Q3 2014 Agrium Inc Earnings Call
Nov 04, 2014 AM EST
AGU.TO - Agrium Inc
Q3 2014 Agrium Inc Earnings Call
Nov 04, 2014 / 04:30PM GMT
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Corporate Participants
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* Richard Downey
Agrium Inc - VP of Investor & Corporate Relations
* Chuck Magro
Agrium Inc - President & CEO
* Ron Wilkinson
Agrium Inc - SVP & President of Wholesale Business Unit
* Steve Dyer
Agrium Inc - EVP, CFO & President of Retail
* Thomas Warner
Agrium Inc - President of North America Retail
* Susan Jones
Agrium Inc - VP of Sales, Marketing & Distribution
* Jason Newton
Agrium Inc - Head of Market Research
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Conference Call Participants
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* Sandy Klugman
Vertical Research Partners. - Analyst
* Ben Isaacson
Scotiabank - Analyst
* Dan Jester
Citigroup - Analyst
* Don Carson
Susquehanna Financial Group / SIG - Analyst
* Chris Parkinson
Credit Suisse - Analyst
* Adam Samuelson
Goldman Sachs - Analyst
* Jacob Bout
CIBC World Markets - Analyst
* Kevin McCarthy
BofA Merrill Lynch - Analyst
* Michael Piken
Cleveland Research Company - Analyst
* Joel Jackson
BMO Capital Markets - Analyst
* Andrew Wong
RBC Capital Markets - Analyst
* John Chu
AltaCorp Capital Inc. - Analyst
* Steve Hansen
Raymond James & Associates, Inc. - Analyst
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Presentation
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Operator [1]
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Good day, everyone, and welcome to Agrium's third-quarter conference call.
(Operator Instructions)
As a reminder, this call is being recorded. Now for opening remarks and introductions, I'd like to turn the conference over to Mr. Richard Downey, Vice President, Investor and Corporate Relations. Thank you, sir, please go ahead.
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Richard Downey, Agrium Inc - VP of Investor & Corporate Relations [2]
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Thank you, operator. Good morning, everyone, and welcome to Agrium's 2014 third-quarter conference call. On the phone today to review and discuss our results is Agrium's leadership team, including Mr. Chuck Magro, President and CEO of Agrium.
As we conduct this conference call various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts, therefore, actual results could differ materially from those contained in our forward-looking information.
Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent annual report, MD&A, and annual information form filed with Canadian and US Security Commissions to which we direct you. I will now turn the call over to Mr. Chuck Magro.
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Chuck Magro, Agrium Inc - President & CEO [3]
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Thank you, Richard. Good morning, everyone, and welcome to Agrium's third-quarter earnings call. I'm very pleased to have Steve Douglas sitting beside me today in his new capacity as Agrium's CFO. Steve comes with some impressive credentials having been the CFO at both Brookfield Property Group and at Falconbridge and we are very happy to have him on our team. Of course, as usual, I'm also joined with Agrium's entire senior leadership team.
Today's call will be will be a little shorter than normal as we will be hosting our investor day in Toronto tomorrow and we will be sharing a lot more detail about Agrium's strategy, outlook and performance. It will also be a good opportunity for shareholders and analysts to interact with our management team and we look forward to seeing many of you there tomorrow.
Given this shorter format, today I would like to focus my commentary on three main topics. First, I will give an update on the fall market conditions across North America and how we believe growers are thinking about crop input decisions both this fall and into the first half of 2015.
One of the benefits of our global network of retail locations is that we have excellent market intelligence, right down to a detailed local level, and we will share some of that with you today. Second, I will discuss our third-quarter earnings results and fourth-quarter guidance. And finally, I will give a brief overview of our longer-term growth profile and strong competitive position across our nitrogen, potash and retail product lines.
My key message here, is that despite some near-term headwinds, Agrium's medium to long-term outlook is very positive. We have made a lot of progress over the past ten months, from impressive results from the Viterra acquisition and Australia retail improvements, significant enhancements to our phosphate business, strong progress on our capacity expansion projects, lower working capital and controllable G&A expenses, and an increased dividend.
We are continuing these efforts and are driving hard towards a period marked by significant increase in production capacity and other earnings growth, a $1.3 billion reduction in investment capital by 2016, and a resulting significant increase in free cash flow.
