inherent in the
integrated model that we have created that combines the benefits of grain and
oilseeds origination globally with an international marketing base that is
positioned to capture opportunities in response to market imbalances," stated
Mayo Schmidt, Viterra's President and Chief Executive Officer. "Our value chain
maximizes shareholder returns and we are pleased to have delivered first quarter
earnings of $0.27 per share, a sharp increase from the $0.03 per share we earned
one year ago. With tightening supply and demand fundamentals, rising commodity
prices and the associated food security issues that are now at the forefront for
many nations, we recognize the importance of agriculture in the global economy
and the role that Viterra plays in delivering quality ingredients to customers
around the world."
Consolidated sales and other operating revenues for the quarter increased 38% to
$2.5 billion compared to $1.8 billion in the first quarter of fiscal 2010. In
addition to the record crop in South Australia, higher fertilizer pricing and
strong margins from food processing in North America drove gross profit and net
revenues from services ("gross profit") to $412 million compared to $276 million
in the first quarter of fiscal 2010.
The Company generated quarterly cash flow provided by operations of $185 million
or $0.50 per share compared to $60 million or $0.16 per share in the first
quarter of last year. Free cash flow also increased significantly to $144
million compared to $32 million in fiscal 2010.
Harvest Update
The western Canadian harvest was essentially complete by the end of November
2010. Production for the six major grains is estimated to be 45.0 million
tonnes, down from the 10-year normalized average of 49.0 million tonnes and
about 15% lower than the 2009 crop that produced 52.8 million tonnes of grains
and oilseeds.
In South Australia, harvest was substantially complete at the end of February
and production is estimated at 9.8 million tonnes for 2011, according to the
Australian Bureau of Agricultural and Resource Economics and Sciences' February
15, 2011 crop report. This is the largest crop on record, exceeding the previous
record of 8.9 million tonnes and representing a 38% increase over last year's
production of 7.1 million tonnes. The 10-year average for South Australia is
approximately 6.0 million tonnes.
Outlook
Grain Handling and Marketing
Management anticipates Canadian Grain Commission receipts for the six major
grains in Western Canada to be about 31.0 million tonnes for the 12 months ended
October 31, 2011, up from its previous estimate of 30.0 million tonnes.
Management confirmed its global pipeline margin per tonne guidance of $33 to $36
per tonne, which will include a full year of gross profit contributions from the
International Grain group. Factors supporting this guidance include:
- Strong shipments out of South Australia throughout the next two quarters given
the significant crop in storage, the favourable commodity pricing environment
and production issues in other grain growing regions of the world.
- Continued export strength out of North America 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.
Management expects that the Canadian Wheat Board's estimated 17.4 million tonne
export target for wheat and barley out of Canada for the 2011 crop year is
achievable.
Agri-products
In fiscal 2011, several trends are expected to continue to support strong
fundamentals in the Agri-products segment including:
- Strong demand for fertilizer in Western Canada due to improved commodity
prices and increased nutrient requirements caused by excess moisture in 2010 and
2011. For fiscal 2011, Management continues to expect that its blended
fertilizer margin will be in the range of $100 to $120 per tonne.
- Increased demand for canola seeded acreage as a result of higher oilseed
prices. Assuming good spring seeding conditions, Management currently estimates
that seeded acres of canola will increase to approximately 18.0 to 19.0 million
acres in 2011 versus about 16.8 million acres in 2010.
These strong fundamentals may be somewhat tempered by an expected reduction in
western Canadian seeded acreage in 2011. Management has not changed its view
that seeded acreage will decrease by approximately 3.0 to 4.0 million acres
below the 10-year average of 60.0 million acres. However, excess moisture last
year, coupled with above average snowfall in certain areas of Western Canada
this winter, does pose some additional risk, should flooding occur entering the
spring planting period.
Processing
Management expects solid contributions from the Processing segment to continue
throughout fiscal 2011 and the combined annual food processing margin to range
between $90 to $110 per tonne. This is being driven by:
- Strong demand for whole grain, nutritional food ingredients, and
- Strong demand for healthy and economical pasta products given the tepid U.S.
recovery.
Management expects these gains will in part be offset by its malt operations
that face some temporary challenges due to excess capacity. Management, however,
remains confident in the long-term outlook for the malt processing industry.
First Quarter Segment Highlights
The following table provides various key financial highlights for the first
quarter ended January 31, 2011 compared to January 31, 2010. The Company's
unaudited Consolidated Financial Statements and accompanying Management
Discussion & Analysis ("MD&A") for the three months ended January 31, 2011 are
incorporated fully into this news release. Readers are encouraged to review the
following pages for a full description of the Company's current financial
performance. Viterra will be hosting a conference call for interested parties on
March 9, 2011 at 1:15 p.m. ET (11:15 a.m. MT) to discuss its first quarter
financial results. Details are available on Viterra's website, under Newsroom at
www.viterra.com.
First Quarter Segment Highlights
(in thousands - except margins) Three Months
ended January 31, Better
(Unaudited) 2011 2010 (Worse)
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Grain Handling and Marketing Segment
Gross profit and net revenues
from services $ 298,441 $ 201,699 $ 96,742
EBITDA (1) 197,762 109,679 88,083
Sales and other operating revenues 1,942,634 1,343,208 599,426
Operating Highlights (tonnes) :
North American Shipments 3,474 3,576 (102)
Australian Receivals 8,238 6,161 2,077
Total pipeline 11,712 9,737 1,975
Consolidated pipeline margin
(per tonne) $ 25.48 $ 20.71 $ 4.77
Agri-products Segment
Gross profit and net revenue
from services $ 53,557 $ 32,599 $ 20,958
EBITDA (1) 9,296 (11,934) 21,230
Sales and other operating revenues 292,571 215,363 77,208
Fertilizer 174,979 120,567 54,412
Crop Protection 5,222 4,092 1,130
Seed 1,120 578 542
Wool 95,503 68,739 26,764
Financial Products 3,670 4,763 (1,093)
Equipment sales and other revenue 12,077 16,624 (4,547)
Fertilizer volume (tonnes) 373 310 63
Fertilizer margin (per tonne sold) $ 98.71 $ 57.05 $ 41.66
Processing Segment
Gross profit and net revenue from
services $ 59,624 $ 41,795 $ 17,829
EBITDA (1) 40,356 23,186 17,170
Sales and other operating revenues 373,910 307,977 65,933
Processing sales volumes (tonnes)
Malt (2) 126 127 (1)
Pasta 54 - N/A
Oats 103 54 49
Canola 38 59 (21)
Combined food processing margin
(per tonne sold) $ 147.36 $ 97.01 $ 50.35
Feed sales volumes (tonnes)
North America 447 538 (91)
New Zealand 43 35 8
Combined feed processing margin
(per tonne sold) $ 25.15 $ 32.31 $ (7.16)
(1) See Non-GAAP Measures in Section 11.0 of the attached Management's
Discussion and Analysis
(2) Includes contributions from Viterra's 42% ownership interest in Prairie
Malt and its wholly owned Australian malt business
Forward-Looking Statements
Certain statements in this news release are forward-looking statements that
reflect Viterra's expectations regarding future results of operations, financial
condition and achievements. All statements included or incorporated by reference
in this news release that address activities, events or developments that
Viterra or its Management expects or anticipates will or may occur in the
future, including such things as growth of its business and operations,
competitive strengths, strategic initiatives, planned capital expenditures,
plans and references to future operations and results, critical accounting
estimates and expectations regarding future capital resources and liquidity of
Viterra and other such matters, are forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance and achievements of
Viterra to be materially different from any future results, performance and
achievements expressed or implied by those forward-looking statements. The risks
include, but are not limited to, those factors discussed in Viterra's MD&A for
the year ended October 31, 2010 under the heading "Risks and Risk Management".
This MD&A can be found on Viterra's website at www.viterra.com as well as on
SEDAR at www.sedar.com under Viterra Inc.
About Viterra
Viterra provides premium quality ingredients to leading global food
manufacturers. Headquartered in Canada, the global agri-business has extensive
operations across Canada, the United States, Australia, and New Zealand. Our
growing international presence also extends to offices in Japan, Singapore,
China, Switzerland, Italy, Ukraine, Germany and India. Driven by an
entrepreneurial spirit, we operate in three distinct businesses: grain handling
and marketing, agri-products, and processing. Viterra's expertise, close
relationships with producers, and superior logistical assets allow the Company
to consistently meet the needs of the most discerning end-use customers, helping
to fulfill the nutritional needs of people around the world.
VITERRA
MANAGEMENT'S DISCUSSION AND ANALYSIS
JANUARY 31, 2011
1.0 Responsibility for Disclosure
Management's Discussion and Analysis ("MD&A") was prepared based on information
available to Viterra Inc. (referred to herein as "Viterra" or the "Company") as
of March 8, 2011. Management prepared this report to help readers interpret
Viterra's unaudited Consolidated Financial Statements for the three months ended
January 31, 2011.
Please read this report in conjunction with the audited Consolidated Financial
Statements and MD&A contained in the Company's Annual Financial Review for the
year ended October 31, 2010, which is available on Viterra's website at
www.viterra.com, as well as on SEDAR at www.sedar.com, under Viterra Inc.
This MD&A and the unaudited Consolidated Financial Statements for the three
months ended January, 31, 2011 have been prepared in accordance with Canadian
Generally Accepted Accounting Principles ("GAAP") and are presented in Canadian
dollars unless specifically stated to the contrary.
2.0 Company Overview
Viterra is a vertically integrated global agri-business headquartered in Canada.
The Company was founded in 1924 and has extensive operations across Western
Canada and Australia, with facilities in the United States ("U.S.") and New
Zealand. Viterra has offices in Canada, the U.S., Australia, New Zealand, Japan,
Singapore, China, Switzerland, Italy, Ukraine, Germany, and India.
As a major participant in the value-added agri-food supply chain, the Company
operates in three interrelated segments, including Grain Handling and Marketing,
Agri-products, and Processing. Geographically, Viterra's operations are
diversified across Canada (primarily in Western Canada), Australia, New Zealand
and throughout the U.S. Viterra wholly owns pasta production, malt production,
oat milling, canola processing and livestock feed manufacturing operations.
Viterra's North American operations also participate in malt production through
a 42% ownership interest in Prairie Malt Limited ("Prairie Malt") and in
fertilizer manufacturing through its 34% ownership in Canadian Fertilizers
Limited ("CFL").
Viterra is also involved in other commodity-related businesses through strategic
alliances and supply agreements with domestic and international grain traders
and food processing companies. The Company markets commodities directly to
customers in more than 50 countries around the world.
On May 5, 2010, Viterra completed the acquisition of Dakota Growers Pasta
Company, Inc. ("Dakota Growers"), a U.S.-based durum miller and leading producer
and marketer of dry pasta products in North America. Dakota Growers' financial
contributions are included in Viterra's results as of May 5, 2010.
On August 17, 2010, Viterra completed the acquisition of 21C Holdings, L.P.
("21st Century") a premier U.S.-based processor of oats, wheat and custom-coated
grains. Contributions from this business are included in Viterra's results
beginning in the fourth quarter of fiscal 2010.
Viterra's shares trade on the Toronto Stock Exchange ("TSX") under the symbol
"VT" and its CHESS Depositary Interests trade on the Australian Securities
Exchange ("ASX") under the symbol "VTA".
3.0 Summary and Analysis of Consolidated Results
Selected Consolidated Financial Information
(in thousands - except per share amounts) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Sales and other operating revenues $ 2,470,537 $ 1,784,525 $ 686,012
----------------------------------------------------------------------------
Gross profit and net revenues
from services $ 411,622 $ 276,093 $ 135,529
Operating, general and
administrative expenses (200,359) (186,325) (14,034)
----------------------------------------------------------------------------
EBITDA (1) 211,263 89,768 121,495
Amortization (49,264) (38,825) (10,439)
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EBIT (1) 161,999 50,943 111,056
Integration expenses (511) (979) 468
Gain (loss) on disposal of assets 843 (366) 1,209
Financing expenses (28,931) (37,231) 8,300
----------------------------------------------------------------------------
133,400 12,367 121,033
Recovery of (provision for)
corporate taxes
Current (1,029) 4,007 (5,036)
Future (32,748) (5,721) (27,027)
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Net earnings $ 99,623 $ 10,653 $ 88,970
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Earnings per share $ 0.27 $ 0.03 $ 0.24
(1) See Non-GAAP Measures in Section 11.0
Consolidated sales and other operating revenues for the first quarter of fiscal
2011 increased 38% to $2.5 billion compared to $1.8 billion in the first quarter
of fiscal 2010. A record crop in South Australia, strong fertilizer pricing and
sales and continued solid results from the Company's new pasta and oat
processing businesses bolstered sales for the quarter. These same factors drove
gross profit and net revenues from services ("gross profit") to $411.6 million
compared to $276.1 million in the same quarter last year.
Operating, general and administrative ("OG&A") expenses were $200.4 million
compared to $186.3 million in the first quarter of last year. The increase
primarily reflects the additional seasonal labour required by Viterra's
Australian operations to handle the record crop, a full complement of costs for
the International Grain group, which was not fully established by this time last
year, and costs related to the new pasta and oat milling businesses.
EBITDA (see Non-GAAP Measures in Section 11.0) was up significantly to $211.3
million for the quarter versus $89.8 million in the first quarter of fiscal
2010. All segments posted earnings improvements, with the majority of the
increase coming from the Australian grain handling and marketing business and
the International Grain group, followed by the North American agri-products
operation.
For further information on segment performance, see Section 4.0 Segment Results.
Amortization for the three months ended January 31, 2011 was $49.3 million
compared to $38.8 million in the same three-month period in fiscal 2010. The
increase relates to the finalization of the purchase price allocations for ABB
Grain Ltd. ("ABB"), Dakota Growers and 21st Century.
EBIT (see Non-GAAP Measures in Section 11.0) was $162.0 million for the quarter,
compared to $50.9 million in the first quarter of fiscal 2010.
Financing Expenses
(in thousands) Three Months
ended January 31,
2011 2010 Change
----------------------------------------------------------------------------
Interest on debt facilities $ 28,487 $ 38,565 $ 10,078
Interest accretion 521 915 394
Amortization of deferred
financing costs 1,340 1,659 319
----------------------------------------------------------------------------
Financing costs 30,348 41,139 10,791
Interest income (1,119) (3,490) (2,371)
CWB carrying charge recovery (298) (418) (120)
----------------------------------------------------------------------------
Total financing and associated
expenses $ 28,931 $ 37,231 $ 8,300
----------------------------------------------------------------------------
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As noted in the table above, financing expenses were $28.9 million for the first
quarter of fiscal 2011, net of interest income and Canadian Wheat Board ("CWB")
carrying charge recoveries. This compares to financing expenses of $37.2 million
in the same period of fiscal 2010. The majority of the decrease relates to lower
long-term debt. Long-term debt was $891.4 million at January 31, 2011 $376.5
million lower than the prior year. After adjusting for interest income,
financing expenses decreased by $10.8 million in the first quarter of fiscal
2011.
