Operator:

Good day, ladies and gentlemen, and welcome to the CF Industries First Half and Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Please go ahead.

Anthony Will :

Thanks, Martin, and good morning, everyone. I'm going to start with a big welcome to Greg Cameron, who joined the CF Industries team as our Chief Financial Officer in June as being his first earnings call with us. Greg brings a strong background in executive leadership finance and clean energy. He is succeeding Chris Bohn, who was promoted to Chief Operating Officer. So welcome, Greg, and congratulations, Chris. Turning to earnings. Yesterday, we posted financial results for the second quarter of 2024, in which we generated adjusted EBITDA of over $750 million. This brought adjusted EBITDA for the first half of this year to $1.2 billion. We're very pleased with our performance during the quarter, both in terms of how well we operate and also the progress we have made on our decarbonization and clean energy projects. With that, Chris is going to provide more detail on our operating results as well as on our strategic initiatives. Chris?

Bert Frost:

Thanks, Chris. The North American spring application season saw strong demand for urea and UAN driven by higher-than-expected planted corn acres in the United States. This demand absorbed urea and UAN imports that were significantly higher in 2024 than the prior year. Spring ammonia applications were low this year following a strong fall 2023 application season. However, industrial demand and exports offset the lower spring volumes. As a result, we believe the North American nitrogen channel exited the spring application season with low inventories across all products. This supported our ammonia and UAN fill programs, which achieved prices that were well above last year's programs, but also represent value for farmers despite lower corn prices. Corn prices have been declining due to anticipated high production of corn in the United States and Brazil this year. As a result, the outlook for farm economics is softer compared to recent years. We have begun to see this ripple through different parts of the agricultural value chain. We don't expect to see a major impact for nitrogen given the non-discretionary nature of our products, but we may see changes in buyer behavior. Globally, the nitrogen supply demand balance tightened as the second quarter progressed. Natural gas curtailments in Egypt resulted in widespread nitrogen production outages from late May to early July, reducing global supply. The continued absence of urea exports from China also helps tighten the global market. We expect exports from China to resume at some point in the second half. However, we believe total volumes for the year will be much lower than the 4.3 million metric tons of urea exported in 2023, given the Chinese government's focus on domestic fertilizer availability. Brazil and India will be a key focus of the global nitrogen market in the coming months. We continue to project that urea consumption and imports in Brazil will grow in 2024. Imports of urea to India will be lower than in previous years as domestic production has ramped up. However, India has imported less than 2 million metric tons of urea so far in 2024. As a result, we believe substantial import volumes are required in the coming months to meet urea demand in India. On a longer-term basis, we anticipate growing demand for low-carbon ammonia and low carbon nitrogen fertilizers for traditional applications. We've had a growing number of conversations with customers who want low carbon versions of the products they buy today. This is because the consumers of agricultural and industrial products, including ethanol producers such as POET are increasingly focused on reducing the carbon footprint of their supply chain, which lower carbon fertilizers will do in a quantifiable and certifiable manner. We expect even greater interest as we bring low carbon ammonia and fertilizers to the market. With that, Greg will cover our financial performance.

Anthony Will:

Thanks, Greg. A year ago on our second quarter earnings call, I expressed dissatisfaction with our safety record as we had experienced an unacceptable number of very preventable injuries. I am really proud of the team for their response and focus on this front, and we have achieved fantastic results both on safety as well as our asset utilization and onstream factors. So, really well done to Chris, Ashraf, Sean, Kelvin and the entire manufacturing team. I also want to recognize the rest of the organization. We are operating extremely well, not only in manufacturing but across the whole company. Our price realizations were strong. We ended the quarter in a fantastic position from an inventory perspective and we are doing a great job on the supply chain side of logistics and gas procurement. Before we turn to your questions, I do want to highlight one other thing that Greg touched on during his remarks. We have seen two significant transactions recently by knowledgeable successful companies acquiring production assets in North America. One transaction, as Greg mentioned was by a long-term entrenched industry participant in the agriculture side of the business, the other by an energy company looking to capitalize on clean energy attributes of low carbon ammonia. Both transactions place values on production assets in North America, roughly new build or replacement cost of those assets. So it is clear that knowledgeable companies looking at the space see higher cash generation and more persistence of that cash generation than the general market recognizes. With our operations really hitting on all cylinders and our world-class EBITDA to cash conversion efficiency, we are in a unique position to continue creating significant value for our long-term shareholders. In fact, over the last 15 years, we have leveraged our cash generation to buy back half of the outstanding shares of the company, while increasing our production capacity by over 1/3. This formula of adding capacity in a disciplined way, while reducing the outstanding share count has driven the best total shareholder return results in the industry. As we look forward, we see the opportunity to continue with this winning approach, providing superior returns for our shareholders. With that, operator, we will now open the call to your questions.