Looking at the conditions in the field now, the main story is the late harvest in the US. As of November 2nd, the corn harvest was 65% complete compared to the long-term average of 75% complete. This delay has been driven by a relatively late crop maturity after a late spring planting season and recent rains which have slowed harvest across the United States. Our US grower customers are primarily focused on harvest rather than fall applications which led to a slow start to crop nutrient demand this fall.
Due to lower crop prices and a slight reduction in acreage, overall we expect the total North American fall crop nutrient demand to be down about 1% to 3% in the 2014/2015 fertilizer year. If volumes are delayed from this fall and shifted to spring, this may exacerbate what is expected to be another tight logistics situation for next spring.
We do not expect a major change in nutrient application rates, given the significant nutrient removal from soils resulting from record yields. However, there is some potential for a slight decline in P and K application rates amongst some growers.
There is still uncertainty around 2015 planting intentions, particularly with low crop prices and the delayed harvest. We expect that these factors may contribute to many growers making planting and crop input decisions later than usual.
Turning to our third-quarter results, we announced net earnings from continuing operations of $91 million, or $0.63 per share. Excluding share-based payments and derivatives and FX positions, as well as a one-time tax benefit recognition, net earnings from continuing operations was $87 million, or $0.60 per share.
Our third-quarter effective tax rate, excluding the one-time tax recovery, was 18% which was significantly lower than the comparable quarter last year. This was due to a shift in the geographic distribution of our earnings this quarter, with more of our earnings coming from the lower tax Canadian business. We expect our effective tax rate to remain at a similar low level in the fourth quarter and return to approximately 27% going into next year.
Agrium's retail business delivered solid results under challenging market conditions this quarter. We estimate US total grower expenditures on crop inputs, excluding changing in nutrient prices for 2014 crops, declined slightly. Growing conditions in the US were near perfect this season leading to record yields for crops across most states. This, along with record crop yield globally, resulted in a significant drop in crop prices.
US growing conditions this summer also resulted in much lower disease and pest pressure than normal. These factors resulted in market wide demand for crop protection products being down year-over-year, particularly from high-margin products such as fungicides and insecticides. This is consistent with what we've seen reported from the major chemical producers. Furthermore, the inclusion of Vieterra's crop product margins impacted our overall reported margins, as Canadian margins were lower than in the US due to a higher proportion of lower margins products in the sales mix and rebates in Canada.
Our crop nutrient segment earnings were up slightly on a gross profit basis, due to the addition of the Viterra business and strong margins helped by higher rebates. Merchandise and services and other segments also performed better than the same period last year, driven by continued improvement in Australia and the addition of the Viterra equipment business in Canada.
The seed segment sales were flat year-over-year. However, the third quarter is a seasonably slow period for seed sales and most of the earnings during the quarter come from rebates from third-party seed sales earlier in the year.
Our Viterra assets have performed extremely well. However, seasonality of the Canadian ag-retail business typically causes a loss in the third quarter and we saw an approximately $6 million EBITDA loss from a Viterra assets in Q3. We are on track to meet or exceed our target EBITDA in the first year of operations.
Despite some significant improvements to our phosphate business, our wholesale results were impacted by the two major planned outages at Vanscoy and Redwater that were progressing during the quarter. In nitrogen, we generated higher volumes compared to the third quarter of last year. However, production volumes this quarter were impacted by the planned turnaround at Redwater to install the new waste heat boiler. During the outage some additional maintenance work was identified that required the turnaround to be extended by three weeks.
Looking beyond this year, with the improvements that we have made to Carseland and the Redwater plants, we expect to achieve significantly higher utilization rates in 2015. Potash volumes and costs were impacted by downtime at the facility this quarter, resulting in gross profit being $2 million compared to $27 million last year. Our Vanscoy expansion project is continuing as planned and we expect the facility will be back up producing potash again in December.
Phosphate gross profit more than quadrupled compared to the third quarter of last year, as our capacity utilization and per unit cost improved at Redwater. We reduced fixed costs at both of our plants, benefited from our sulfur and ammonia cost advantages, and realized significantly higher phosphate prices. All of these factors contributed to Agrium having the highest phosphate margins among its peers this quarter.
We continue to make good progress on our potash and nitrogen expansion projects and we will give a full update of each project at the investor day tomorrow. Agrium's total capital expenditure is expected to be $2.15 billion in 2014, compared to the $2.1 billion we referenced last quarter. And our 2015 total CapEx estimate remains unchanged at $1.3 billion.
Looking towards the fourth quarter, we issued guidance today of $0.45 to $0.75 per share. The fourth quarter guidance level and range is influenced by the later US harvest, with potential for some crop input applications and purchases to be shifted into the first half of 2015, as well as the additional downtime at the Redwater facility.