Viterra recorded a net corporate income tax provision of $33.8 million in the
three-month period ended January 31, 2011, compared to $1.7 million in the same
period of fiscal 2010. In the first quarter of fiscal 2011, the company had an
effective tax rate of 25.3%.
Viterra's first quarter net earnings were $99.6 million or $0.27 per share,
which compares to $10.7 million or $0.03 per share in the same three-month
period last year.
3.1 Select Quarterly Information
Select Quarterly Financial Information
For the quarters ended
(in millions - except per share amounts)
January 31, October 31, July 31, April 30,
2011 Q1(1) 2010 Q4(1) 2010 Q3(1) 2010 Q2(1)
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Sales and other operating
revenues $ 2,470.5 $ 1,951.7 $ 2,493.2 $ 2,026.9
Net earnings (loss) $ 99.6 $ 52.7 $ 63.5 $ 18.4
Basic earnings per share $ 0.27 $ 0.14 $ 0.17 $ 0.05
Diluted earnings per share $ 0.27 $ 0.14 $ 0.17 $ 0.05
January 31, October 31, July 31, April 30,
2010 Q1(1) 2009 Q4(2) 2009 Q3 2009 Q2
----------------------------------------------------------------------------
Sales and other operating
revenues $ 1,784.5 $ 1,417.1 $ 2,223.5 $ 1,609.1
Net earnings (loss) $ 10.7 $ (0.9) $ 120.7 $ 26.3
Basic earnings per share $ 0.03 $ - $ 0.51 $ 0.11
Diluted earnings per share $ 0.03 $ - $ 0.51 $ 0.11
(1) Includes results for Viterra's Australian operations.
(2) Includes results for Viterra's Australian operations from September 24,
2009 to October 31, 2009.
A discussion of the factors that have caused variations over the quarters is
found in Sections 6.1 and 6.2 of the MD&A for the fiscal year ended October 31,
2010 and Section 4.0 Segment Results below. These sections discuss, among other
things, the trends and seasonality of the Company's three operating segments:
Grain Handling and Marketing, Agri-products and Processing.
4.0 Segment Results
4.1 Grain Handling and Marketing
The Grain Handling and Marketing operations accumulate, store, transport and
market grains, oilseeds, pulses and special crops. This business includes grain
storage facilities and processing plants strategically located in the prime
agricultural growing regions of North America and Australia. This segment also
includes wholly owned port export terminals located in Canada and Australia. The
International Grain group, through its sales offices, handles the merchandising
of grains and oilseeds between origination and offshore destination customers.
In addition, the International Grain group sources commodities from locations
where Viterra has no accumulation and storage assets.
Seasonality
Receipts and subsequent shipments in any given fiscal year are dependent upon
production levels and carry-over stocks from the prior year. Grain flows can
fluctuate depending on global demand, crop size, prices of competing
commodities, as well as other factors noted in the following discussion on
volumes and shipments. In North America, grain shipments are fairly consistent
from quarter to quarter, as are port terminal activities off the west coast. At
Thunder Bay, shipments through the Company's port terminals end in late
December, when the St. Lawrence Seaway is closed for the winter months and
typically resume near the end of April.
In South Australia, the majority of grain flows into the system during the first
quarter as this is the harvest period, which begins in October and continues
through until the end of January. During the second quarter, the operations
typically receive the last of the grower grain deliveries, with the exception of
a small amount that remains on-farm. Viterra owns and operates approximately 95%
of South Australia's storage and all of its port terminal capacity. The grain
that is delivered into the Company's grain storage and handling facilities is
classified and blended in preparation for export. Viterra and other marketers
then buy these grains and oilseeds and market them directly to destination
customers. Shipping from the Company's port terminals typically commences in
harvest and continues throughout the year. Income is derived from storage and
handling fees including receivals and monthly carrying and out-turn (shipping)
fees. Additional income is derived through handling and shipping of non-grain
commodities year-round from select port terminals.
In addition, the Company's International Grain group earns merchandising margins
for commodities that it acquires from third parties and sells to destination
customers around the world.
Industry Receivals and Shipments
The western Canadian harvest was essentially complete by the end of November
2010. Production for the six major grains is estimated to be 45.0 million
tonnes, below the 10-year normalized average of 49.0 million tonnes and about
15% lower than the 2009 crop that produced 52.8 million tonnes.
In the first quarter of fiscal 2011, western Canadian industry shipments of the
six major grains totaled 7.7 million tonnes compared to 8.1 million tonnes
during the first quarter of fiscal 2010.
South Australian production for 2011 is estimated at 9.8 million tonnes,
according to the Australian Bureau of Agricultural and Resource Economics and
Sciences' February 15, 2011 crop report. This would be the largest crop on
record, exceeding the previous record of 8.9 million tonnes and representing a
38% increase over last year's production of 7.1 million tonnes. The 10-year
average for South Australia is approximately 6.0 million tonnes.
Viterra's North American Volumes
Viterra's shipments for the three months ended January 31, 2011 were 3.5 million
tonnes compared to 3.6 million tonnes in the first quarter of fiscal 2010.
Viterra shipped 1.5 million tonnes of CWB grains during the quarter, which is
down slightly from the prior year due to the timing of the export program. Open
market grain shipments increased slightly, reflecting strong demand from
Asian-Pacific countries. Viterra's split between CWB grains and open market
grain shipments for the quarter was 42/58, compared to a 50/50 split in the
first quarter of last year, which will likely equalize over the balance of the
year.
Viterra's port terminal receipts were 2.4 million tonnes, about the same level
as in the first quarter of 2010, with approximately 84% moving to west coast
port terminals in the quarter to support continued strong demand from
Asian-Pacific countries. Port terminal volumes to the Company's Thunder Bay
assets were 16% of the total.
Viterra's South Australia Volumes
Viterra's Australian Volume Three Months
(in thousands of tonnes) ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Total shipments 1,627 635 992
Merchandised volumes
South Australia 621 290 331
Rest of Australia 668 1,110 (442)
----------------------------------------------------------------------------
Total merchandised volumes 1,289 1,400 (111)
Viterra's South Australian operation received 8.2 million tonnes of grains,
oilseeds and special crops into its system in the first quarter of fiscal 2011.
This represents a 34% increase over the first quarter of fiscal 2010 when the
Company received 6.2 million tonnes.
The Company had a very strong shipping program in place for the first quarter
and moved 1.6 million tonnes through its South Australia port terminals compared
to 0.6 million tonnes in the first quarter of last year. High commodity prices,
strong demand and the need for storage due to the record crop motivated both
growers and Viterra to ship a significant amount of grain during the quarter. Of
the total shipments out of South Australia, Viterra purchased approximately 38%
for its own account.
Operating Results
Grain Handling and Marketing
(in thousands - except margins) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Gross profit and net revenues from
services $ 298,441 $ 201,699 $ 96,742
Operating, general and
administrative expenses (100,679) (92,020) (8,659)
----------------------------------------------------------------------------
EBITDA (1) 197,762 109,679 88,083
Amortization (25,608) (18,108) (7,500)
----------------------------------------------------------------------------
EBIT (1) $ 172,154 $ 91,571 $ 80,583
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Total sales and other operating
revenues $ 1,942,634 $ 1,343,208 $ 599,426
North American Industry Statistics
(tonnes)
Canadian Industry Receipts
- six major grains 8,277 8,254 23
Canadian Industry Shipments
- six major grains 7,730 8,064 (334)
Canadian Industry Terminal Receipts 5,645 5,693 (48)
Viterra - North American Operations
(tonnes)
Elevator receipts 3,632 3,585 47
Elevator shipments 3,474 3,576 (102)
Port terminal receipts 2,378 2,410 (32)
Viterra - Australian Operations (tonnes)
Shipments 1,627 635 992
Receivals 8,238 6,161 2,077
Consolidated Global Pipeline (tonnes)
North American shipments 3,474 3,576 (102)
Australian receivals 8,238 6,161 2,077
---------------------------------------------------------------------------
Total pipeline 11,712 9,737 1,975
Consolidated pipeline margin
(per tonne) $ 25.48 $ 20.71 $ 4.77
(1) See Non-GAAP Measures in Section 11.0
Gross profit for the Grain Handling and Marketing segment totaled $298.4 million
and was up 48% or $96.7 million over the first quarter of last year. A
significant portion of this increase was due to the performance of Viterra's
Australian operations for the quarter.
The International Grain group had a strong quarter as a result of its ability to
leverage Viterra's global commodity and communications pipelines in order to
capitalize on rapidly changing market dynamics for the Company's core
commodities. This group's activities are driven by opportunities that arise in
the market and its ability to optimize Viterra's commodity flow around the
world. As such, results can fluctuate quarter over quarter depending upon
varying market dynamics. Throughout fiscal 2010, as Viterra's international
sales offices opened around the world, the associated export commodity positions
became the responsibility of the International Grain group. Earnings from those
sales are now recorded as contributions from that group rather than being
included within North American and Australian results as was the case in the
first quarter of fiscal 2010.
Gross profit was also positively impacted by improved North American margins
that benefited from increased merchandising and blending opportunities,
attributable to market volatility, higher commodity prices and increased pulse
crop volumes.
On a consolidated basis, gross margins were $25.48 per tonne compared to $20.71
per tonne in the first quarter of fiscal 2010. South Australia first quarter
margins reflect the majority of the receival margin that is generated from
harvest activity, together with margins earned on the 1.6 million tonnes shipped
during the quarter. Margins on the remaining crop derived from storage, shipping
and merchandising will materialize through the rest of the year. As a result,
Viterra's consolidated gross margin per tonne builds across the quarters and
should be viewed on an annual basis. Management continues to expect its global
pipeline margin to be in the $33 to $36 per tonne range. This margin will
include a full year of gross profit contributions from the International Grain
group, which is now fully established.
OG&A expenses for the Grain Handling and Marketing segment were $100.7 million
in the first quarter of fiscal 2011 compared to $92.0 million in the first
quarter of last year. The increase primarily relates to additional seasonal
labour hired in Australia to handle the record crop. OG&A expenses for the
Australian operation are typically the highest in the first quarter. Viterra
hired approximately 1,300 temporary employees to handle the harvest this year.
These additional costs normalized by mid-February. OG&A expenses also increased
quarter over quarter due to the full complement of International Grain group
costs, while North American OG&A expenses decreased slightly compared to the
prior year's quarter.
The Grain Handling and Marketing segment generated $197.8 million in EBITDA for
the quarter compared to $109.7 million in the first quarter of last year.
Viterra's Australian operations contributed $114.0 million versus $64.0 million
a year ago. The Company's North American operations contributed $50.5 million
compared to $44.4 million in the first quarter of fiscal 2010. These increases
reflect additional receival revenues in Australia and additional blending and
higher merchandising margins relative to last year, the result of an increasing
commodity price environment. The International Grain group contributed $33.3
million to EBITDA in the first quarter of fiscal 2011.
EBIT was $172.2 million in the first quarter of fiscal 2011, compared to $91.6
million in the first quarter of fiscal 2010.
Outlook
In South Australia, the Company expects shipments to be very strong throughout
the next two quarters given the significant crop in storage, the favourable
commodity pricing environment and production issues in other grain growing
regions of the world. To complement the 8.2 million tonnes, which has been
received into our system during the first quarter of fiscal 2011, there was
approximately 1.2 million tonnes of carry-in stocks from fiscal 2010. Management
currently estimates carry-over stocks into fiscal 2012 for the Company's
Australian system to range between 2.5 to 3.0 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 half of the crop year (August 1st to January 31st), were 14.1 million
tonnes, slightly ahead of the 14.0 million tonnes exported during the same
period in crop year 2010. Export strength is anticipated to continue, despite
lower than average production last fall. 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.
Management continues to believe that the CWB's estimated 17.4 million tonne
export target for wheat and barley out of Canada for the 2011 crop year is
achievable.
Management believes that CGC marketings will be about 31.0 million tonnes for
the 12 months ended October 31, 2011, up from its previous estimate of 30.0
million tonnes. This is a function of strong commodity prices and strong demand
for all marketed commodities, regardless of quality. This change is expected to
reduce the carry-out stocks to historical norms.
Globally, production setbacks in the European Union, somewhat in Canada and most
importantly, in the Black Sea region, have significantly altered the global
wheat production outlook. The United States Department of Agriculture estimates
that by the end of the 2011 crop year, the global stocks-to-use ratio for wheat
and coarse grains will be approximately 19%, a 4% drop from the end of 2010. As
demonstrated in the chart below, this tight supply situation is indicative of
both short-term supply difficulties in several key production regions and a
longer-term trend of tighter supplies for agri-commodities over the last decade.
Viterra will continue to watch these short and longer-term trends and look for
opportunities to capitalize on its position in the global marketplace.
To view a Global Stocks to Use Ratios - Wheat and Coarse Grains graph, please
visit the following link: http://media3.marketwire.com/docs/308vt_graph.jpg
4.2 Agri-products
Viterra operates a network of 261 agri-products retail locations throughout
Western Canada, which are geographically dispersed throughout the growing
regions of the Prairies. The Company's operations in Western Canada represent
approximately a 34% share of the market. Viterra has a 34% investment in
Canadian Fertilizers Limited ("CFL"), a nitrogen fertilizer manufacturing plant
in Medicine Hat, Alberta. The Company is entitled to receive 34% of
approximately 1.4 million tonnes of merchantable product, split between granular
urea and anhydrous ammonia ("NH3").
The segment includes contributions from the Company's financial products
business. Through Viterra Financial(TM), the Company acts as an agent for a
Canadian chartered bank. On behalf of the bank, Viterra extends unsecured and
secured trade credit at competitive rates to the Company's agri-products and
feed products customers. The repayment terms are structured to meet the
producers' cash flow needs. Viterra directly manages the customer relationship
and receives a fee for performing front-end customer review and credit
adjudication services. The profitability of this program relates to the level,
duration and quality of credit in a given period, which is influenced by crop
inputs, farm income levels, interest rates and, to a lesser extent, feed product
demand.
In Australia, Viterra operates 12 retail locations across South Australia,
through which it sells seed, fertilizer and crop protection products. The
Company also has five fertilizer warehouses in the region and has approximately
a 5% share of the combined southern and eastern Australian retail and wholesale
fertilizer business. As part of ongoing operations, Viterra operates a domestic
wool network extending across the agricultural areas of Western Australia, South
Australia and Victoria. Internationally, Viterra is the largest buyer of
Australian wool and an exporter to key markets such as China, India and Italy.