Andrew Wong :

It sounds like you're receiving more interest in low carbon ammonia from the agriculture side of things, which I think is a bit of a shift from about a year ago when we were all kind of talking about more interest on the industrial side of things. So can you talk about that shift and what that might mean for pricing of low-carbon ammonia?

Anthony Will :

And Andrew, I'm just going to tack on one other thing. It's not that we've seen a diminution or reduction on the industrial or energy side for these products. It's just what has happened is on the agricultural side, we've seen demand develop that we hadn't previously recognized. What we're also seeing is a lot of interest from other potential industrial companies and looking at new low-carbon intense ammonia production for a variety of potential industries that they're focused on as well. So we're not only seeing it in terms of demand across the product space, but also demand from companies that are looking to vertically integrate their inputs.

Andrew Wong :

And then maybe building on top of that then, you talk a lot about the potential for more ammonia supply and the potential for oversupply. But given we're seeing building demand trends around different industrial applications and maybe on the ag side as well. Like is it possible this is an area where maybe the demand for low carbon ammonia could be strong enough to maybe just tighten the overall market just because of how long it takes to build on these plants. And obviously, we know that, that doesn't always go smoothly.

Operator:

The next question comes from Josh Spector of UBS.

Anthony Will :

Yes, Josh, I think it's a great question that you bring up, but I think you're thinking about this a little wrong. So the way to think about the Woodside OCI transaction as you take a conventional plant and you basically cleave it in half between the front end of the plant and the back end of the plant. And what's essentially happened is I think Linde is putting about $1.8 billion in the ground to create the front end of a plant. And now you've got Woodside that's paying $2.35 billion for the back end of that plan. So you add those together to really look at what an integrated plant looks like, and your north of $4 billion. Now the piece that Linde is building is a bit larger from a capacity standpoint than just the requirements of the back-end ammonia plant but you do get efficiencies of scale when you start getting into a large production volumes. And so that doesn't scale on a linear basis. If you drop that plant down to kind of just what's required on the input basis, you're still probably talking about $1.3 billion to $1.5 billion. So you're looking at an integrated equivalency plant that's probably pushing [3.75 to 4] on that basis. So you really need to think about it in terms of what the total cost of construction of that plant is. And by the way, Linde has got a take-or-pay on the inputs that they're providing to across the fence line to what's now going to be the Woodside plant. And they're expecting a good rate of return on that. So you can't just look at the back end of the plant and try to do the math on it. You really have to look at what they're paying for the hydrogen, the nitrogen, the oxygen and then capitalize that back into the full cost of what a plant is.

Josh Spector :

Definitely a different way to look at it. I want to follow-up and just ask a little bit more longer term on the blue ammonia off-take or really your decision on FID for the greenfield facility. Just I think you've been helpful about thinking about the milestones needed within Japan, Korea, et cetera, to kind of say when they're comfortable knowing what they're willing to pay in terms of contract for difference to maybe enable some of those contracts. So is there any update you can provide on the time line there beyond your FEED study that will be required for decisions to be made?

Operator:

Next question comes from Steve Byrne with Bank of America.

Bert Frost :

So regarding the fall of 2023 was a big season for us. And in the spring this year, as I mentioned was lighter. However, for the fall programs, whether that be urea, UAN or ammonia, there's been very good uptake and it's a good value. The value that we put out for the fall application program was well received from a broad array of customers. And so we're expecting a solid fall application weather permitting. And the outlook -- yes, the grower outlook at $4 corn today were sub-$4 in the cash market, forward market for this 2025 is in the $4.50 range, which is acceptable. And so it's a question of how farmers are managing their economics. But fertilizer in general, that's [NP&K] on a revenue basis is still in that 20% range, which is acceptable, we think that nitrogen is a good value today. And will be well uptake, and we're expecting 90-plus million acres of corn for next year, which will then support, I think, not only ourselves but the imports that come in and so we're positive for 2025 in the fall application of 2024.