Overall, we expect fourth quarter results from our retail business to be comparable to last year. Our nitrogen volumes are expected to be slightly [higher] (corrected by company after the call) than the comparable period last year. And we remind you that the Vanscoy facility will be out of service for most of the fourth quarter which will lead to lower produced volumes.
Due to the costs of the ongoing work and the very few tons being produced, we are expecting gross profit to be negative $50 million to $60 million the potash this quarter. The facility will be restarting production in December and the expansion remains a very important step to position Agrium as a globally low cost producer and secure the future profitability of our potash business.
Looking out past the next quarter, we remain focused on our 2015 retail metrics. We have already surpassed our target on working capital and continue to work towards achieving the remaining targets. Of course, significantly lower crop prices does create a headwind to our business. When we set our 2015 $1.3 billion EBITDA goal, corn prices were over $7 a bushel, twice what they are today. We estimate that the US crop input market was down in 2014 somewhere between 5% and 8%.
While on a year-to-date basis retail's EBITDA is up $147 million over last year, even after accounting for contributions from Viterra and the tuck-ins, there is solid EBITDA generation from our organic growth and business improvement. Which demonstrates solid performance in fairly tough market conditions.
While it is too early to say, we expect 2015 crop input market to be flat at best, and likely to be down on somewhere between 1% and 3%. As a result it will be a challenge to hit $1.3 billion target. Although we are confident we will deliver significant year-over-year growth in retail earnings next year, it is also important to note that our 2015 targets are not end-state goals but a step along the way. And we will announce new growth and improvement targets post-2015.
Our wholesale expansion projects will increase our overall production capacity by 20%. These projects span our North American and international nitrogen and our Canadian potash production assets. These projects will all be completed by the end of next year and we will see a dramatic reduction in our investments and capital expenditures at the same time. These two factors will enable us to generate significant free cash flow and additional returns to shareholders.
In a demonstration of our confidence in this growth profile and our commitment to shareholder returns, we announced a 4% increase to the dividend today, bringing our annual payout to $3.12 per share. We have been very clear about our capital allocation policy, and today's dividend increase is consistent with our stated intention to continue to grow shareholder returns on a consistent and incremental basis.
That brings me to the end of my prepared remarks. But I would like to leave you with some final thoughts before we open up the lines for questions. Despite some near-term challenges in the agricultural industry, we must not forget the broader macroeconomic trends that will drive the industry in the long term.
The world's population continues to grow. Last year alone, global demand for key crops grew by over 100 million tons. At current yields that would require approximately 90 million more acres of land, which is the equivalent of the entire US corn acreage in 2014. All of which require associated crop inputs.
We believe that Agrium's unique model of complementary retail and wholesale businesses position the Company to achieve the greatest benefit from this growth in demand for crop input. Our identified growth projects, disciplined capital allocation policy, and focus on operational excellence will position the Company to provide meaningful and growing shareholder returns over the coming years. So with that, operator, we can open the lines for questions.
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Questions and Answers
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Operator [1]
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Thank you.
(Operator Instructions)
Sandy Klugman, Vertical Research Partners.
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Sandy Klugman, Vertical Research Partners. - Analyst [2]
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So you guys generated your highest phosphate margins since Q1 of 2013. Could you discuss a little bit of what's going on with your merchant rock supply from OCP?
And then just as a follow-up, does this do anything to change your goal of moving Redwater back to an integrated rock supply?
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Chuck Magro, Agrium Inc - President & CEO [3]
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Hi Sandy, it's Chuck.
I'll have Ron answer the first part of the question in terms of what we've done to drive those margins up and how the OCP rock is performing. And then I'll talk about the strategic direction of phosphate.
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Ron Wilkinson, Agrium Inc - SVP & President of Wholesale Business Unit [4]
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Good morning, Sandy. It's Ron Wilkinson.
With respect to the OCP rock, I'd say we went through a learning curve in the fourth quarter of last year and the first two quarters of this year. But starting late in the second quarter, we started to line the plant [owed] on the Moroccan rock and started to get the production rates where we felt they needed to be. And combining that with, I'll say a very high focus on cost management -- and to give you an example, our phosphate workforce at Redwater and Conda is down by 100 contractors and employees, versus where we were this time last year. The combination of those really reduced our costs, combined with a little higher prices, give us the excellent returns that we showed in the third quarter.