Seasonality
Retail sales of agri-products are seasonal and correlate directly to the life
cycle of the crop. About 60% of Viterra's annual agri-products sales are
typically generated during the third quarter as producers purchase crop inputs
such as seed, fertilizer and crop protection products. Only about 10% to 12% of
agri-products sales occur during the first quarter of each fiscal year. However,
during this period Viterra receives prepayments from farm customers who want to
order a portion of their agri-product requirements for the following spring.
Actual sales are recorded when product is delivered. Seed bookings, prepayments
and discussions with customers provide Viterra with an early indication of
seeding intentions. In Australia, few agri-products sales occur in the first
quarter as growers are harvesting their crop. Most crop inputs are purchased
during the seeding period, which begins in April and extends into June, with
additional sales occurring throughout the growing season to support crop
development.
Operating Results
Agri-products
(in thousands - except margins) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Gross profit and net revenues from
services $ 53,557 $ 32,599 $ 20,958
Operating, general and administrative
expenses (44,261) (44,533) 272
----------------------------------------------------------------------------
EBITDA (1) 9,296 (11,934) 21,230
Amortization (9,002) (11,182) 2,180
----------------------------------------------------------------------------
EBIT (1) $ 294 $ (23,116) $ 23,410
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Highlights
Sales and other operating revenues $ 292,571 $ 215,363 $ 77,208
Fertilizer 174,979 120,567 54,412
Crop Protection 5,222 4,092 1,130
Seed 1,120 578 542
Wool 95,503 68,739 26,764
Equipment sales and other revenue 12,077 16,624 (4,547)
Financial Products 3,670 4,763 (1,093)
Fertilizer volume (tonnes) 373 310 63
Fertilizer margin (per tonne) $ 98.71 $ 57.05 $ 41.66
----------------------------------------------------------------------------
(1) See Non-GAAP Measures in Section 11.0
Sales and other operating revenues for the Agri-products segment during the
first quarter of fiscal 2011 were $292.6 million, up 36% from sales of $215.4
million for the same three-month period of fiscal 2010. These strong results
were driven by fertilizer sales. Selling prices increased over the prior year
and volumes were up approximately 20% over the prior year's quarter. Fertilizer
volumes increased due to higher commodity prices and higher expected usage
rates, which has motivated certain farmers to take early delivery of product.
----------------------------------------------------------------------------
Consolidated Fertilizer Volumes by Quarter (in thousands of tonnes)
For the quarter ended
Fiscal year 31-Jan 30-Apr 31-Jul 31-Oct Total
----------------------------------------------------------------------------
2011 373 - - - 373
2010 310 371 699 370 1,750
----------------------------------------------------------------------------
Revenues from the Company's Australian wool business during the first quarter
were $95.5 million compared to $68.7 million a year ago. Wool prices have
rallied to their highest level in 30 years, reflecting tight global supply and
strong demand from international markets, including China and India.
Segment gross margins were up significantly to $53.6 million compared to $32.6
million in the first quarter of fiscal 2010. The increase relates mainly to
fertilizer margins that have increased to $98.71 per tonne in fiscal 2011
compared to $57.05 per tonne a year earlier. This is the result of higher
average selling prices and lower natural gas costs compared to the prior year.
For fiscal 2011, Management continues to expect that its fertilizer margin will
be in the range of $100 to $120 per tonne. However, quarterly gross margins per
tonne can vary outside this range due to product and customer mix and timing of
purchases for manufactured versus resale tonnes. The gross profit contribution
from financial products was $3.7 million compared to $4.2 million for the same
period last year.
OG&A expenses were $44.3 million for the first quarter and are on par with the
same period last year.
As a result of strong fertilizer volumes and margins, EBITDA for the quarter was
$9.3 million compared to a loss of $11.9 million in the first quarter of fiscal
2010. Quarterly EBITDA includes $3.5 million (2010 - $0.9 million) from the
Australia operations.
EBIT for the first quarter was $0.3 million versus a loss of $23.1 million in
the first quarter of fiscal 2010.
Outlook
In fiscal 2011, there are several trends which are expected to continue to
support strong fundamentals in the Agri-products segment.
For fertilizer, Management expects western Canadian demand to be strong due to
improved commodity prices and increased nutrient requirements caused by excess
moisture in 2010 and 2011. Early indicators support these expectations as
fertilizer movement to farm has been very strong in the first quarter of fiscal
2011 even with selling prices above last year's.
Demand for seed is also expected to be strong due to an expected increase in
canola seeded acreage driven by higher oilseed prices. Management currently
estimates 2011 seeded acres of canola will increase to approximately 18.0 to
19.0 million acres versus about 16.8 million acres in 2010, assuming good spring
seeding conditions.
As of January 31, 2011, North American retail customer prepayments were at
record levels of $338.9 million, a 24% increase over January 31, 2010
prepayments of $272.0 million. The increase was primarily due to strong seed and
fertilizer demand, as well as higher fertilizer prices.
These strong fundamentals may be somewhat tempered by an expected reduction in
western Canadian seeded acreage in 2011. Management has not changed its view
that seeded acreage will decrease by approximately 3.0 to 4.0 million acres
below the 10-year average of 60.0 million acres. However, excess moisture last
year, coupled with above average snowfall in certain areas of Western Canada
this winter, does pose some additional risk, should flooding occur as we enter
the spring period. Final seeded acreage numbers will be dependent upon
favourable weather conditions in the coming months.
4.3 Processing
Viterra's Processing segment is an important aspect of the Company's value
chain. Overall, this segment extends the Company's pipeline by producing food
ingredients for consumer products companies and food processors around the
world. This segment also consists of feed manufacturing operations that provide
feed and nutritional supplements to the feed industries, primarily in Canada,
the U.S. and New Zealand.
Viterra's North American food processing operations consist of oat and specialty
grain milling, pasta manufacturing, canola crushing and a 42% interest in
Prairie Malt, a single-site malt operation located in Saskatchewan. There are
four oat milling facilities with capacity to process 540,000 tonnes of raw oats
into 335,000 tonnes of food ingredients annually. The wheat flour mill operation
has the capacity to grind about 100,000 tonnes of grains into 75,000 tonnes of
flour and bran, while the two pasta manufacturing facilities have the capacity
to grind 340,000 tonnes of durum wheat and process 254,000 tonnes of pasta
annually. The Company's canola crush facility has the capacity to process
340,000 tonnes of canola into 323,000 tonnes of oil and meal on an annual basis.
In Australia, Viterra is the largest malt processor, operating eight processing
plants strategically positioned across Australia, with production capacity of up
to 500,000 tonnes annually. Approximately 400,000 tonnes are destined for export
markets and 100,000 tonnes are consumed domestically. Viterra supplies malt to
major domestic brewers and international brewers that predominantly supply the
Asian-Pacific region.
Viterra is a major player in the North American and New Zealand feed markets. In
Canada, feed manufacturing is conducted at six feed mills and one pre-mix
manufacturing facility. In the U.S., the operations include six feed mills and
commodity blending sites in Texas, Oklahoma, and New Mexico. The Company
distributes nearly 2.0 million tonnes of feed from its North American operations
annually.
In New Zealand, the Company has a presence across the feed supply chain, from
marketing and accumulation to storage, freight, milling and the sale of end-use
products. It is a key importer and distributor of grains and meals to the New
Zealand market. The Company operates three storage facilities in close proximity
to the prime dairy regions. It is involved in maize processing and also operates
a feed manufacturing and distribution business with four feed mills representing
sales of approximately 330,000 tonnes annually. During fiscal 2010, Viterra
commissioned its 180,000 tonne capacity feed mill in South Auckland.
Operating Results
Processing
(in thousands - except margins) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Gross profit and net revenues from
services $ 59,624 $ 41,795 $ 17,829
Operating, general and administrative
expenses (19,268) (18,609) (659)
----------------------------------------------------------------------------
EBITDA (1) 40,356 23,186 17,170
Amortization (12,246) (7,842) (4,404)
----------------------------------------------------------------------------
EBIT (1) $ 28,110 $ 15,344 $ 12,766
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales and other operating revenues $ 373,910 $ 307,977 $ 65,933
Operating Highlights - Food
Sales volumes (tonnes)
Malt (2) 126 127 (1)
Pasta 54 - N/A
Oats 103 54 49
Canola 38 59 (21)
Combined food processing margin
(per tonne sold) $ 147.36 $ 97.01 $ 50.35
Operating Highlights - Feed
Feed sales volumes (tonnes)
North America 447 538 (91)
New Zealand 43 35 8
Combined feed processing margin
(per tonne sold) $ 25.15 $ 32.31 $ (7.16)
----------------------------------------------------------------------------
(1) See Non-GAAP Measures in Section 11.0
(2) Includes contributions from Viterra's 42% ownership interest in Prairie
Malt and its wholly owned Australian malt business
Sales and other operating revenues for the Processing segment for the first
quarter were $373.9 million, up $65.9 million or 21% from the comparable period
of 2010. The year-over-year increase reflects new contributions from the pasta
and oat processing businesses that were acquired in the second half of fiscal
2010.
First quarter sales volumes for the pasta business were 54,000 tonnes and
reflect continued strong demand in the U.S. In the oat business, volumes nearly
doubled to 103,000 tonnes with the addition of the 21st Century oat business,
complementing strong sales from the existing oat operations.
Canola crush volumes were 36% lower than the prior year's quarter. The Company
temporarily reduced production during the quarter in an effort to mitigate the
impact of poor margins. A recent 45% increase in Canadian canola processing
capacity in Western Canada has depressed margins in the short-term. Viterra
continues to serve its customers and meet its contract requirements and will
adjust its production capacity to balance profitability with demand if and when
industry fundamentals improve.
Viterra's malt operations, which include the Company's 42% ownership interest in
Prairie Malt, generated sales of $64.9 million for the first quarter of fiscal
2011 compared to $86.2 million for the same period last year. While sales in
Canada were comparable year-over-year, in Australia sales from malt were down
due to lower volumes reflecting sluggish customer demand and softening world
malt prices. Despite these challenges, Viterra's grain business was able to
procure low raw material costs for its operations, which supported solid margins
for the quarter.
Quarterly gross profit from the food processing operations was $47.3 million,
more than double the first quarter of fiscal 2010 at $23.3 million due primarily
to the acquisitions completed in the prior year.
On a combined basis, gross margins for the food processing operations were
$147.36 per tonne compared to $97.01 per tonne a year ago. This increase is
primarily due to contributions from its new pasta and oat production facilities,
which produce higher margins. Lower canola margins partially offset these
positive contributions. Combined food processing margins can fluctuate by
quarter given product mix and the impact of supply and demand fundamentals. As
such Management maintains its annual guidance range of $90 to $110 per tonne for
fiscal 2011.
Viterra's feed products operations generated sales revenue of $158.9 million
compared to $159.9 million for the three months ended January 31, 2010.
Sales volumes for North American feed products were down to 447,000 tonnes for
the three months ended January 31, 2011, versus 538,000 tonnes in the first
quarter of 2010. Intense competition in the western Canadian market for poultry
and dairy feed and the impact on demand from lower swine and beef populations
were the primary factors. It is estimated that the Canadian feed manufacturing
industry has significant surplus capacity of approximately 50% in some regions
such as Alberta and Manitoba due to lower than historical animal populations. As
a result, competitors became more aggressive on pricing in the quarter.
In the U.S., volumes decreased about 5%, reflecting slower demand in the beef
and dairy markets, which has yet to see dairy producers increase their purchase
of complex feeds. In the New Zealand feed operations, sales volumes improved but
margins were down due to increased demand for lower margin products.
The combined feed operations gross profit declined to $12.3 million for the
first quarter of 2011, compared to $18.5 million a year ago. Gross margins per
tonne were $25.15 per tonne in the first quarter, compared to $32.31 per tonne a
year ago on lower sales volumes and margins.
OG&A expenses for the Processing segment were $19.3 million for the quarter
versus $18.6 million a year ago, reflecting the new pasta and oat businesses
purchased in the second half of fiscal 2010. This increase was partially offset
by lower costs in the North American operation due to integration work.
The Processing segment's EBITDA for the quarter was $40.4 million, up
significantly from the $23.2 million in the first quarter of fiscal 2010.
Viterra's new pasta and oats businesses were responsible for the majority of the
increase with $19.6 million in EBITDA contributions for the quarter, on a
combined basis. Viterra's Australian malt operation contributed $11.2 million
versus $8.3 million.
Segment EBIT was $28.1 million for the quarter compared to $15.3 million in the
first quarter of fiscal 2010.
Outlook
Management expects solid contributions from the Processing segment in fiscal
2011 The segment's performance reflects the benefits of the Company's
diversification strategy to grow its portfolio of food and feed ingredients
businesses.
Demand for whole grain, nutritional food ingredients is strong. With the
economic challenges facing North America, Management anticipates an increase in
private label/store brand ready-to-eat cereals and more consumption of oatmeal.
In addition, as fiscal 2011 progresses, Management believes the tepid recovery
in the U.S. will continue to support strong demand for pasta products, which are
healthy and economical.
In the Canadian canola processing operation, the increase in Canadian canola
crushing capacity last year has put pressure on margins and will continue to do
so in the near term. However, Management does expect a modest earnings
improvement in fiscal 2011. Prospects for this industry remain strong over the
longer term given ongoing demand for healthy oils. Viterra is pursuing the
opportunity to leverage its double expeller-press process by producing specialty
oils, Non-GMO and Hi Oleic oil, for the natural food market.
Global malt markets are expected to remain challenged in the near-term due to
sluggish beer sales in North America and Europe. This has created excess
capacity and has increased competition across the globe, which impacts industry
margins. For Viterra's malt operations in Australia, Management does not believe
demand will recover to pre-recession levels until at least the second half of
fiscal 2011. However, the Company remains confident in the long-term outlook for
this industry.
For the North American feed business, western Canadian operations will be
challenged by overcapacity, intense competition and margin compression in the
near-term. However, results are expected to improve with the addition of new
sales personnel and market strategies. In the U.S., the Company expects the
demand for complex feed products will increase in response to the recent surge
in short and medium-term milk futures pricing.
In the New Zealand feed market, the ongoing recovery in the global economy and
demand from Southeast Asia for dried milk products is driving higher milk prices
in this market. These trends are expected to move producers from commodity feeds
to higher margin complex feed products over time.
4.4 Corporate Expenses
Corporate Expenses
(in thousands) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Operating, general and administrative
expenses $ (36,151) $ (31,163) $ (4,988)
Amortization (2,408) (1,693) (715)
----------------------------------------------------------------------------
EBIT (1) $ (38,559) $ (32,856) $ (5,703)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See Non-GAAP Measures in Section 11.0
Corporate OG&A expenses were $36.2 million in the first quarter of fiscal 2011,
compared to $31.2 million in the first quarter of 2010 due to higher incentive
expenses related to short-term and stock-based compensation programs. In
addition, information technology expenses increased as Viterra enhanced its
global delivery requirements.