Anthony Will :

Yes Steve, I'm going to start, and then I'll hand the question over to Chris. So we are going through a flue gas capture FEED study right now. And part of that is does it make sense if we were going to do a new build on an SMR, but part of it also is informing us in terms of the path forward of how we're going to long-term approach getting to net zero by 2050. And there's definitely going to have to be a flue gas capture component of ultimately how we get there, in order to make it work. So this is not only good for the current but good for the long-term as well. And as you say, I think you can design these things at different levels of carbon reduction coming out of the flue. The problem is that sort of thing affects the geometries of the vessels. And so, if you were going to go to all of the pain and hassle of an expense of putting in flue gas capture. It's fairly shortsighted, I think to undersize that unit or to make it so that it's not terribly efficient because then ultimately, if your goal over long-term is to get to net zero, you're going to have to mostly replace or rebuild all of that capital you've already put in the ground. But it is certainly something that we're looking at and evaluating. We actually believe that the value of a superior decarbonized product is going to be such in the marketplace from a demand standpoint that extracting as much carbon out of it as you can is going to pay for itself. Not only do you get the 45Q benefit, but also the market demand for -- and premium that would be accompanying a decarbonized product, I think will carry the day.

Operator:

The next question comes from Chris Parkinson with Wolfe Research.

Bert Frost :

When you're looking at India, there has been, as we communicated a growth in domestic production, which has been the Made in India movement by Prime Minister, Modi. And they've been successful in that. However, taking a step back and looking at those investments, with the cost of LNG being 60% of their gas needs, those are expensive operations, not only from a CapEx position but from an operational and a delivered basis. But doing what it is, that's what they've chosen to do. And so exports or imports to India have declined over time, and we're projecting those to be in the 5 million to 6 million ton range for 2024. To date, and that's a January to date, India has imported about 2 million tons, including their NIFCO tons. And so we would expect over the next several months, September, October, November, December, you would probably see approximately 3 million tons. And so India is still a significant importer but has now fall into the second place as Brazil has taken over the lead for the largest importing country at approximately 8 million tons. And that's been a tremendous growth of demand reflected in their exports of corn and other products. So Brazil is the agricultural powerhouse we've been projecting for years, and we'll continue to grow in their imports of nitrogen. When you look at China, just the second part of your question that has been a great moderator to the -- or the supply of urea for the world. China has been in the 3 million to 5 million-ton export range for the last several years. And this year, it's almost insignificant because it's almost zero of their exports to date. We have talked about them being in the 2 million to 3 million-ton range. I don't think that's a questionable volume. And so when you put that in perspective of if the world export vessel traded market is approximately 55 million tons, taking 3 million to 4 million tons out of that supply is a great supporter of the current price structure where we are, that as well as the Egyptian loss of production in May through July, as what has been supporting the price structure that we have today.

Christopher Bohn:

All right. I'll start with the CapEx part, Chris. Our CapEx that we have is right now in the range of $550 million. As you know, having followed our company long enough that Q3 is when we do a lot of our planned maintenance. So we'll see probably a little heavier spend in Q3 here along with some of the production being a little bit lower. But with the full year being at gross ammonia production of the 9.8 million tons we talked about. As we get into an FID and say it's a positive FID to move forward with a new plant, the spending really occurs over five years, and it's almost just like a standard distribution a little bit with the beginning spend being relatively thin and then getting into years back half of the second year, third and fourth year, heavier and then the tail back on the fifth year. So a bit longer of a spend trajectory than the actual construction of plant itself is how we plan that out based on whatever our share component of that will be. I'll let Greg talk about maybe share repurchases.

Anthony Will :

And I would just add one thing, Chris, which is the good news, you mentioned our best-in-class EBITDA to cash conversion. And I think somewhere fairly traditionally in the 60% to 70% range is pretty normal for us. We were a little lower given kind of some of the operating challenges we had in Q1 with the weather-related outages and then the ripple on in terms of what that meant from some of our industrial ammonia contracts. But I would expect us to kind of get back into that range. That's pretty normal for us. And at that kind of conversion efficiency and cash generation, it's not an either/or question. It's both. And even if illustratively you're talking about a greenfield project if we decided to go forward with it that's in the range of what the Woodside/Linde project is trading at. If we're only doing kind of 50% of the capital on that spread over four or five years, it's not such a heavy capital load on us given our cash generation that we can't continue to do pretty significant share repo at the same time. So our view is it's the formula that we have used in the past of disciplined and addition of capacity while reducing our share count, we think works on a go-forward basis and we expect to continue to generate superior returns.