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Chuck Magro, Agrium Inc - President & CEO [5]
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Yes, and to your other question, Sandy, in terms of the overall direction and has it changed our view. The answer is no, it has not changed. We still believe to be successful in the phosphate business you need low-cost sulfur, you need low-cost ammonia, and you need an integrated rock source.
So our primary focus right now is to try to see if we can find, for the right economic returns, an appropriate integrated rock source for Redwater. After that, we're looking at other options for the phosphate business, but primarily we're focused on that singular question right now. And we'll update you and the rest of the market when we have something to share.
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Sandy Klugman, Vertical Research Partners. - Analyst [6]
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Okay. Thank you very much.
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Operator [7]
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Ben Isaacson, Scotiabank.
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Ben Isaacson, Scotiabank - Analyst [8]
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When I look at your retail working capital, or return metrics that you set in early 2013, I believe, they seem to be progressing quite nicely. Can you talk about what the action plan has been to get to where we are right now and what needs to be done to get to those 2015 targets? I'm sure you'll talk about it in more detail tomorrow, but maybe some quick thoughts?
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Chuck Magro, Agrium Inc - President & CEO [9]
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Okay. I'll start and then I'll turn it over to Steve Dyer, our President, to give you the specific actions that he has taken with his team.
But certainly we're pleased with the progress for all the retail metrics. I think this year, we've seen significant improvement across the board. Working capital is the one where we've had a lots of good work done. It is a focus for the Company, not only in retail but in wholesale, that we think that there's some opportunity.
Overall, what I'd tell you, Ben, is from a company-wide perspective, we've reduced our working capital by about $200 million. We think there's more to do. The portfolio review that we will share with you tomorrow that we've looked at all of our businesses, will reduce working capital even further.
And there's some very specific steps that Steve Dyer and his leadership team have taken in retail. So Steve, why don't you share that with Ben?
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [10]
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Sure. Hi, Ben.
In terms of working capital specifically, as you mentioned, we have exceeded our target already of achieving 18% of revenue. And again, as Chuck mentioned in his commentary, that's obviously not the end-state for us. We will be taking a look at where we go from here in terms of working capital. And we do see additional opportunities to bring working capital down further.
But specific to what we've taken a look at, from a Viterra standpoint and the addition of it's working capital to revenue was a little better than we expected through this year. So that's been -- provided a bit of a step change as well.
And then the key area for us has been around accounts receivable. And that's where we really rate across the globe, in bringing bring that down. So focusing in places like the southern US where the receivables have tended to have a longer period of time.
We've made great progress in bringing those down over the year. As well as, we've made a good step change in South America in improving our AR and our working capital in South America. And we've made some progress in Australia as well from an AR standpoint.
And then the second piece would be around inventory management. And, again, through consolidation of our facilities, as well as closer management of overall inventories, we've been able to make a step change there as well. And those would be the two main areas that we focused on from a working capital standpoint. And again, we'll go into more detail tomorrow on where we see ourselves going from here.
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Ben Isaacson, Scotiabank - Analyst [11]
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That's great. Thank you so much.
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Operator [12]
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PJ Juvekar, Citi.
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Dan Jester, Citigroup - Analyst [13]
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It's Dan Jester on for PJ. Just two quick question on seeds.
First, can you give us an update on what you're seeing for seed pricing for next year? And then secondly, I think you've talked in the past about the Dyna-Gro business growing mid-teens growth rate. How should we be thinking about that, given the uncertainty for planted acres next year? Thanks.
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Chuck Magro, Agrium Inc - President & CEO [14]
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Dan, it's Chuck. I'll turn those questions over to Steve Dyer and Tom Warner to address.
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [15]
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Just quickly on overall and Dyna-Gro and I'll turn it over to Tom. So far this year we're up about 10% on Dyna-Gro. So we're very pleased with that. And I'll turn it over to Tom to give a little bit more color on our seed overall.
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Thomas Warner, Agrium Inc - President of North America Retail [16]
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Dan, this is Tom.
What I see in 2015 is seed being pretty flat on prices. I don't see much upside, but also don't see much downside.
Specifically on Dyna-Gro, in 2014, corn was up 13% year over year, beans were up 9% and cotton was up 26%. We see similar growth as we go into 2015 on the Dyna-Gro seed, specifically.
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Dan Jester, Citigroup - Analyst [17]
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Great. Thank you.
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Operator [18]
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Don Carson, Susquehanna.