5.0 Liquidity and Capital Resources
5.1 Cash Flow Information
Cash Flow Provided by Operations (1)
(in thousands - except per share amounts) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
EBITDA (1) $ 211,263 $ 89,768 $ 121,495
Add (Deduct)
Employee future benefits 1,776 1,662 114
Other items 831 346 485
----------------------------------------------------------------------------
Adjusted EBITDA 213,870 91,776 122,094
Integration expenses (511) (979) 468
Cash interest expense (27,070) (34,657) 7,587
----------------------------------------------------------------------------
Pre-tax cash flow 186,289 56,140 130,149
Current income tax recovery (expense) (1,029) 4,007 (5,036)
----------------------------------------------------------------------------
Cash flow provided by operations (1) $ 185,260 $ 60,147 $ 125,113
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per share $ 0.50 $ 0.16 $ 0.34
(1) See Non-GAAP Measures in Section 11.0
For the three months ended January 31, 2011, cash flow provided by operations
(see Non-GAAP Measures in Section 11.0) increased by $125.1 million or $0.34 per
share. Improved cash flow in fiscal 2011 reflects higher EBITDA and lower cash
financing costs.
Free Cash Flow (1)
(in thousands) Three Months
ended January 31, Better
2011 2010 (Worse)
----------------------------------------------------------------------------
Cash flow provided by operations (1) $ 185,260 $ 60,147 $ 125,113
Property, plant and equipment
expenditures (38,757) (25,549) (13,208)
Intangible assets expenditures (2,621) (2,316) (305)
----------------------------------------------------------------------------
Free cash flow (1) $ 143,882 $ 32,282 $ 111,600
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See Non-GAAP Measures in Section 11.0
Free cash flow is measured by cash flow provided by operations less capital
expenditures and does not reflect changes in non-cash working capital (see
Non-GAAP Measures in Section 11.0). For the three months ended January 31, 2011,
free cash flow increased by $111.6 million to $143.9 million from the comparable
period of the prior year. The increase reflects improved EBITDA along with lower
cash interest expense, offset by additional capital expenditures on property,
plant and equipment.
5.2 Investing Activities
Viterra's property, plant and equipment expenditures for the three months ended
January 31, 2011 were $38.8 million compared to $25.5 million for the comparable
period of the prior year. Capital expenditures reflect a number of improvements
and upgrades undertaken in the ordinary course of business plus additional
bunker storage put in place in Australia to handle the record crop.
On an annualized basis, Viterra expects consolidated sustaining capital
expenditures will be approximately $130.0 to $140.0 million, which will be
funded by cash flow provided by operations.
5.3 Non-Cash Working Capital
Non-cash Working Capital
(in thousands)
As at January 31,
2011 2010 Change
----------------------------------------------------------------------------
Inventories $ 1,905,267 $ 1,119,914 $ 785,353
Accounts receivable 1,256,476 916,968 339,508
Prepaid expenses and deposits 205,583 242,955 (37,372)
Accounts payable and accrued
liabilities (1,487,912) (1,019,040) (468,872)
----------------------------------------------------------------------------
$ 1,879,414 $ 1,260,797 $ 618,617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Inventory levels at January 31, 2011 were up significantly to $1,905.3 million
compared with $1,119.9 million at January 31, 2010. The majority of the increase
related to grain inventory values due to higher commodity prices and a record
crop in South Australia. Viterra's Australian grain inventory values were $729.7
million at January 31, 2011 compared to $344.5 million at January 31, 2010.
Agri-product inventory also increased due primarily to higher levels of seed and
crop protection products, along with higher fertilizer prices, which were in
part, offset by lower fertilizer stocks on hand.
The Company's inventory value is significantly influenced by commodity prices in
the Grain Handling and Marketing segment and fertilizer prices in the
Agri-products segment. Generally, inventory reaches its peak in the January to
April months as harvest in Australia is completed and the North America
Agri-products business is building inventory for the high-volume spring sales
season.
Accounts receivable at January 31, 2011 were $1,256.5 million and $339.5 million
higher than at January 31, 2010. The increase primarily reflects higher
commodity prices and the addition of our pasta and oat processing businesses.
Prepaid expenses and deposits at January 31, 2011 were $205.6 million down from
$243.0 million on January 31, 2010.
Given the increase in inventory and accounts receivable, there was a
corresponding increase in short-term borrowings and accounts payable and accrued
liabilities during the quarter.
5.4 Financing Activities
Key Financial Information (1)
(in thousands - except ratios and percentages)
As at January 31,
2011 2010 Change
----------------------------------------------------------------------------
Cash and cash equivalents $ 288,767 $ 618,753 $ (329,986)
Total debt 1,668,289 1,432,893 235,396
Total debt, net of cash and cash
equivalents 1,379,522 814,140 565,382
Ratios
Current ratio 1.60 x 2.44 x (0.84 x)
Debt-to-total capital 30.6% 29.2% 1.4 pt
Long-term debt-to-capital 16.3% 25.8% (9.5 pt)
----------------------------------------------------------------------------
(1) See Non-GAAP Measures in Section 11.0
Viterra's balance sheet at January 31, 2011 remained strong with total
debt-to-capital of 30.6% (29.2% at January 31, 2010). Viterra had $288.8 million
in cash and cash equivalents and cash drawings of $771.7 million on its $1.6
billion unsecured revolving credit facility ("Global Credit Facility").
The increase in total debt, net of cash and cash equivalents, is primarily due
to increased drawings on the revolving operating lines used mainly to support
increased net non-cash working capital offset by lower long-term debt. As
explained below, a significant amount of cash was used to reduce debt during
2010.
Following are the long-term debt facilities that have been repaid since April
30, 2010 using proceeds from short-term borrowings and cash on hand:
CAD (in thousands)
----------------------------------------------------------------------------
Term Credit Facility $ 377,114
Viterra's Australian Operations 283,196
8% Senior Secured Notes Series 2006-1 100,000
----------------------------------------------------------------------------
Total long-term repaid subsequent to April 30, 2010 $ 760,310
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As a result of closing the Global Credit Facility and repaying of the term loan
Credit Facility, all security has been released on the Company's debt including
the Senior Unsecured Notes that remain outstanding.
On August 4, 2010, the Company issued a private placement of USD $400 million,
5.95% Senior Unsecured Notes, maturing August 1, 2020. Proceeds were used to
reduce borrowings under the Global Credit Facility and for general corporate
purposes.
On December 1, 2010, the Company declared a five-cent ($0.05) Canadian per share
dividend, which was paid on February 10, 2011 to holders of record on January
20, 2011. The annual dividend rate is currently intended to be ten cents ($0.10)
Canadian per share and will be reviewed semi-annually by the Board of Directors.
Subsequent to the quarter-end, on February 15, 2011, the Company issued $200
million, 6.406% Senior Unsecured Notes, maturing February 16, 2021. This
offering was made pursuant to the Company's short-form base shelf prospectus
dated August 6, 2010 and a prospectus supplement filed on February 10, 2011. The
proceeds will be used to partially repay drawings on its Global Credit Facility.
5.5 Debt Ratings
The following table summarizes the Company's current credit ratings:
----------------------------------------------------------------------------
Senior Unsecured
Corporate Rating Notes Trend
----------------------------------------------------------------------------
Standard & Poor's BBB- BBB- Stable
----------------------------------------------------------------------------
DBRS Limited BBB (Low) BBB (Low) Stable
----------------------------------------------------------------------------
Moody's Investors Service Ba1 Ba1 Stable
----------------------------------------------------------------------------
5.6 Contractual Obligations
The following table summarizes the Company's outstanding contractual
obligations as at January 31, 2011:
----------------------------------------------------------------------------
Contractual Obligations
(in thousands) Principal Payments Due by Period
----------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After
Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Balance Sheet
Obligations
Bank Indebtedness $ 50,160 $ 50,160 $ - $ - $ -
Short-term
borrowings 776,928 776,928 - - -
Long-term debt 906,647 2,092 1,736 300,667 602,152
Other long-term
obligations 97,550 24,593 26,821 10,943 35,193
----------------------------------------------------------------------------
1,831,285 853,773 28,557 311,610 637,345
----------------------------------------------------------------------------
Other Contractual
Obligations
Operating leases $ 123,383 $ 35,171 $ 47,568 $ 17,923 $ 22,721
Purchase
obligations (1) 1,803,704 1,784,780 14,867 2,918 1,139
----------------------------------------------------------------------------
1,927,087 1,819,951 62,435 20,841 23,860
----------------------------------------------------------------------------
Total Contractual
Obligations $ 3,758,372 $ 2,673,724 $ 90,992 $ 332,451 $ 661,205
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Substantially all of the purchase obligations represent contractual
commitments to purchase commodities and products for resale.
5.7 Off-Balance Sheet Arrangements
5.7.1 Viterra Financial
Viterra Financial(TM) provides grain and oilseed producers with secured and
unsecured working capital financing, through a Canadian chartered bank, to
purchase the Company's fertilizer, crop protection products, seed and equipment.
Outstanding credit was $417.1 million at January 31, 2011, compared to $393.2
million at January 31, 2010. Approximately 97% of the current outstanding credit
relates to Viterra Financial's(TM) highest credit rating categories. The Company
indemnifies the bank for 50% of future losses under Viterra Financial(TM) to a
maximum limit of 5% of the aggregate qualified portfolio balance. The Company's
aggregate indemnity will vary at any given time with the size of the underlying
portfolio. As at January 31, 2011, Viterra has provided $7.3 million for actual
and future expected losses.
Viterra Financial(TM) also provides livestock producers with secured and
unsecured financing through a Canadian chartered bank to purchase feeder cattle
and related feed inputs under terms that do not require payment until the
livestock are sold. Viterra Financial(TM) approved $90.9 million in credit
applications for Viterra's feed products customers in the first three months of
fiscal 2011, compared to $93.7 million in the first quarter of fiscal 2010.
Customers had drawn $50.9 million at January 31, 2011 (January 31, 2010 - $46.7
million). The Company has indemnified the bank for aggregate credit losses of up
to $11.5 million based on the first 20% to 33% of new credit issued on an
individual account as well as for credit losses, shared on an equal basis, of up
to 5% of the aggregate qualified portfolio balance. The Company's aggregate
indemnity will vary at any given time with the credit rating of underlying
accounts and the aggregate credit outstanding. As at January 31, 2011, the
Company had provided about $0.5 million for actual and expected future losses.
6.0 Outstanding Share Data
The market capitalization of the Company's 371.7 million issued and outstanding
shares at March 7, 2011 was $4.4 billion or $11.96 per share. The issued and
outstanding shares at March 7, 2011, together with securities convertible into
common shares are summarized in the following table:
As at March 7, 2011
----------------------------------------------------------------------------
Issued and outstanding common shares 371,685,244
Securities convertible into common shares - stock options 2,528,673
----------------------------------------------------------------------------
374,213,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As of January 31, 2011, there were 23.4 million CDIs which trade on the ASX.
7.0 Related Party Transactions
The Company has transactions with related parties in the normal course of
business measured at exchange amounts, which are comparable to commercial rates
and terms. Related parties include investee Prince Rupert Grain, as well as
grain pools operated by the Company.
There were no related party sales in the first quarter of fiscal 2011 (2010 -
$1.8 million) and total purchases from related parties were $5.0 million for the
same period in 2011 (2010 - $2.9 million). As at January 31, 2011, accounts
receivable from related parties totaled $11.2 million (2010 - $19.4 million) and
accounts payable to related parties totaled $16.4 million (2010 - $0.2 million).
Related party sales, purchases and balances are due mainly to grain shipping and
handling activities conducted through Prince Rupert Grain as well as marketing
activities conducted in operation of the grain pools.
8.0 Other Matters
8.1 Accounting Policy Changes
8.1.1 International Financial Reporting Standards
In February 2008, the Accounting Standards Board ("AcSB") announced that 2011 is
the changeover date for publicly accountable enterprises to replace current GAAP
with International Financial Reporting Standards ("IFRS"). The date relates to
interim and annual financial statements for fiscal years beginning on or after
January 1, 2011, which will be applicable for Viterra's first quarter of fiscal
2012. Viterra will also be required to provide IFRS comparative information for
the previous fiscal period and therefore recording under IFRS will commence on
Viterra's transition date, which was November 1, 2010.
Viterra has undertaken a project to assess and record the potential impacts of
its transition to IFRS.
Viterra has completed the Initial, Detailed Assessment and Design phases of its
project plan. Viterra has started the Execution phase which will culminate when
the Company issues its first IFRS interim financial statements for the quarter
ended January 31, 2012. For details on the key activities and the status of the
transition see Section 16.1.1 of the MD&A for the fiscal year ended October 31,
2010.
Progress made in the first quarter ending January 31, 2011 continues to track
the Company's communicated project plan and the focus in the second quarter will
be on the following key activities:
- Preparation of opening IFRS Balance Sheet
- Ongoing recording of IFRS adjustments for the comparative year
- The development of IFRS financial reports for both internal and external use
- Continuous monitoring and assessment of upcoming IFRS standards
- Communication and training
As communicated in Section 16.1.3 of the MD&A for the fiscal year ended October
31, 2010, we anticipated material opening balance sheet adjustments related to
IFRS 1 - First-time Adoption of International Financial Reporting Standards
elections for employee benefits and currency translation differences. In
relation to employee benefits the cumulative actuarial loss that will be
recorded in retained earnings is estimated to be $111.2 million. In relation to
currency translation differences, a cumulative unrealized gain of approximately
$112.3 million from foreign currency translation of foreign operations and net
investment hedges will be recorded in retained earnings.
No additional significant differences between GAAP and IFRS have been
identified. For details on the identified differences between GAAP and IFRS see
Section 16.1.2 of the MD&A for the fiscal year ended October 31, 2010.
As described in Section 16.1.3 of the MD&A for the fiscal year ended October 31,
2010 and referred to above, the Company has performed an assessment regarding
IFRS 1 - First-time Adoption of International Financial Reporting Standards.
There has been no significant changes to the expected elections or their impact.
As Viterra continues to monitor IFRS standards changed or issued there may be
changes to the Company's expectations regarding IFRS, IFRS 1 optional exemptions
and the expected IFRS accounting policies. In addition, Viterra may identify
circumstances or experience changes in its business that may have an impact on
these expectations.
8.2 Critical Accounting Estimates
In preparing the Company's Consolidated Financial Statements, Management is
required to make estimates, assumptions and judgments as to the outcome of
future events that might affect reported assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities. Such
assessments are made using the best information available to Management at the
time. Although Management reviews its estimates on an ongoing basis, actual
results may differ from these estimates as confirming events occur. The
following is an analysis of the critical accounting estimates that depend most
heavily on such Management estimates, assumptions and judgments, any changes
which may have a material impact on the Company's financial condition or results
of operations. For more information about certain assumptions and risks that
might affect these estimates, assumptions and judgments, refer to Section 13.0,
Forward-Looking Information.