Adam Samuelson :

Bert, in your prepared remarks, you alluded to potential changes in buyer marketing patterns over the balance of the year. And I just wanted to clarify, is that a lot of the global pieces that you were just answering response to Chris' question? Or was there shifts you're seeing amongst your U.S. domestic customers in the fertilizer space? And if so, could you just elaborate a little bit on what is changing in terms of how people are buying fertilizer for the second half of the year?

Adam Samuelson :

And if I can just ask a follow-up. I believe you had the supply agreement for ammonia to Mosaic for most of the last decade. I believe that you've exercised your right to terminate that supply agreement beginning in January. Just how do we think about the non-trivial amounts of your own ammonia volumes, how do you think about -- how you're thinking about marketing that next year or you working to renegotiate the terms of that agreement?

Christopher Bohn:

Yes. And I think as Europe implements the financial aspects of the CBAM, going forward to there may be more alternatives that provide a higher netback for that low carbon ammonia that will be in production next year for Bert and his team to evaluate as well.

Ben Theurer :

First of all, congrats on a very strong second quarter. Just wanted to give your thoughts around just the cost piece of it, gas pricing and obviously, would it potentially does in Europe right now from a capacity point of view. You've highlighted in your prepared remarks, it was an offsetting a little bit the price decline clearly during the quarter from an EBITDA perspective and also on a first half basis. So as we see it right now, where do you think the spread is going to trend out just also given the geopolitical tension in the Middle East? And have you done any sort of like contracting, hedging et cetera, just to lock in those lower costs that are prevailing right now in the North American market, my first one.

Bert Frost :

Where we are on gas and you see it reflected in our Q2 exceptional performance and great job to the gas team is we're wide open in the cash market, and we're believers in the future of North American production. Today, we're running at a rate of about 102 Bcf and with exports still in the 12 Bcf to 13 Bcf per day and the spreads, you're still injecting and building inventory and that's what's driving and keeping the Henry Hub price lower. And so the spread against the international market, TTF or JKM, Europe and Asia is over $10, and that's an exceptional place for us to be as operators of these assets. But when you look at the trends, you've seen what happened in Egypt when it turns to summer and they want the gas for electricity or other purposes. They're now a large importer of LNG or Trinidad on the gas constraints that we're experiencing with our own assets. And so what will happen when you combine the EU and North Africa and Trinidad combined with their production assets and the global S&D for the products that those plants produce, it places, again, like Chris said, an exporter or a producer like CF Industries in a fantastic place outside of what could happen in the Middle East with all the disruption in Gaza and the Red Sea. So I think we're well positioned.

Ben Theurer :

And then just following up, you've talked a little bit about the Waggaman integration, but just wanted to understand where you're at in terms of like efficiency at Waggaman versus your own legacy assets? Where is still the potential? And just like from an operating run rate perspective. Where are you at right now? And where do you want to be maybe by year-end or in the first half of '25?

Anthony Will :

The other thing I'd just add is from an efficiency standpoint, I think I'm right in saying that is the most efficient plant we have in the entire network. And we're running at, I think, under 30 MMBtu per ton of ammonia, where the legacy systems, not including the recent expansion plans, but the legacy systems are more like 33, 32, and even the expansions are in the 30 range. So not only is it a fantastic plant from being able to operate above nameplate, but it's the most efficient plant in the system. And we've got a really engaged workforce down there. We could not be happier with that acquisition.

Richard Garchitorena :

So I was wondering if you could maybe give us an update in terms of how you're thinking about the market environment for clean ammonia today versus when you started your process to build out the strategy. Obviously, the recent OCI transaction would confirm, I guess, value that's out there. And then also, we had conflicting views out there in terms of the viability more green ammonia than blue ammonia, but maybe just some updated thoughts would be great.

Bert Frost :

I agree with Chris. In terms of where we are in our evolution in this process, we're focused on the business and where we can generate higher revenues and higher profitability and clean products are going to be a part of that. And it's amazing the receptivity from the processors. Again, when you look at the corn value chain in and of itself of what low-carbon product low-carbon ammonia or ammonia to upgrade it as UAN or as ammonium nitrate. What that can do in that value chain for corn or wheat as you take it through to the farmer and the farmer does beneficial practices that are being focused on today through the processor and as we sequester that CO2 from, let's say, the ethanol producer, you have a very -- a very low carbon finished product that can go into sustainable aviation fuel or ethanol. And those -- that's where we're focusing our attention on the ag cycle.

Bert Frost :

And I think that's where you see the stalling globally of the green projects where you see CF and others leaping ahead with low carbon products.