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Don Carson, Susquehanna Financial Group / SIG - Analyst [19]
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Chuck, want to go back to Vanscoy. On the last call you stated that if you got up in November, December that you expect shipments next year to be up 900,000 tons versus 2014. So the follow-up is, can you confirm that that's still the case?
Secondly, where do you expect to put that 900,000 tons? Is most of that going to be in the domestic market? And how many purchased tons are you going to be backing out of your system? It sounds like Vanscoy could make the domestic granular market pretty competitive next year.
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Chuck Magro, Agrium Inc - President & CEO [20]
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Yes. Don, that's right. We have full intentions of ramping up the Vanscoy incremental 1 million tons over the next three years. Next year we will produce 2.1 million tons and I'll have Ron Wilkinson, our President, just talk about the mix between PFR and produced tons as we move through 2015.
Go ahead, Ron.
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Ron Wilkinson, Agrium Inc - SVP & President of Wholesale Business Unit [21]
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Hi, Don, it's Ron.
In terms of potash production next year, just a few comments. Number one is, the ramp up will be gradual over the years. So you'll see Q4, for example, much greater than Q1. At least that's our planning basis. And therefore, we actually will be purchasing some third-party potash in the first quarter.
And of the 2.1 that we intend to produce, we're projecting that we'll sell 1.9 of that. And we'll be putting 200,000 tons into inventory for spring 2016 sales. And we'll be going into 2015 with zero inventory. So we won't be selling out our total productive capacity. We'll be inventorying a little bit of it.
In terms of a split between, I'll say domestic and international, we will be probably in the first half a little more weighted to international with our Canpotex allocation. And then in the second half, it will be a little more weighted to the domestic volumes. And of course, we'll be leveraging our retail sales volumes there.
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Chuck Magro, Agrium Inc - President & CEO [22]
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Don, overall we expect for the 1 million tons -- and it won't be all in 2015, that we will use North America to move half of that and our retail business will be a big part of that equation. And then we expect the other half most likely will go international through Canpotex.
That sort of the high-level marketing plan.
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Don Carson, Susquehanna Financial Group / SIG - Analyst [23]
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Thank you.
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Operator [24]
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Chris Parkinson, Credit Suisse.
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Chris Parkinson, Credit Suisse - Analyst [25]
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Can you give us a quick update on your expectations for the landmark business going forward? And what you've seen over the last, let's say, 6 to 9 months, after you've made some switched there? It seems like you had some decent tailwind, so I'm wondering what the updated strategy is there? Thank you.
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Chuck Magro, Agrium Inc - President & CEO [26]
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Chris, I'll turn that over to Steve Dyer. But what we have seen at the top lines is that we've seen significant revenue increases. We've seen the EBITDA more than double in Australia, so we're very pleased with the changes that we've made. It has been a focus for us.
And going forward, the longer-term picture for Australia, we are getting more and more confident every day that this can be a major earnings contributor for retail in the future. So very pleased at the highest level. And Steve can talk to you about exactly what we've done in Australia to deliver those results.
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [27]
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Yes, Chris. Just a little bit more color there.
If you look at the first nine months of the year we're up from $27 million to $72 million in EBITDA for that business. So we've made great progress. We've had fairly decent weather conditions this year right across most of Australia.
But on top of that, we've made some great improvements. Margins are up across that business. All of the shelves. As well as we've taken a significant amount of additional costs out of that system, as well.
We've done a number of consolidations, as well, which I'll actually get into a little bit more detail on tomorrow. But just high-level, in 2013 and into 2014, we've closed about 49 locations to do some consolidation there. To bring some costs out of the system as well. As well as we talked a little bit about working capital.
We've made a good change in working capital. We've reduced working capital from around 22% of revenue, and I think we're sitting at around 19% of revenue today, as well. So those are some of the things that we've done so far.
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Chris Parkinson, Credit Suisse - Analyst [28]
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Thank you.
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Operator [29]
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Adam Samuelson, Goldman Sachs.
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Adam Samuelson, Goldman Sachs - Analyst [30]
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Question in retail on the operating expense side. Wanted to just get some color on one part of the retail long-term targets that you are below the 2015 outlook.
Just to get a sense of expectations for 4Q, have selling expenses this year actually come in ahead or below of your own expectations and some of the actions that you're looking at as you move into 2015 to improve the operating cost leverage? Thank you.
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Chuck Magro, Agrium Inc - President & CEO [31]
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Adam, it's Chuck. Steve, do you want to handle that question?
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [32]
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Sure. Hi, Adam.