8.2.1 Future Income Taxes
As at January 31, 2011, the Company had loss carry-forwards of approximately
$13.3 million, compared to $54.6 million at January 31, 2010. These loss
carry-forwards include losses for tax purposes for the current three month
period and are available to reduce income taxes otherwise payable in future
periods. Of these losses, $1.4 million will expire between 2013 and 2031, and
$11.9 million are not subject to expiry.
A short-term future income tax asset of $3.5 million has been recorded as at
January 31, 2011 in respect of the Company's unutilized losses. The Company
recognizes the future tax benefit in respect of its losses to the extent it is
more likely than not to be realized. No future tax benefit has been recognized
for $1.4 million of the Company's losses.
9.0 Restructuring and Integration Matters
Dakota Growers
Integration execution continues at Dakota Growers, following the acquisition on
May 5, 2010. Synergies are being realized with the most significant to date
being the implementation of the raw material procurement as well as the
elimination of public company costs. Both system and human resources integration
continue on track.
21st Century
Following the acquisition on August 17, 2010, formal integration planning was
completed in January 2011. The new operating model was finalized in December
2010 and integration execution will continue over the next 18 months. Synergy
commitments have been identified with the most significant generated primarily
through revenue and cost efficiency.
Shareholders should benefit from annual estimated gross synergies within
Processing of approximately $6.0 million, relating to the acquisition of Dakota
Growers and 21st Century, with the full annualized benefit to be delivered in
fiscal 2011.
ABB
On September 23, 2009, the Company acquired all of the issued and outstanding
common shares of ABB, an Australian agri-business. Integration of the two
companies is continuing to progress well. Shareholders should benefit from
annual estimated gross synergies of approximately $30.0 million, with about
$20.0 million to be achieved in the Grain Handling and Marketing segment, $9.0
million through reduced corporate expenses and the remaining $1.0 million in
various other segments. These synergies are being generated primarily through
revenue and cost efficiency, with the full annualized benefit to be delivered in
fiscal 2012. Detailed implementation plans have been completed to achieve these
targeted synergies. As at January 31, 2011, the Company had achieved a total of
$26.9 million in synergies, primarily in the Grain Handling and Marketing
segment and through reduced corporate expenses, and is on track to achieve its
full annualized run rate synergy targets by 2012.
Integration costs related to severance and closures incurred by or related to
ABB have been accrued on the balance sheet as part of the acquisition price of
the ABB shares in accordance with the purchase method of accounting, with a
corresponding increase in goodwill. On a pre-tax basis, estimated total net
integration costs for both entities, which include share issuance costs and
refinancing costs, are about $113.2 million. The following table summarizes the
actual costs to January 31, 2011:
Estimated Integration Costs for ABB
(in millions) To January 31, 2011
----------------------------------------------------------------------------
Pre-tax estimated total integration costs $ 113.2
Integration costs already paid (95.1)
---------------------
Remaining integration costs to be paid 18.1
Costs accrued and outstanding (5.4)
---------------------
Estimated costs to be expensed or capitalized 12.7
---------------------
---------------------
These costs are being financed by free cash flow.
10.0 Risks and Risk Management
Viterra faces certain risks which can impact its financial performance. For
information on risks and risk management, readers should review the MD&A for the
fiscal year ended October 31, 2010, which is available on Viterra's website at
www.viterra.com, as well as on SEDAR at www.sedar.com, under Viterra Inc.
11.0 Non-GAAP Measures
EBITDA - Earnings before financing expenses, taxes, amortization, gain (loss) on
disposal of assets, and integration expenses, and EBIT - Earnings before
financing expenses, taxes, gain (loss) on disposal of assets, and integration
expenses are non-GAAP measures. Those items excluded in the determination of
EBITDA and EBIT represent items that are non-cash in nature, income taxes,
financing expenses or are otherwise not considered to be in the ordinary course
of business. These measures are intended to provide further insight with respect
to Viterra's financial results and to supplement information on earnings
(losses) as determined in accordance with GAAP.
EBITDA is used by Management to assess the cash generated by operations, and
EBIT is a measure of earnings from operations prior to financing costs and
taxes. Both measures also provide important management information concerning
business segment performance since the Company does not allocate financing
expenses, income taxes or other excluded items to these individual segments.
Total debt, net of cash and cash equivalents, is provided to assist investors
and is used by Management to assess the Company's liquidity position and to
monitor how much debt the Company has after taking into account its liquid
assets, such as cash and cash equivalents. Such measures should not be used in
isolation of, or as a substitute for, current liabilities, short-term
borrowings, or long-term debt as a measure of the Company's indebtedness.
Cash flow provided by operations is the cash from (or used in) operating
activities, excluding non-cash working capital changes. Viterra uses cash flow
provided by operations and cash flow provided by operations per share as
financial measures for the evaluation of liquidity. Management believes that
excluding the seasonal swings of non-cash working capital assists its evaluation
of long-term liquidity.
Free cash flow is cash flow provided by operations (prior to any changes in
non-cash working capital) net of capital expenditures, excluding business
acquisitions. Free cash flow is used by management to assess liquidity and
financial strength. This measurement is also useful as an indicator of the
Company's ability to service its debt, meet other payment obligations and make
strategic investments. Readers should be aware that free cash flow does not
represent residual cash flow available for discretionary expenditures.
These non-GAAP measures should not be considered in isolation of, or as a
substitute for, GAAP measures such as (i) net earnings (loss), as an indicator
of the Company's profitability and operating performance or (ii) cash flow from
or used in operations, as a measure of the Company's ability to generate cash.
Such measures do not have any standardized meanings prescribed by GAAP and are,
therefore, unlikely to be comparable to similar measures presented by other
corporations.
Reconciliations of each of these terms are provided in the table below.
Non-GAAP Terms, Reconciliations and Calculations
(in thousands - except percentages and ratios)
Better
For the three months ended January 31, 2011 2010 (Worse)
----------------------------------------------------------------------------
Gross profit and net revenues from
services $ 411,622 $ 276,093 $ 135,529
Operating, general and administrative
expenses (200,359) (186,325) (14,034)
----------------------------------------------------------------------------
EBITDA $ 211,263 $ 89,768 $ 121,495
Amortization (49,264) (38,825) (10,439)
----------------------------------------------------------------------------
EBIT $ 161,999 $ 50,943 $ 111,056
----------------------------------------------------------------------------
Net earnings $ 99,623 $ 10,653 $ 88,970
Amortization 49,264 38,825 10,439
Non-cash financing expenses 1,861 2,574 (713)
Employee future benefits 1,776 1,662 114
Future income tax provision 32,748 5,721 27,027
(Gain) loss on disposal of assets (843) 366 (1,209)
Other items 831 346 485
----------------------------------------------------------------------------
Cash flow prior to working
capital changes $ 185,260 $ 60,147 $ 125,113
Property, plant and equipment
expenditures (38,757) (25,549) (13,208)
Intangible assets expenditures (2,621) (2,316) (305)
----------------------------------------------------------------------------
Free cash flow $ 143,882 $ 32,282 $ 111,600
----------------------------------------------------------------------------
As at January 31,
Current assets $ 3,714,955 $ 2,945,564 $ 769,391
Current liabilities 2,318,800 1,208,674 (1,110,126)
----------------------------------------------------------------------------
Current Ratio (Current
Assets/Current Liabilities) 1.60 x 2.44 x (0.84 x)
----------------------------------------------------------------------------
Short-term borrowings 776,928 165,067 (611,861)
----------------------------------------------------------------------------
(A) Long-term debt due within one year 2,092 18,064 15,972
(A) Long-term debt 889,269 1,249,762 360,493
----------------------------------------------------------------------------
(B) Total debt $ 1,668,289 $ 1,432,893 $ (235,396)
----------------------------------------------------------------------------
(C) Cash and cash equivalents $ 288,767 $ 618,753 $ (329,986)
----------------------------------------------------------------------------
Total debt, net of cash and
cash equivalents $ 1,379,522 $ 814,140 $ (565,382)
----------------------------------------------------------------------------
(D) Total equity $ 3,789,853 $ 3,477,158 $ 312,695
----------------------------------------------------------------------------
(E) Total capital (B + D) $ 5,458,142 $ 4,910,051 $ 548,091
Debt-to-total capital (B)/(E) 30.6% 29.2% (1.4 pt)
Long-Term debt-to-capital (A)/(E) 16.3% 25.8% 9.5 pt
----------------------------------------------------------------------------
12.0 Evaluation of Disclosure and Procedures
Management, including the President and Chief Executive Officer and Chief
Financial Officer has evaluated the design of Viterra's disclosure controls and
procedures and internal controls over financial reporting (as defined in
National Instrument 52-109 of the Canadian Securities Administrators) as of
January 31, 2011. Management has concluded that, as of January 31, 2011,
Viterra's disclosure controls and procedures and internal controls over
financial reporting are designed effectively to provide reasonable assurance
that material information relating to Viterra and its consolidated subsidiaries
and joint ventures would be made known to them by others within those entities,
particularly during the period in which this report was being prepared.
13.0 Forward-Looking Information
Certain statements in Management's Discussion and Analysis are forward-looking
statements and reflect Viterra's expectations regarding future results of
operations, financial condition and achievements. All statements that address
activities, events or developments that Viterra or its Management expects or
anticipates will or may occur in the future, including such things as growth of
its business and operations, competitive strengths, strategic initiatives,
planned capital expenditures, plans and references to future operations and
results, critical accounting estimates, and expectations regarding future
capital resources and liquidity of the Company and other such matters, are
forward-looking statements. In addition, when used in this Management's
Discussion and Analysis the words "believes", "intends", "anticipates",
"expects", "estimates", "plans", "likely", "will", "may", "could", "should",
"would", "outlook", "forecast", "objective", "continue" (or the negative
thereof) and words of similar import may indicate forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance and
achievements of Viterra to be materially different from any future results,
performance and achievements expressed or implied by those forward-looking
statements. The risks include, but are not limited to, those factors discussed
in the Company's Management's Discussion and Analysis for the fiscal year ended
October 31, 2010 under the heading "Risk and Risk Management". The uncertainties
and other factors include, but are not limited to, weather risk; food and feed
product safety risk; commodity price and trading risk; sovereign and political
risk; capital market risk; liquidity risk; financial reporting risk; credit
risk; foreign exchange risk; interest rate risk; merger and acquisition risk;
regulatory risk; corporate and social responsibility risk; third-party
relationship risk; information technology risk; talent management and succession
planning risk; and employees relations risk. Many of these risks, uncertainties
and other factors are beyond the control of the Company. All of the
forward-looking statements made in Management's Discussion and Analysis are
qualified by these cautionary statements and the other cautionary statements and
factors contained herein and there can be no assurance that the actual
developments or results anticipated by the Company and its Management will be
realized or, even if substantially realized, that they will have the expected
consequences for, or effects on, the Company.
Although Viterra believes the assumptions inherent in forward-looking statements
are reasonable, undue reliance should not be placed on these statements, which
only apply as of the date of this Management's Discussion and Analysis. In
addition to other assumptions identified in this Management's Discussion and
Analysis, assumptions have been made regarding, among other things:
- western Canadian and southern Australian crop production and quality in 2011
and subsequent crop years;
- the volume and quality of grain held on-farm by producers in North America;
- movement and sales of Board grains by the CWB;
- the amount of grains and oilseeds purchased by other marketers in Australia;
- demand for and supply of open market grains;
- movement and sale of grain and grain meal in Australia and New Zealand,
particularly in the Australian states of South Australia, Victoria and New South
Wales;
- agricultural commodity prices;
- general financial conditions for western Canadian and southern Australian
agricultural producers;
- demand for seed, fertilizer, chemicals and other agri-products;
- market share of grain deliveries and agri-products sales that will be achieved
by Viterra;
- extent of customer defaults in connection with credit provided by Viterra, its
subsidiaries or a Canadian chartered bank in connection with feed product and
agri-products purchases;
- ability of the railways to ship grain to port facilities for export without
labour or other service disruptions;
- demand for oat, pasta, canola and malt barley products, and the market share
of sales of these products that will be achieved by Viterra;
- ability to maintain existing customer contracts and relationships;
- the availability of feed ingredients for livestock;
- cyclicality of livestock prices;
- demand for wool and the market share of sales of wool production that will be
achieved by Viterra's subsidiaries in Australia;
- the impact of competition;
- environmental and reclamation costs;
- the ability to obtain and maintain existing financing on acceptable terms; and
- currency, exchange and interest rates.
The preceding list is not exhaustive of all possible factors. All factors should
be considered carefully when making decisions with respect to Viterra.
To the extent any forward-looking statements constitute future-oriented
financial information or financial outlooks, as those terms are defined under
applicable Canadian securities laws, such statements are being provided to
describe the current anticipated potential of the Company and readers are
cautioned that these statements may not be appropriate for any other purpose,
including investment decisions.
Viterra disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
developments or otherwise, except as required by Canadian securities laws.
14.0 Annual Management's Discussion and Analysis
This Management's Discussion and Analysis relating to the first quarter ended
January 31, 2011 should be read in conjunction with Viterra's Management's
Discussion and Analysis for the fiscal year ended October 31, 2010. Additional
information relating to Viterra, including the most recent Annual Information
Form filed by the Company, is available under the Company's profile on SEDAR at
www.sedar.com and on Viterra's website, www.viterra.com.