Christopher Bohn:

Yes. As we've talked about all along, we have a hierarchy of plants that we were hitting that were the most attractive and the soonest to execute so we could move on those. The first being Donaldsonville, the second being Medicine Hat, Yazoo City, so we've executed with Yazoo City, so we're working on Medicine Hat. Waggaman, our initial goal there was just the utilization rate and getting that stable and moving forward with the projects we have in place from a maintenance standpoint. But that definitely is probably the next on the list after Medicine Hat that we begin to look at CCS in that particular region.

Edlain Rodriguez :

Tony, a quick question for you. Like you talked about like the stock being undervalued and those two transactions clearly prove you right. The question is, how do you unlock the value? Like what do you need to do? Or what can you do to make investors see the light?

Operator:

The next question comes from Vincent Andrews with Morgan Stanley.

Christopher Bohn:

Yes. So I think the Medi decision time frame is one aspect that's in our partnership with JERA, where they would feel comfortable moving forward once they know what the contract for difference is. However, in saying that what is really the gating item initially right now is completion of the FEED study and our understanding that's going to inform what is the CapEx, what is the volume we can get off of that. And then out of that, what is the return profile. And if that's significantly above our capital -- our cost of capital, there's other partners that we're also in discussion with that could accelerate that. So I wouldn't say it's 100% pinned to Medi just given some of the other activity that we've seen around that. I think given the size of the project, there's two ways we look at partnership. One would be in an equity investment and one would be a long-term off-take no differently than we've done in the past with CHS and as Bert talked about earlier with Mosaic. To move to a second plant right away, I think we would need probably really to be ensured that we had partnerships and the cash flow. As Tony said, we're looking at this in a very disciplined way while continuing to do capital allocation back to the shareholders, but also grow and we think right now, our focus is on that first plant at the blue point side.

Operator:

The next question comes from Jeff Zekauskas with JPMorgan.

Anthony Will :

No, that does. And it's actually fairly comparable to what we did a year ago. Those were credits that were -- that were provided by the U.K. government as part of the overall ETF submissions scheme in the UK. And we are, at this point, given the fact that our ammonia production is offline kind of largely through that bank of credits. But on an account basis quarter-over-quarter from last year versus this that number didn't change dramatically.

Anthony Will :

Yes. It matters a little bit in terms of the value of the 45Q tax credit. The payments higher, if you go into a Class 6 well than EOR. The agreement that we have with ExxonMobil was contemplated on a Class 6 well, and so that is still for both plants, both Deville and Yazoo City. So that is still the expectation of where we're going to end up longer term. There is a question in terms of whether Class 6 permitting will be completed by the time that we're ready to begin injection from our side. And so there may be some transition period that we are talking about whether that makes sense to accelerate and go into EOR for a period of time before Class 6. But more to come on that front. Our perspective is the world is going to continue to need that oil. And whether it's our CO2 or whether it's CO2 that comes out of naturally occurring sources like Jackson Dome in Mississippi or other places, that oil is going to get produced. This is a net reduction in the amount of emissions that we're providing that's going into the ground and staying there and the oil is coming out anyway. And so our perspective is this is nothing but good for the environment. I think different potential customers may have different perspectives on that. And we've got to align with customer requirements. But in the near-term, the difference really is about the value of the 45Q tax credit. But longer term, the intent of all of our agreements is Class 6 permitting.

Christopher Bohn:

Yes. I think that's what Tony was trying to explain that certain customer bases are going to view EOR differently than a permanent sequestration. So as you look to Asia, it's more permanent sequestration is a requirement. I think as you look here in the U.S. and some of the other regions around the world, EOR given his point that he made, it's still sequestering CO2 will be acceptable. We look at it both on a strategic basis from that, but also on the economic as he explained as well.

Martin Jarosick :

Thanks, everyone, for joining us today. We look forward to seeing you at upcoming conferences.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries Earnings Conference Call. With me today are Tony Will, CEO; Chris Bohn, Executive Vice President and Chief Operating Officer; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first quarter of 2024 yesterday afternoon.

W. Will:

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first quarter of 2024 in which we generated adjusted EBITDA of $460 million. Our performance reflects a challenging quarter for our production network. Plant outages caused by severe cold in January as well as other unplanned downtime resulted in a significant loss of production and maintenance activity.

Christopher Bohn:

Thanks, Bert. For the first quarter of 2024, the company reported net earnings attributable to common stockholders of approximately $194 million or $1.03 per diluted share. EBITDA was $488 million, and adjusted EBITDA was approximately $460 million. The production outages that we experienced earlier this year affected our results in 2 significant ways.