In terms of our operating costs, we look at it overall, we're pretty much in alignment with where we would expect to be from an operating cost standpoint. On that ratio, with a little bit of the headwinds that we've seen with lower commodity prices, again, that's the ratio that we have is to GP, if you're looking at specifically the metric of GP to up costs. So there's been a little bit of influence there from some of the headwinds.
But overall, again, as I talked about, we have made some good improvements from an operating cost standpoint. Talked a little bit about Australia earlier. We've made some improvements in South America. And we've made great progress with the Canadian operations, as well, in achieving those synergies as part of the Viterra acquisition and a chunk of that was related to operating costs or G&A.
And as well as we continue in the US to work through and do some rationalization of our network. And every time we do some rationalization it does take costs out of the system as well, as we consolidate facilities. And again, I'll be getting into that in quite a bit more detail at the investor day tomorrow.
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Operator [33]
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Jacob Bout, CIBC.
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Jacob Bout, CIBC World Markets - Analyst [34]
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Can you talk a little bit about your relationship with ValueAct? Do you think your priorities are aligned? And is there any indication that they'll be seeking a seat on the Board?
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Chuck Magro, Agrium Inc - President & CEO [35]
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Jacob, it's Chuck.
So, our relationship with ValueAct is still evolving. I can tell you that we've had a few meetings with them.
Like all shareholder discussions, I don't think it's appropriate for me to talk about specifics, but what I will tell you is, discussions have been friendly. We've had very good two-way dialogue, back-and-forth. And so far what they're telling me is the reason they've invested in Agrium is they like the strategic plan.
They like the plan that I've been sharing with shareholders for the last 10 months. They see the same thing that we see. And for Agrium, I guess all I can say is, certainly we're focused simply on the execution of that plan.
Right now we've got a lot of capital going out the door. We're in the middle of some very sensitive parts of our capital expansion project. And it's absolutely critical that we focus on execution. We believe that the plan we have today is the best way to create long-term sustainable value for our shareholders. And that's what we're focusing on.
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Operator [36]
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Kevin McCarthy, Bank of America Merrill Lynch.
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Kevin McCarthy, BofA Merrill Lynch - Analyst [37]
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A few questions on the late harvest. First broadly, how would you assess the financial impact in terms of 3Q versus 4Q?
And then more narrowly, I think on the last slide of your deck, you referenced a slightly higher proportion of P and K applications to be applied in the spring versus the fall. Noticeably absent there is nitrogen. Just wondering why that might be the case?
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Chuck Magro, Agrium Inc - President & CEO [38]
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Kevin, I think we should answer that question in two parts. I'll have Ron Wilkinson talk about the impacts for wholesale. And then Steve can do the same for retail. So go ahead, Ron.
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Ron Wilkinson, Agrium Inc - SVP & President of Wholesale Business Unit [39]
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Kevin, it's Ron.
In terms of wholesale, we don't see really too much of a change on nitrogen, specifically the ammonia season. We still believe the weather window is wide enough to get the ammonia down. And we're largely through the ammonia season in Western Canada, with, I'll say, expected results.
In terms of the P and K for wholesale, it's more about customer forward pull. And at this point in time, we're very well forward sold on phosphate, and of course we don't have very much produced potash to sell for the fourth quarter.
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Chuck Magro, Agrium Inc - President & CEO [40]
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Steve Dyer, how about retail?
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [41]
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From a retail standpoint, and then Kevin, just to your question on Q3 versus Q4. Q3 is really driven by chemistry when you look at insecticides and fungicides and that's where we had a little bit of impact in Q3. And Q4 is really driven by fertilizer.
So from a Q4 standpoint, reason we didn't talk about nitrogen, we see nitrogen, weather permitting, to be normal from an application standpoint. And right now, we are moving P and K, and we say there might be a little bit of push of P and K, but right now things are moving pretty good, from that standpoint. So we don't see any major issues. It should be a fairly typical fall season, again, weather permitting.
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Kevin McCarthy, BofA Merrill Lynch - Analyst [42]
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Thank you very much.
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Operator [43]
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Michael Piken, Cleveland Research.
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Michael Piken, Cleveland Research Company - Analyst [44]
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Just wanted to touch a little bit more into some of the logistical issues and your expectations with these higher rail and barge costs, how the shakeout of the cost is going to be? How much is going to be incurred by the wholesalers or fertilizer manufacturers versus the retailers versus the farmers? Thanks.