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, January 31, October 31,
AS AT 2011 2010 2010
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
ASSETS
Current Assets
Cash $ 200,466 $ 98,560 $ 107,428
Short-term investments 138,461 526,059 88,204
Accounts receivable 1,256,476 916,968 995,656
Inventories (Note 3) 1,905,267 1,119,914 1,211,887
Prepaid expenses and
deposits 205,583 242,955 107,638
Future income taxes 8,702 41,108 30,067
----------------------------------------------------------------------------
3,714,955 2,945,564 2,540,880
Investments 8,167 9,604 9,661
Property, Plant and
Equipment 2,481,106 2,370,318 2,491,047
Other Long-Term Assets 119,402 118,024 123,136
Intangible Assets 151,131 41,517 154,915
Goodwill 767,799 691,483 772,233
Future Income Taxes 8,496 6,297 25,010
----------------------------------------------------------------------------
$ 7,251,056 $ 6,182,807 $ 6,116,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Bank indebtedness $ 50,160 $ 5,866 $ 40,839
Short-term borrowings 776,928 165,067 61,677
Accounts payable and
accrued liabilities 1,487,912 1,019,040 1,151,652
Long-term debt due within
one year 2,092 18,064 2,295
Future income taxes 1,708 637 391
----------------------------------------------------------------------------
2,318,800 1,208,674 1,256,854
Long-Term Debt 889,269 1,249,762 896,834
Other Long-Term
Liabilities 53,947 75,243 51,351
Future Income Taxes 199,187 171,970 201,580
----------------------------------------------------------------------------
3,461,203 2,705,649 2,406,619
----------------------------------------------------------------------------
Shareholders' Equity
Retained earnings 652,056 436,394 571,013
Accumulated other
comprehensive income (Note 4) 104,420 10,930 107,192
----------------------------------------------------------------------------
756,476 447,324 678,205
Share capital (Note 5) 3,026,080 3,025,490 3,025,491
Contributed surplus 7,297 4,344 6,567
----------------------------------------------------------------------------
3,789,853 3,477,158 3,710,263
----------------------------------------------------------------------------
$ 7,251,056 $ 6,182,807 $ 6,116,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments, contingencies and guarantees (Note 10)
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
Three Months Ended Three Months Ended
FOR THE PERIOD ENDED January 31, 2011 January 31, 2010
----------------------------------------------------------------------------
(unaudited) (unaudited)
Sales and other operating revenues $ 2,470,537 $ 1,784,525
Cost of sales (excluding amortization
see Note 3) (2,058,915) (1,508,432)
----------------------------------------------------------------------------
Gross profit and net revenues from
services 411,622 276,093
Operating, general and administrative
expenses (200,359) (186,325)
----------------------------------------------------------------------------
211,263 89,768
Amortization (49,264) (38,825)
----------------------------------------------------------------------------
161,999 50,943
Gain (loss) on disposal of assets 843 (366)
Integration expenses (511) (979)
Financing expenses (Note 9) (28,931) (37,231)
----------------------------------------------------------------------------
133,400 12,367
Recovery of (provision for) corporate
taxes
Current (1,029) 4,007
Future (32,748) (5,721)
----------------------------------------------------------------------------
Net earnings $ 99,623 $ 10,653
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings per share
(Note 6) $ 0.27 $ 0.03
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended Three Months Ended
FOR THE PERIOD ENDED January 31, 2011 January 31, 2010
----------------------------------------------------------------------------
(unaudited) (unaudited)
Net earnings $ 99,623 $ 10,653
Other comprehensive income (loss), net of
tax
Reclassification of gain on dedesignated
hedged contracts - (572)
Unrealized gain (loss) on cash flow hedges 2,538 (4,524)
Reclassification of loss on cash flow hedges 1,574 5,065
Net investment hedges 5,741 2,078
Unrealized loss on available for sale assets (1) (6)
Unrealized effect of foreign currency
translation of foreign operations (12,624) (45,327)
----------------------------------------------------------------------------
Other comprehensive loss (2,772) (43,286)
----------------------------------------------------------------------------
Comprehensive income (loss) $ 96,851 $ (32,633)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Other Total
Share Contributed Comprehensive Retained Shareholders'
Capital Surplus Income Earnings Equity
----------------------------------------------------------------------------
(Note 5)
As at October
31, 2009 $3,025,486 $ 3,476 $ 54,216 $ 425,741 $ 3,508,919
Share capital
issued 4 - - - 4
Options
exercised - (2) - - (2)
Stock-based
compensation - 870 - - 870
Other
comprehensive
income (loss),
net of tax
Reclassification
of gain on
dedesignated
hedged
contracts - - (572) - (572)
Unrealized loss
on cash flow
hedges - - (4,524) - (4,524)
Reclassification
of loss on
cash flow
hedges - - 5,065 - 5,065
Net investment
hedges 2,078 2,078
Unrealized loss
on available
for sale assets - - (6) - (6)
Unrealized
effect of
foreign
currency
translation of
foreign
operations - - (45,327) - (45,327)
Net earnings
for the period - - - 10,653 10,653
----------------------------------------------------------------------------
As at January
31, 2010 $3,025,490 $ 4,344 $ 10,930 $436,394 $ 3,477,158
Share capital
issued 1 - - - 1
Stock-based
compensation - 2,223 - - 2,223
Other
comprehensive
income (loss),
net of tax
Reclassification
of gain on
dedesignated
hedged
contracts - - (168) - (168)
Unrealized loss
on cash flow
hedges - - (15,619) - (15,619)
Reclassification
of loss on
cash flow
hedges - - 10,306 - 10,306
Net investment
hedges - - (1,913) - (1,913)
Unrealized gain
on available
for sale assets - - 9 - 9
Unrealized
effect of
foreign
currency
translation of
foreign
operations - - 103,647 - 103,647
Net earnings
for the period - - - 134,619 134,619
----------------------------------------------------------------------------
As at October
31, 2010 $3,025,491 $ 6,567 $ 107,192 $571,013 $ 3,710,263
Share capital
issued 589 - - - 589
Stock-based
compensation - 730 - - 730
Other
comprehensive
income (loss),
net of tax
Unrealized gain
on cash flow
hedges - - 2,538 - 2,538
Reclassification
of loss on
cash flow
hedges - - 1,574 - 1,574
Net investment
hedges - - 5,741 - 5,741
Unrealized loss
on available
for sale assets - - (1) - (1)
Unrealized
effect of
foreign
currency
translation of
foreign
operations - - (12,624) - (12,624)
Dividends - - - (18,580) (18,580)
Net earnings
for the period - - - 99,623 99,623
----------------------------------------------------------------------------
As at January
31, 2011 $3,026,080 $ 7,297 $ 104,420 $652,056 $ 3,789,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Three Months Ended Three Months Ended
FOR THE PERIOD ENDED January 31, 2011 January 31, 2010
----------------------------------------------------------------------------
(unaudited) (unaudited)
Cash From (Used In) Operating
Activities
Net earnings $ 99,623 $ 10,653
----------------------------------------------------------------------------
Adjustments for items not involving
cash and/or operations
Amortization 49,264 38,825
Future income tax provision 32,748 5,721
Employee future benefits (Note 8) 1,776 1,662
Non-cash financing expenses (Note 9) 1,861 2,574
Loss (gain) on disposal of assets (843) 366
Other items 831 346
----------------------------------------------------------------------------
Adjustments for items not involving
cash and/or operations 85,637 49,494
----------------------------------------------------------------------------
185,260 60,147
----------------------------------------------------------------------------
Changes in non-cash working capital
items
Accounts receivable (258,453) 26,384
Inventories (694,811) (167,867)
Accounts payable and accrued
liabilities 324,565 (23,802)
Prepaid expenses and deposits (97,486) (156,173)
----------------------------------------------------------------------------
Changes in non-cash working capital (726,185) (321,458)
----------------------------------------------------------------------------
Cash used in operating activities (540,925) (261,311)
----------------------------------------------------------------------------
Cash From (Used in) Financing
Activities
Proceeds from long-term debt - 1,505
Repayment of long-term debt (414) (7,244)
Proceeds (repayment) of short-term
borrowings 714,855 (118,475)
Repayment of other long-term
liabilities, net (72) (271)
Increase in share capital 589 -
----------------------------------------------------------------------------
Cash from (used in) financing
activities 714,958 (124,485)
----------------------------------------------------------------------------
Cash From (Used in) Investing
Activities
Property, plant and equipment
expenditures (38,757) (25,549)
Proceeds on sale of property, plant
and equipment 478 588
Decrease in investments 1,372 101
Intangible assets expenditures (2,621) (2,316)
----------------------------------------------------------------------------
Cash used in investing activities (39,528) (27,176)
----------------------------------------------------------------------------
Increase (Decrease) in Cash and
Cash Equivalents 134,505 (412,972)
Cash and Cash Equivalents,
Beginning of Period 154,793 1,033,075
Impact on cash of unrealized effect
of foreign currency translation
of foreign operations (531) (1,350)
----------------------------------------------------------------------------
Cash and Cash Equivalents, End of
Period $ 288,767 $ 618,753
Cash and cash equivalents consist
of:
Cash $ 200,466 $ 98,560
Short-term investments 138,461 526,059
Bank indebtedness (50,160) (5,866)
----------------------------------------------------------------------------
$ 288,767 $ 618,753
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash
paid during the period from
operations:
Interest paid $ 24,030 $ 47,799
Income taxes paid $ 5,383 $ 5,118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011 (unaudited) - in thousands of Canadian dollars, except as noted
1. NATURE OF BUSINESS
Viterra Inc. (the "Company") is a publicly traded, vertically integrated
international agribusiness. Business operations include four reporting segments:
Grain Handling and Marketing, Agri-products, Processing and Corporate. The
Company has operations across Canada, the United States ("U.S."), Australia and
New Zealand, as well as marketing and trading offices in Japan, Singapore,
China, Switzerland, Italy, Ukraine, Germany and India.
The Grain Handling and Marketing segment includes grain storage facilities,
joint venture grain facilities, and processing plants strategically located in
the prime agricultural growing regions of North America, Australia and New
Zealand. This segment also includes port terminal facilities located in Canada
and Australia and merchandising offices in Europe and Asia. Activity in this
segment consists of the collection of grain through the Company's primary
storage system, shipping to inland or port terminals, cleaning of grain to meet
regulatory specifications, and sales to domestic or export markets. Earnings are
volume driven. Revenue is also derived through grain handling, blending, storage
and other ancillary services, as well as the sale of byproducts.
The Agri-products segment includes an ownership interest in a fertilizer
manufacturer, fertilizer distribution and a network of retail locations, and
offers financial services such as lending and cash management. Agri-products
sales lines include fertilizer, crop protection products, seed and seed
treatments, equipment, general merchandise, wool and livestock.
The Processing segment in North America includes the manufacturing and marketing
of value-added food products associated with oats, canola, wheat and malt barley
for domestic and export markets. This segment also includes activities relating
to formulating and manufacturing of feed products at feed mills and pre-mix
facilities across the western regions of Canada and the U.S. The Processing
segment includes malting plants positioned across Australia and a feed business
in New Zealand.
Weather conditions are the primary risk in the agri-business industry. Grain
volumes, grain quality, the volume and mix of crop inputs sold and ultimately,
the financial performance of the Company, are highly dependent upon weather
conditions throughout the crop production cycle.
The Company's earnings follow the seasonal pattern of grain production in each
geographic location. The volume of grain shipments is relatively stable through
the quarters, but can be influenced by destination customer demand, customer
export programs and producers' marketing decisions. Sales of the Company's
agri-products peak during the growing season, supplemented by additional crop
nutrient sales in the late fall.
2. ACCOUNTING POLICIES
These interim unaudited consolidated statements are based on accounting
principles consistent with those used and described in the October 31, 2010
annual consolidated financial statements. The Company's accounting policies are
in accordance with Canadian generally accepted accounting principles. However,
these financial statements do not include all of the information and disclosures
required for annual financial statement presentation. The interim consolidated
financial statements should be read in conjunction with the Company's annual
consolidated financial statements for the year ended October 31, 2010. All
amounts are reported in Canadian dollars unless specifically stated to the
contrary.
Certain comparative figures have been reclassified to conform to the current
year's presentation.
Future Accounting Changes - International Financial Reporting Standards
In January 2006, the Canadian Institute of Chartered Accountants Accounting
Standards Board adopted a strategic plan for the direction of accounting
standards in Canada. As part of that plan, accounting standards for public
companies would be required to converge with International Financial Reporting
Standards ("IFRS") for fiscal years beginning on or after January 1, 2011 with
comparative figures presented on the same basis. In February 2008, the
Accounting Standards Board confirmed the effective due date of the initial
adoption of IFRS. The Company's transition date was November 1, 2010 with a
conversion date of November 1, 2011. The annual and quarterly financial
reporting for the year ending October 31, 2012 will be the first reported under
IFRS.
3. INVENTORIES
January 31, January 31, October 31,
As at 2011 2010 2010
----------------------------------------------------------------------------
Grain $ 1,237,869 $ 548,441 $ 724,157
Agri-products 551,681 478,865 385,953
Processing
Raw materials and supplies 44,304 42,229 40,393
Work in progress 14,225 23,337 14,366
Finished goods 57,188 27,042 47,018
----------------------------------------------------------------------------
$ 1,905,267 $ 1,119,914 $ 1,211,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Grain cost of sales includes the cost of inventories, net realized and
unrealized gains and losses on commodity contracts and exchange-traded
derivatives, and freight.
Amortization of $13.6 million for the three month period ended January 31, 2011
(January 31, 2010 - $10.6 million) related to the manufacture of inventory that
has now been sold is included in amortization expense.
Write-downs related to Agri-products inventory at January 31, 2011 of $1.1
million (January 31, 2010 - $1.0 million) have been included in cost of sales.
4. ACCUMULATED OTHER COMPREHENSIVE INCOME
January 31, January 31, October 31,
As at 2011 2010 2010
----------------------------------------------------------------------------
Cash flow hedges (1) $ (996) $ 373 $ (5,108)
Net investment hedges (2) 5,906 2,078 165
Unrealized losses on available for
sale assets(3) (4) (12) (3)
Unrealized effect of foreign
currency translation of
foreign operations 99,514 8,491 112,138
----------------------------------------------------------------------------
$ 104,420 $ 10,930 $ 107,192
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net of tax of $(496) (January 2010 - $1,053, October 2010 - $1,612).
(2) Net of tax of $(2,191) (January 2010 - $(310), October 2010 - $(68)).
(3) Net of tax of $(8) (January 2010 - $(7), October 2010 - $(8)).
5. SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS
a) Common Voting Shares
Authorized
Unlimited Common Voting Shares
Common Voting Shares
Number(1) Amount
----------------------------------------------------------------------------
Balance, October 31, 2009 371,596,508 $ 3,025,486
Adjustment to share capital from contributed
surplus for options exercised 375 4
----------------------------------------------------------------------------
Balance, January 31, 2010 371,596,883 $ 3,025,490
Share issuance for cash 50 1
Adjustment to share capital from contributed
surplus for options exercised - -
----------------------------------------------------------------------------
Balance, October 31, 2010 371,596,933 $ 3,025,491
Share issuance for cash 48,211 437
Adjustment to share capital from contributed
surplus for options exercised - 152
----------------------------------------------------------------------------
Balance, January 31, 2011 371,645,144 $ 3,026,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Number of shares not shown in thousands.
b) Management Stock Option Plan
The maximum number of common shares that may be issued under options issued
pursuant to the Stock Option Plan is approximately 10.2 million common shares.
Once the 2.6 million common shares that can potentially be issued under
currently granted and contingently granted options are deducted, approximately
7.6 million common shares have been reserved for subsequent option grants.
The expense related to stock options is recognized over the vesting period based
on the fair value of options determined by the Black-Scholes option pricing
model with the following weighted average assumptions: risk-free rate 2.5%,
dividend yield 0%, a volatility factor of the expected market price of the
Company's shares of 38%, and a weighted average expected option life of 4.7
years. The Company's stock-based compensation expense for the three month period
ended January 31, 2011 was $0.9 million (January 31, 2010 - $0.9 million).
Weighted Weighted Weighted
Average Average Number of Average
Number of Grant-Date Exercise Options Exercise
Options(1) Fair Value Price Exercisable(1) Price
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding
October 31, 2009 1,657,190 $ 12.67 384,391 $ 19.59
Options granted 1,066,914 $ 3.50 $ 9.97
Forfeited (1,088) $ 59.07
Expired (18,000) $ 135.14
Exercised (375) $ 5.90
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding
January 31, 2010 2,704,641 $ 10.76 364,928 $ 13.78
Options granted - $ - $ -
Forfeited (57,127) $ 9.59
Expired (11,930) $ 68.19
Exercised (50) $ 5.90
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding
October 31, 2010 2,635,534 $ 10.53 1,639,314 $ 11.05
Options granted - $ - $ -
Forfeited (25) $ 31.00
Expired (175) $ 29.54
Exercised (48,211) $ 9.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding
January 31, 2011 2,587,123 $ 10.56 1,590,903 $ 11.11
----------------------------------------------------------------------------
(1) Number of options not shown in thousands.
The following table summarizes the options outstanding and exercisable as at
January 31, 2011:
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Options Life Exercise Options Exercise
Exercise Price Outstanding(1) (Years) Price Exercisable(1) Price
----------------------------------------------------------------------------
$ 5.90 - $ 9.50 896,710 4.73 $ 9.00 589,068 $ 8.99
$ 9.51 - $11.05 1,028,298 5.98 9.97 339,720 9.97
$11.06 - $21.56 634,412 4.96 12.12 634,412 12.12
$21.57 - $51.00 27,703 0.42 46.86 27,703 46.86
----------------------------------------------------------------------------
2,587,123 5.24 $ 10.56 1,590,903 $ 11.11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Number of options not shown in thousands.
6. EARNINGS PER SHARE
For the three months ended January 31 2011 2010
----------------------------------------------------------------------------
Net earnings $ 99,623 $ 10,653
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for basic earnings per share amounts:
Weighted average number of shares outstanding(1) 371,599 371,597
Basic earnings per share $ 0.27 $ 0.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted earnings per share amounts:
Weighted average number of shares outstanding(1) 371,599 371,597
Dilutive effect of stock options(1) 86 139
Weighted average number of shares outstanding,
assuming dilution(1) 371,685 371,736
Diluted earnings per share $ 0.27 $ 0.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Number of shares and options in thousands.
7. SEGMENTED INFORMATION
A description of the types of products and services from which the segments
derive their revenue is included in the Nature of Business (Note 1). The
segments' accounting policies are consistent with those described in Accounting
Policies (Note 2). The Company accounts for inter-segment sales at current
market prices under normal trade terms.
For the three months ended January 31 2011 2010
----------------------------------------------------------------------------
Sales and other operating revenues
----------------------------------------------------------------------------
Grain Handling and Marketing $ 1,942,634 $ 1,343,208
Agri-products 292,571 215,363
Processing 373,910 307,977
----------------------------------------------------------------------------
2,609,115 1,866,548
Less: Inter-segment sales 138,578 82,023
----------------------------------------------------------------------------
$ 2,470,537 $ 1,784,525
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Inter-segment sales
----------------------------------------------------------------------------
Grain Handling and Marketing $ 130,484 $ 81,903
Processing 8,094 120
----------------------------------------------------------------------------
$ 138,578 $ 82,023
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit and net revenues from services
----------------------------------------------------------------------------
Grain Handling and Marketing $ 298,441 $ 201,699
Agri-products 53,557 32,599
Processing 59,624 41,795
----------------------------------------------------------------------------
$ 411,622 $ 276,093
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended January 31 2011 2010
----------------------------------------------------------------------------
Operating, general and administrative expenses
----------------------------------------------------------------------------
Grain Handling and Marketing $ (100,679) $ (92,020)
Agri-products (44,261) (44,533)
Processing (19,268) (18,609)
Corporate (36,151) (31,163)
----------------------------------------------------------------------------
$ (200,359) $ (186,325)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA(1)
----------------------------------------------------------------------------
Grain Handling and Marketing $ 197,762 $ 109,679
Agri-products 9,296 (11,934)
Processing 40,356 23,186
Corporate (36,151) (31,163)
----------------------------------------------------------------------------
$ 211,263 $ 89,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) EBITDA - Earnings before financing expenses, taxes, amortization, gain
(loss) on disposal of assets and integration expenses.
Amortization
----------------------------------------------------------------------------
Grain Handling and Marketing $ (25,608) $ (18,108)
Agri-products (9,002) (11,182)
Processing (12,246) (7,842)
Corporate (2,408) (1,693)
----------------------------------------------------------------------------
$ (49,264) $ (38,825)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBIT(2)
----------------------------------------------------------------------------
Grain Handling and Marketing $ 172,154 $ 91,571
Agri-products 294 (23,116)
Processing 28,110 15,344
Corporate (38,559) (32,856)
----------------------------------------------------------------------------
$ 161,999 $ 50,943
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(2)EBIT - Earnings before financing expenses, taxes, gain (loss) on disposal
of assets and integration expenses.
8. EMPLOYEE FUTURE BENEFITS
a) Defined Benefit Plans and Future Benefits
The Company's net benefit costs related to defined benefit pension plans and
other future benefits for the three month period ended January 31, 2011 were
$1.8 million (2010 - $1.7 million).
b) Defined Contribution Plans
The Company, including subsidiaries and affiliates, contributes to several
defined contribution plans including multi-employer plans. The Company's total
consolidated defined contribution plan expense for the three month period ended
January 31, 2011 was $5.6 million (2010 - $4.0 million).
9. FINANCING EXPENSES
For the three months ended January 31 2011 2010
----------------------------------------------------------------------------
Interest expense on:
Long-term debt $ 16,347 $ 27,717
Short-term debt 12,140 10,848
Interest income (1,119) (3,490)
Canadian Wheat Board ("CWB") carrying charge
recovery (298) (418)
----------------------------------------------------------------------------
27,070 34,657
Interest accretion 521 915
Amortization of deferred financing costs 1,340 1,659
----------------------------------------------------------------------------
$ 28,931 $ 37,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. COMMITMENTS, CONTINGENCIES AND GUARANTEES
a) Letter of Credit and Bid Bonds
At January 31, 2011, the Company had outstanding letters of credit and similar
instruments of $16.4 million related to operating an agri-business (October 31,
2010 - $15.9 million, January 31, 2010 - $17.8 million). The terms range in
duration and expire at various dates through to August 31, 2015. The amounts
vary depending on underlying business activity or the specific agreements in
place with the third parties. At January 31, 2011, the Company had outstanding
bid bonds and similar instruments of $4.1 million (October 31, 2010 - $5.7
million, January 31, 2010 - nil) related to trade facility agreements.
b) Indemnification of Accounts Receivable - Viterra Financial (TM)
The Company has a rolling five-year agreement with a Canadian Schedule I
chartered bank to provide credit for qualifying agricultural producers to
purchase crop inputs. The agreement may be terminated at an earlier date by
mutual consent or by either party upon one year's written notice. The Company
indemnifies the bank for 50% of future losses to a maximum of 5% of the
aggregate qualified portfolio balance. The Company's aggregate indemnity will
vary at any given time with the size of the underlying portfolio. As at January
31, 2011, outstanding credit was $417.1 million (October 31, 2010 - $520.0
million, January 31, 2010 - $393.2 million), and the Company's obligation of
$7.3 million (October 31, 2010 - $9.1 million, January 31, 2010 - $6.5 million)
for past and future losses is current with the bank in accordance with the
Agency Agreement.
The Company also has a rolling five-year agreement with a Canadian Schedule I
chartered bank to provide loans to Processing customers to purchase feeder
cattle, as well as related feed inputs, with terms that do not require payment
until the livestock is sold. The agreement may be terminated at an earlier date
by mutual consent or by either party upon one year's written notice. The Company
indemnifies the bank for credit losses based on the first 20% to 33% of new
credit issued on an individual account, dependent on the account's underlying
credit rating, with losses in excess of these amounts shared on an equal basis
with the bank up to 5% on the aggregate qualified portfolio balance. The
Company's aggregate indemnity will vary at any given time with the credit rating
of the underlying accounts and the aggregate credit outstanding. As at January
31, 2011, outstanding credit was $50.9 million (October 31, 2010 - $36.1
million, January 31, 2010 - $46.7 million), and the Company's obligation of $0.5
million (October 31, 2010 - $0.6 million, January 31, 2010 - $0.5 million) for
past and future losses is current with the bank in accordance with the Agency
Agreement.
c) Guarantees
The Company's subsidiary in Australia has entered into a Deed of Cross Guarantee
with certain controlled entities. The effect of this Deed is that the subsidiary
and each of these controlled entities has guaranteed to pay any debts of any of
the companies' party to the Deed in the event their debts cannot be paid as and
when they fall due. The consolidated net assets of the entities party to the
Deed of Cross Guarantee is $1.4 billion.
The Company is contingently liable under several guarantees given to third-party
lenders who have provided certain financing facilities to its wholly owned
foreign subsidiaries. As at January 31, 2011, the maximum amounts of the
guarantees are $96.5 million CAD, $95.0 million USD, $83.2 million AUD and
Japanese Yen ("JPY") 2.0 billion or approximately $299.1 million CAD in
aggregate. As at January 31, 2011, liabilities recorded that have been
guaranteed would include subsidiary trade facility borrowings of $5.1 million
(October 31, 2010 - $10.6 million, January 31, 2010 - nil) included in
short-term borrowings.
The Company is contingently liable under several guarantees given to third-party
lenders who have provided long-term financing to certain independent hog
producers. As at January 31, 2011, the current outstanding balance of these
guarantees is $2.1 million (October 31, 2010 - $2.2 million, January 31, 2010 -
$2.5 million). These guarantees diminish as the underlying loans are repaid and
expire in 2014.
The Company's Australian operations self-insure in South Australia for workers'
compensation liability and are subject to a bank guarantee for $1.8 million AUD
(October 31, 2010 - $1.2 million AUD, January 31, 2010 - $1.3 million AUD).
The Company is contingently liable to a finance company for a portion of losses
incurred related to potential producer delinquencies associated with equipment
leases and credit provided for the purchase of fertilizer bins. Given
historically low delinquent rates in conjunction with collateral values of
assets, the Company has accrued no obligation.
d) Asset Retirement Obligations
The asset retirement obligations represent the best estimate by management of
the legal obligations it would incur during the reclamation process relating to
closed facilities and current leases. Reclamation involves the demolition of
facilities and the reclamation of land. Uncertainty exists regarding the
estimation of future decommissioning and reclamation costs.
At January 31, 2011, the Company estimated that the undiscounted cash flow
required to settle the asset retirement obligations was approximately $39.9
million (October 31, 2010 - $38.6 million, January 31, 2010 - $27.4 million),
which is expected to be settled over the 2011 through 2022 period. The credit
adjusted risk-free rates at which the estimated cash flows have been discounted
range from 4.0% to 8.0%.
The Company has a joint venture interest in a fertilizer manufacturer that has
certain obligations with respect to plant decommissioning and land reclamation
upon cessation of operations. The Company has not recorded an asset retirement
obligation for these obligations at January 31, 2011 because it does not
currently believe there is a reasonable basis for estimating a date or range of
dates of cessation of operations.
e) Director and Officer Indemnification
The Company indemnifies its directors and officers against any and all claims or
losses reasonably incurred in the performance of their service to the Company to
the extent permitted by law. The Company has acquired and maintains liability
insurance for its directors and officers as well as those of certain affiliated
companies.
f) Other Indemnification Provisions
From time to time, the Company enters into agreements in the normal course of
operations and in connection with business or asset acquisitions or
dispositions. By their nature, these agreements may provide for indemnification
of counterparties. The varying nature of these indemnification agreements
prevents the Company from making a reasonable estimate of the maximum potential
amount it could incur. Historically, the Company has not made any significant
payments in connection with these indemnification provisions.
g) Other Contingencies
As at January 31, 2011, there are claims against the Company in varying amounts
for which a provision in the financial statements is not considered necessary.
The occurrence of the confirming future event is not determinable or it is not
possible to determine the amounts that may ultimately be assessed against the
Company with respect to these claims. Management believes that any such amounts
would not have a material impact on the business or financial position of the
Company.
11. FINANCIAL AND OTHER INSTRUMENTS AND HEDGING
a) Fair Value
The following table presents the fair value of the Company's financial
instruments and non-financial derivatives where fair value is recognized in the
balance sheet. The table also identifies the financial instrument category and
the level per the fair value hierarchy.
As at January 31 2011 2010
----------------------------------------------------------------------------
Financial
Instruments
Fair Value Level Category Fair Value Level
----------------------------------------------------------------------------
Financial assets:
Cash $ 200,466 1 HFT $ 98,560 1
Short-term investments 138,461 1 HFT-D 526,059 1
Exchange-traded derivatives 33,422 1 HFT 19,702 1
Commodity forward contracts 203,535 2 HFT 110,146 2
Foreign exchange forward
contracts (OTC) 55,373 2 HFT 44,838 2
Interest rate swaps - HFT 300 2
Available for sale at fair
value 27 1 AFS 415 1
Natural gas swaps 97 2 HFT -
Financial liabilities:
Bank indebtedness 50,160 1 HFT 5,866 1
Exchange-traded derivatives 63,525 1 HFT 12,879 1
Commodity forward contracts 164,388 2 HFT 70,757 2
Foreign exchange forward
contracts (OTC) 13,661 2 HFT 21,911 2
Cross-currency swaps 8,228 2 HFT -
Interest rate swaps - HFT 7,905 2
Bond forward contracts 13,704 2 HFT -
Natural gas swaps 30 2 HFT 700 2
----------------------------------------------------------------------------
Financial instruments category/guide: HFT Held for trading
HFT-D Held for trading - designated
AFS Available for sale
The aggregate carrying value of financial instruments classified as loans and
receivables is $973.9 million (October 31, 2010 - $758.0 million, January 31,
2010 - $776.3 million). The aggregate carrying value of financial instruments
classified as other financial liabilities is $1.7 billion (October 31, 2010 -
$1.9 billion, January 31, 2010 - $2.4 billion).
b) Financial Risks and Risk Management
The Company faces certain financial risks such as commodity price, foreign
exchange, interest rate, credit and liquidity risk that can impact its financial
performance. The Company is exposed to changes in commodity prices, foreign
exchange rates and interest rates. The Company utilizes a number of financial
instruments to manage these exposures. The Company mitigates risk associated
with these financial instruments through Board-approved policies, limits on use
and amount of exposure, internal monitoring and compliance reporting to senior
management and the Board.
i. Commodity Price Risk
The Company's diverse range of services is spread across the agri-business
supply chain. As a result, the Company is exposed to agricultural and other
related commodity price movements within the market as part of its normal
operations. The Company uses exchange-traded futures and options contracts as
well as over the counter ("OTC") contracts to minimize the effects of changes in
the prices of hedgeable agricultural commodities on its agri-business
inventories and agricultural commodities forward cash purchase and sales
contracts. Derivative contracts are valued at the quoted market prices. The
Company manages the risk associated with inventory and open contracts on a
combined basis.