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Chuck Magro, Agrium Inc - President & CEO [45]
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Michael, I'll pass that question over to Susan Jones, our Vice President of Sales, Marketing and Distribution for Wholesale.
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Susan Jones, Agrium Inc - VP of Sales, Marketing & Distribution [46]
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Good morning, Michael.
What I'd say from a rail perspective is, we have continued to see delays and also logistical issues. What I can say though, with respect to our own network is, we've got about 4 million tons of storage between our own wholesale channel and our retail channel. We have been continuing to position as much product forward as possible. And we also have significant rail car fleets within our own fleet to ensure the product is moved using our own railcar.
So with respect to an impact to the retailer and farmer, we're doing all we can to ensure that they're not going to see a significant impact, but of course we've got to leverage our system.
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Ron Wilkinson, Agrium Inc - SVP & President of Wholesale Business Unit [47]
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Michael, it's Ron Wilkinson.
I'd also add with the dropping price of oil, we will see a reduction in the fuel surcharges we pay, which will help offset any increase in rates.
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Operator [48]
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Joel Jackson, BMO Capital Markets.
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Joel Jackson, BMO Capital Markets - Analyst [49]
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I want to talk about your retail tuck-ins. I think you had $129 million in the quarter of retail tuck-ins.
So first, can you talk about how many (inaudible) you acquired, what was the earnings multiple you were paying on that? And also, some larger retail competitors, Allana, Pinnacle, seem to be doing a roll up farm center consolidation strategy, possibly bidding up some of these assets. Can you talk about what's going on there? Thanks.
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Chuck Magro, Agrium Inc - President & CEO [50]
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Steve Dyer, you want to handle that question please?
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Steve Dyer, Agrium Inc - EVP, CFO & President of Retail [51]
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Sure. Hi, Joel.
In terms of tuck-ins we do see continued very robust pipeline for us. We've done 23 tuck-ins so far this year.
And in terms of the cost of those tuck-ins, we are seeing a little bit more competition out there right now. But if you look at our pure retail tuck-ins, we're seeing a little bit more pressure. Historically we've purchased them at about a five multiple, before synergies. And the ones we've done this year have averaged about 5.5, so a little bit of cost increase there, but nothing substantiative.
And we do continue to see a good pipeline moving forward as well. And again I'll give a little more color in terms of how we see that rolling forward for us at the investor day tomorrow.
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Joel Jackson, BMO Capital Markets - Analyst [52]
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Thank you.
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Operator [53]
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Andrew Wong, RBC Capital Markets.
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Andrew Wong, RBC Capital Markets - Analyst [54]
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So, I just wanted -- looks like, looking out to next year, wholesale segment looks like it's getting back on track. Which is good to see. Can you talk about some of the lessons that you've learned over the past year and maybe some of the changes that you've made to limit the operational risks going forward for next year? Thanks.
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Chuck Magro, Agrium Inc - President & CEO [55]
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I'll start, Andrew, and then I'll pass it over to Ron.
So obviously, there's been a lot of lessons learned. But what I would tell you is this, it really comes down to -- when we had the nitrogen assets in the years 2000 and 2005, natural gas pricing was very high. And we didn't even know if these plants were going to run on a sustainable basis. So at that point, way back then, the capital costs of sustaining maintenance capital was pared back. Was that the wrong decision? Probably not, given the time.
It was probably the right decision at the time. And then with the shale gas revolution hit us and you saw these plants basically becoming so profitable, we ran them very hard. And at that point, starting in around 2009, 2010 we did ramp-up the sustaining capital. And we've been playing, I guess, some element of catch-up since then.
So the lesson learned for me, is that with these assets as long as they run you have to have the right amount of sustaining capital for them. And we believe that that number for the Company is around $550 million a year. We get that number by benchmarking against all of our peers and best practices out there. And it seems to be the right number.
So for us, what you're going to see going forward, is we're sort of going to dial in our maintenance capital at a number. We're not going to monkey around with it too much. And then the rest of it, from a free cash flow perspective, will be very strong going forward. But that is clearly a key lesson for me. Now we did a whole bunch of things to refresh the plant this year and I'll that pass that over to Ron Wilkinson.
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Ron Wilkinson, Agrium Inc - SVP & President of Wholesale Business Unit [56]
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Andrew, it's Ron.
As Chuck said, the majority of our issues here have been associated with end of life equipment and we stepped up our sustaining capital. But we've looked more broadly than that. And I'll share more on this tomorrow at the investor day, but we've looked very closely at our operations and maintenance practices. We've bench marked them against the best in the petrochemical industry. And we have identified some areas where we have some weakness and we'll be working those areas on priority.