All market risk associated with commodity price movement is measured using a
Value at Risk ("VaR") method. The VaR calculation quantifies potential changes
in the value of commodity positions as a result of potential market price
movements from all sources of market risk, whether as a consequence of asset
ownership, customer sales, hedging or position taking.
There is currently no uniform industry methodology for estimating VaR. The VaR
calculation estimates the potential loss in pre-taxation profit over a given
holding period for a specified confidence level. The VaR methodology is a
statistically defined, probability-based approach that takes into account market
volatilities as well as risk diversification by recognizing offsetting positions
and correlations between products and markets. The use of VaR has limitations
because it is based on historical correlations and volatilities in commodity
prices and assumes that future price movements will follow a statistical
distribution. The five-day VaR number used by the group reflects the 95%
probability that the gain or loss in a five-day period will not exceed the
reported VaR based on the previous pricing period. Although losses are not
expected to exceed the statistically estimated VaR on 95% of occasions, losses
on the other 5% of occasions could be substantially greater than the estimated
VaR. The VaR at the balance sheet date is not representative of the risk
throughout the period as the period-end exposure does not reflect the exposure
during the period. In practice, as markets move, the Company actively manages
its risk and adjusts hedging strategies as appropriate.
The Company's Risk Management Policy provides limits within which management may
maintain inventory and certain long or short commodity positions. The Company
has established policies that limit the amount of agricultural commodity
positions permissible, which are a combination of quantity and VaR limits. VaR
levels are reported daily and compared with approved limits. Limits are
regularly reviewed to ensure consistency with risk management objectives, market
developments and business activities.
January 31, October 31,
As at 2011 2010
----------------------------------------------------------------------------
Historical VaR (95%, five-day):
Agricultural commodity price VaR $ 22,465 $ 16,333
ii. Foreign Exchange Risk
The Company undertakes certain transactions denominated in foreign currencies
and, as a result is exposed to foreign exchange risk. The Company is exposed to
foreign exchange risk on commodity contracts which are denominated in foreign
currencies and on its investment in foreign subsidiaries. The Company uses
derivative financial instruments, such as foreign currency forward contracts,
cross-currency swaps, futures contracts and options to limit exposures to
changes in foreign currency exchange rates with respect to its recorded foreign
currency denominated assets and liabilities as well as anticipated transactions.
The Company uses hedge accounting to match the cash flow of some of its
processed products to be sold in foreign funds with its foreign dollar currency
hedging instruments. Maturity dates for the foreign exchange forward contracts
on anticipated transactions extend for approximately 24 months. As at January
31, 2011, the portion of the forward contracts considered to be ineffective is
insignificant. The estimated amount reported in other comprehensive income that
is expected to be reclassified to net earnings during the next 12 months is an
after tax gain of $7.1 million.
A realized gain of $5.6 million after tax is included in net investment hedges
accumulated other comprehensive income at January 31, 2011 in relation to a
settled derivative and discontinued hedge accounting. The Company has an
outstanding $200 million cross-currency swap arrangement in place in order to
limit exposure to a change in the AUD on a portion of its net investment in its
Australian operations. The derivative is used to mitigate the risk of economic
loss arising from changes in the value of the AUD compared to the CAD. As at
January 31, 2011, the portion of the cross-currency swap considered to be
ineffective is nil. The estimated loss reported in other comprehensive income
that is expected to be reported in net earnings relating to this net investment
hedge during the next 12 months is approximately $0.6 million. The corresponding
exchange gain arising from the translation of the financial statements of the
net investment that is expected to be reported in net earnings during the next
12 months is approximately $4.1 million.
The Company has $400 million USD Senior Notes outstanding the principal of which
had been designated a hedge in order to limit exposure to a change in the USD on
a portion of the Company's net investment in its U.S. operations. As at January
31, 2011, the portion of the hedge considered to be ineffective is nil. The
estimated amount reported in other comprehensive income that is expected to be
reported in net earnings during the next 12 months is nil.
Except as noted above, the foreign currency forward contracts, futures contracts
and options used by the Company are marked-to-market and unrealized gains and
losses are recognized in net earnings in the period in which they occur.
The following table details the Company's sensitivity on the net carrying value
of financial instruments that are denominated in a foreign currency other than
the functional currency in which they are measured as at the balance sheet date,
had currencies moved as illustrated, with all other variables held constant.
Impact On Other
Impact On Comprehensive
Earnings, Income,
Carrying Value After Tax After Tax
----------------------------------------------------------------------------
10% increase
CAD/USD $ 10,144 $ 20 $ 127
CAD/Euro 400 28 -
CAD/AUD 2,201 (173) -
AUD/USD (14,030) 360 (2,813)
AUD/Euro 5,874 (387) (77)
AUD/JPY (4) (58) (126)
AUD/NZD (209) 13 -
AUD/Singapore dollars 621 (39) -
10% decrease
CAD/USD 10,144 (20) (127)
CAD/Euro 400 (28) -
CAD/AUD 2,201 207 -
AUD/USD (14,030) (466) 3,432
AUD/Euro 5,874 470 94
AUD/JPY (4) 71 154
AUD/NZD (209) (16) -
AUD/Singapore dollars 621 46 -
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The above sensitivity analysis for foreign currency risk does not take
translation risk into account. Translation exposures arise from financial and
non-financial items held by foreign entities determined to be self-sustaining
operations. Sensitivity on net investments in self-sustaining foreign operations
is therefore not included in the analysis. The sensitivity at the balance sheet
date is not representative of the sensitivity throughout the year as the balance
sheet date exposure does not necessarily reflect the exposure during the year.
iii. Interest Rate Risk
The Company's exposure to interest rate risk relates primarily to the Company's
debt obligations. The Company manages interest rate risk and currency risk on
borrowings by using a combination of cash instruments, forwards and a mixture of
fixed and floating rates.
Based on the January 31, 2011 borrowings, the Company is exposed to interest
rate risk on short-term variable rate borrowings. A 25 basis point change in
short-term variable rates based on the Company's current credit ratings and the
current borrowings would impact after tax earnings by $1.4 million per annum.
During the prior year, the Company entered into derivative contracts in
connection with its plans to issue additional debt. Bond forward contracts were
entered into in order to protect against the risk of economic loss arising from
changes in the interest rates. The impact of a 25 basis point change in interest
rates on after tax other comprehensive income is approximately $3.1 million. As
at the balance sheet date, there would be no impact on after tax earnings. The
Company estimates that approximately $1.0 million after tax will be amortized to
net income as financing expense in the next 12 months. See Note 13 for further
information regarding the issuance of new debt.
iv. Credit Risk
The Company is exposed to credit risk in respect of its trade receivables.
Credit approval policies and procedures are in place to guide internal credit
specialists in granting credit to new customers as well as in continuing to
extend credit to existing customers. The Company manages this credit risk
through monitoring of credit balances, ongoing credit reviews of all significant
contracts and analysis of payment and loss history. Customers that fail to meet
specified credit requirements may transact with the Company on a prepayment
basis or provide another form of credit support, such as letters of credit,
approved by the Company.
The absence of significant financial concentration of trade receivables, except
as noted below for receivables from the CWB, limits the Company's exposure to
credit risk. Credit risk exposure for the Agri-products and Processing segments
are also partially limited through an arrangement with a Canadian Schedule I
chartered bank which provides for limited recourse to the Company for credit
losses on producer accounts receivable under Viterra Financial (TM).
The Company is also exposed to credit risk in the event of non-performance of
its counterparties on its derivative contracts. However, in the case of OTC
derivative contracts, the Company only contracts with pre-authorized
counterparties where agreements are in place and the Company monitors the credit
ratings of its counterparties on an ongoing basis. Exchange-traded contracts
used to hedge future revenues in the Company's grain business are not subject to
any significant credit risk as the changes in contract positions are settled
daily through a recognized exchange.
All bad debt write-offs are charged to operating, general and administrative
expenses. The year-to-date changes in the allowances for losses against accounts
receivable are as follows:
For the three months ended January 31 2011 2010
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Beginning balance $ 9,907 $ 8,081
Provision for losses 792 1,901
Write-offs, net of recoveries (1,327) (438)
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Ending balance $ 9,372 $ 9,544
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The Company has historically experienced minimal credit losses and, as a result,
it considers the credit quality of the trade receivables at January 31, 2011
that are not past due to be high. The distribution of trade accounts receivable
by credit quality as at the balance sheet is shown in the following table:
January 31, January 31, October 31,
As at 2011 2010 2010
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Not past due $ 586,925 $ 372,266 $ 422,440
Past due:
Past due less than 60 days 16,661 116,171 9,995
Past due greater than 61 days
and less than 90 days 5,167 5,402 2,626
Past due greater than 91 days 36,058 31,455 36,888
Allowances for losses (9,372) (9,544) (9,907)
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$ 635,439 $ 515,750 $ 462,042
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Included in trade accounts receivable is $90.2 million due from the CWB, which
represents a significant concentration of credit risk.
The Company's maximum credit exposure at the balance sheet date consists
primarily of the carrying amounts of non-derivative financial assets such as
cash, short-term investments, accounts receivable and long-term receivables as
well as the fair value of commodity contracts, exchange-traded derivatives and
other non-trade assets included in accounts receivable. Short-term investments
are held with Schedule I (Canada) and A-rated (Australia) banks, and have
maturities of less than three months.
v. Liquidity Risk
The Company's liquidity risk refers to its ability to settle or meet its
obligations as they fall due and is managed as part of the risk strategy.
Liquidity adequacy is continually monitored, taking into consideration estimated
future cash flows including the amount and timing of cash generated from
operations, working capital requirements, planned capital expenditure programs,
debt servicing requirement, dividend policy and business acquisitions. The
Company actively maintains credit facilities to ensure it has sufficient
available funds to meet current and foreseeable financial requirements.
Management believes that future cash flows from operations and availability
under existing banking arrangements will be adequate to support these financial
liabilities.
The following table approximates the Company's remaining contractual maturity
for its financial liabilities and matching financial assets as well as matching
cash flows in designated hedge relationships as at the balance sheet date. The
table below details the undiscounted cash flows of financial instruments based
on the earliest date on which the Company can be required to pay. The table
includes both interest and principal cash flows.
Contractual Within 1 to 2 2 to 3
Cash Flows 1 Year Years Years Thereafter
Financial Assets:
Exchange-traded
derivatives $ 33,422 $ 33,170 $ 252 $ - $ -
Commodity forward
contracts 203,535 203,425 110 - -
Foreign exchange
forward contracts
(OTC) 57,843 52,452 5,340 51 -
Natural gas swaps 97 97 - - -
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Financial
Liabilities:
Bank indebtedness $ (50,160) $ (50,160) $ - $ - $ -
Short-term
borrowings (776,928) (776,928) - - -
Exchange-traded
derivatives (63,525) (60,497) (3,028) - -
Commodity forward
contracts (169,877) (169,866) (11) - -
Foreign exchange
forward contracts
(OTC) (16,531) (14,382) (2,131) (18) -
Cross-currency
swaps (8,674) (8,674) - - -
Bond forwards (13,704) (13,704) - - -
Natural gas swaps (30) (30) - - -
Other current
liabilities (1,224,376) (1,224,376) - - -
Long-term debt,
including current
portion (1,351,128) (67,013) (67,013) (67,013) (1,150,089)
Classified as
other long-term
liabilities (11,154) (756) (3,221) (2,292) (4,885)
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12. MANAGEMENT OF CAPITAL
The Company's objective when managing capital is to strive for a long-term
manageable level of debt to total capital together with maintaining an
acceptable ratio of EBITDA to cash interest. Due to the seasonal nature of the
Company's short-term borrowing requirements, the Company's objective is to
manage the level of debt to total capital between 30% to 40% and to maintain a
rolling 12-month EBITDA that is at least five times the level of cash interest
paid.
Debt to total capital is defined as total interest bearing debt divided by total
interest bearing debt plus the book value of total shareholders' equity.
Interest bearing debt is the aggregate of short-term borrowings, long-term debt
due within one year and long-term debt.
January 31, January 31, October 31,
As at 2011 2010 2010
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Short-term borrowings $ 776,928 $ 165,067 $ 61,677
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Long-term debt due within one
year $ 2,092 $ 18,064 $ 2,295
Long-term debt 889,269 1,249,762 896,834
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Total long-term debt $ 891,361 $ 1,267,826 $ 899,129
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Total interest bearing debt $ 1,668,289 $ 1,432,893 $ 960,806
Shareholders' equity 3,789,853 3,477,158 3,710,263
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Total capital $ 5,458,142 $ 4,910,051 $ 4,671,069
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Debt to total capital:
As at the balance sheet date 31:69 29:71 21:79
Four quarter average 25:75 30:70 25:75
EBITDA to cash interest is defined as earnings before financing expenses, taxes,
amortization, gain (loss) on disposal of assets, integration expenses and net
foreign exchange gain (loss) on acquisition divided by cash interest. Cash
interest is net financing expenses excluding refinancing costs less non-cash
financing expenses. The ratio is calculated on a rolling 12- month basis.
For the rolling twelve months ended January 31 2011 2010
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EBITDA $ 639,078 $ 419,871
Cash interest, net 96,014 81,769
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EBITDA to cash interest: 6.7 5.1
Management uses EBITDA to cash interest to assess interest coverage and the
Company's ability to service its interest bearing debt.
The Company monitors its capital structure and makes adjustments according to
market conditions and seasonal requirements in an effort to meet its objectives.
The Company may manage its capital structure by issuing new shares, obtaining
additional financing, issuing unsecured notes, refinancing existing debt,
repaying current debt, or by paying dividends.
During the period, the Company was in compliance with external covenants
relating to the management of capital.
13. SUBSEQUENT EVENT
On February 15, 2011, the Company closed the offering of $200 million of 6.406%
senior unsecured notes due 2021. The offering was made pursuant to the Company's
short form base shelf prospectus dated August 6, 2010 and a prospectus
supplement filed on February 10, 2011. The notes, which will be guaranteed by
certain of the Company's subsidiaries, will pay interest semi-annually on
February 16th and August 16th of each year beginning August 16, 2011 and will
mature on February 16, 2021. Proceeds from the offering will be used to
partially repay amounts drawn by the Company on its Global Credit Facility.
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