Another area where we are focused is actually the instrumentation protection systems on critical equipment. And we've got a fairly major initiative to upgrade them so that, in the event of a failure, we failsafe rather than damaging equipment.
And then finally, we are updating and improving our turnaround practices and that includes going to a four-year cycle for our major sites.
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Chuck Magro, Agrium Inc - President & CEO [57]
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One other comment, Andrew, is, this year has been a challenge. But I will tell you that it's really been an investment. So we have refreshed Caresland (inaudible), Saskatchewan and the Redwater facility. And moving into next year, we will show you some numbers tomorrow, but you can expect to see higher volumes of nitrogen at lower costs.
And so this year has been an investment year. It has been a refresh year. But I think that next year you're going to start to see the benefits of that investment.
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Andrew Wong, RBC Capital Markets - Analyst [58]
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That's great. Thanks a lot.
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Operator [59]
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John Chu, AltaCorp capital.
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John Chu, AltaCorp Capital Inc. - Analyst [60]
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Just wanted to touch on the 2015 North American fertilizer outlook being down 1% to 3%. I'm assuming that's probably more of a broader industry forecast. And with Agrium's retail network can we assume that the impact should be more mitigated because of that?
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Chuck Magro, Agrium Inc - President & CEO [61]
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I'll pass that over to Jason Newton, our Head of Market Research. What I would tell you, John, is exactly that.
It's our view of chemistry, seed and fertilizer. Looking at that acreage and the dollars per acre. But from our retail business perspective, if you look at what we did this year, we thought the market was down even more than that this year, say 5% to 8%. And if you look at what we've delivered in retail, we've outperformed the market quite substantially.
So moving into 2015, we are thinking the market could be flat to slightly down. I'll have Jason explain that more for you in just a minute. But we think our retail business will still outperform the market even in 2015 market conditions.
So Jason, why don't you walk through the 1% to 3%?
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Jason Newton, Agrium Inc - Head of Market Research [62]
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Good morning, John.
Just to start with, those numbers are based on an acreage forecast. And so in terms of what we think about acreage is mainly corn and soybeans, we'd expect corn area to be down -- flat to slightly down from this year from that 90 million, 91 million acre range, soybeans flat to slightly higher. And so that's driving the nutrient supply/demand or demand forecast for next year.
What we see based on that acreage forecast is that nutrient demand will be slightly lower and weighted more towards phosphates and potash, but basically probably 2% down on nitrogen and more 3% down P and K. Then you add in the expenditure per acre, which is based on the price of nutrients, which are based at today's ammonia prices are slightly higher, you get to that 1% to 3% down on overall crop nutrient expenditure basis.
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John Chu, AltaCorp Capital Inc. - Analyst [63]
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Great. Thank you.
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Operator [64]
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Steve Hansen, Raymond James.
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Steve Hansen, Raymond James & Associates, Inc. - Analyst [65]
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Just wanted to circle back on the tuck-in strategy quickly here where you're suggesting your pipeline is full. I'm just hoping you could speak to how you think about the broader strategy in the context of some potential weakness shipping of next year and whether the strategy shifts at all, whether you apply some cash here, or whether you pull back temporarily? Just trying to get a broader context of what you think about next 2 to 3 years.
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Chuck Magro, Agrium Inc - President & CEO [66]
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Hi, Steve, it's Chuck.
Certainly we would not pull back. In fact, we're thinking quite the opposite. So, what we're seeing right now is, with crop prices the way they are, some of the retailers quite honestly are looking at it saying maybe now's the time to monetize their investments and we've seen our pipeline be quite full.
We also have seen a pickup in competition. To be honest with you, that's healthy, because the retail business does need further consolidation. So if market conditions are as we predict, we think that we can even ramp-up our tuck-ins to some degree in 2015 and beyond. And that would further accelerate our earnings growth potential, as well as the consolidation of an industry which I believe needs to be further consolidated.
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Steve Hansen, Raymond James & Associates, Inc. - Analyst [67]
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Very helpful. Thanks, guys.
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Operator [68]
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Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
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Richard Downey, Agrium Inc - VP of Investor & Corporate Relations [69]
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Thanks, everyone. It's Richard Downey here.
We will be webcasting the entire investor day tomorrow. So we hope to see you or have you join us online. Thanks for everyone's participation.
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Operator [70]
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Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
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