Operator:

[Operator Instructions] The first question comes from Chris Parkinson with Wolfe Research.

W. Will:

Yes, Chris, I think that we believe, going forward, there are some significant challenges for a number of the production facilities in Europe. And our expectation is that utilization rates there will continue to be challenging. And we would expect some of those assets to permanently close. So I think that the combination of some challenges in Europe and other places in the world -- Trinidad is both running out of gas and with gas cost climbing as each of the existing contracts roll off, you've got challenges in parts of Asia and Latin America as well.

Operator:

The next question comes from Joel Jackson with BMO Capital Markets.

Christopher Bohn:

Yes. From a production standpoint, Joel, I think you can look at 2025 and going forward similar to what we had announced earlier this year at sort of the circa 10 million tons of ammonia -- gross ammonia production. And then based on where the margin potentials are that's going to change the product mix related to the total product that we do. But give or take, 100,000 tons on either side of that is generally where we look to produce.

Andrew Wong:

So my first one is really on Blue Point. I understand the plan is to go with mostly sales that are based on like a fixed margin type offtake. Just curious, how does the ammonia market pricing effect you're thinking on the investment decision there?

Operator:

We have the next question from Adam Samuel -- sorry, that's Adam Samuelson with Goldman Sachs.

Adam Samuelson:

That's helpful. And if I could just ask a follow-up on the spring demand here. Obviously, the ammonia side of things is more complete. Can you talk about kind of where we are on UAN from a side dress and topdress perspective and kind of when you start to think that in-season pull will really start to materialize?

Steve Byrne:

Yes. Thank you. I'd like to continue that discussion there, Bert. You had production issues this year. You had less imports into the U.S. China's exports of urea first couple of months were almost 0. We were thinking that there was going to be some strength going into the application season, but yet over the last month, pricing has fallen.

Bert Frost:

Yes. Welcome to my confusing world because that is exactly that you've listed the dynamics that we deal with every day that really were confusing. And then just pointing to the CF system of what Tony and Chris articulated with the difficulties with the weather and the production and the maintenance issues that created on the sales side or at least the commercial side, different product allocation and movements, and I give a lot of credit to our logistics team for moving that product around.

Steve Byrne:

Okay. And just a question on the green ammonia plant that you're commissioning. Just curious if you've signed any contracts for that product and any of your partners in Japan or South Korea interested in bringing green ammonia into their facilities? Or do they really prefer the blue?

Operator:

The next question comes from Josh Spector with UBS.

W. Will:

Yes, Josh. While we're evaluating a couple of different projects, principally, what we're looking at is different technology pathways to get us to a very low carbon intensity solution. And realistically, at least at this time, we're focused on one plant as opposed to multiple plants and doing the evaluation, as I said, should that be just a straight SMR, should it be an SMR with flue gas capture?

W. Will:

Initially, they were different based on the type of technology but certainly, it's our hope that we can find a way to have all of our partners participate in the same project, and that would be something that we can combine together and aggregate demand so that we're -- have a home for more rather than fewer of the tons coming off of that project.

Operator:

The next question comes from Ben Isaacson with Scotia Bank.

Bert Frost:

Yes, Ben, this is Bert. And the situation in Russia is as cloudy and clear as it's ever been. So that's a little bit of a dichotomy. But it's difficult because there are some places in the world that will not accept Russian product. And so there are places that are. And the largest happens to be the United States, which is surprising with where we are geopolitically, but the other is the EU.

W. Will:

Yes. I mean to tag along on that one just for a second. It's kind of shocking and I think actually, [ Yara may ] mention this as well in their call. But what's kind of shocking is that there's been all of this focus on not funding the Russian war machine and not buying Russian gas and yet the U.S. is arms wide open to take urea and UAN coming out of Russia, which is effectively just natural gas that's been converted and so it's -- the U.S. is funding the very war effort over there that on the one hand, it's condemning. So it's absolutely shocking, but I think that's not surprising given the political climate over here and the fact that we're in an election year.

Ben Isaacson:

And maybe just a quick follow-up on that. Can you talk about Ukraine? I mean before the invasion, I think, in 2014, Ukraine was a major exporter. And where do they stand right now? Are they self-sufficient for the net importer?

W. Will:

Although that one was struggling economically even well prior to the war. So that one has always been sort of up and down again.

Operator:

The next question comes from Ben Theurer with Barclays.

Christopher Bohn:

Yes. As we talked about, a lot of the issues that occurred in Q1 were discrete to Q1 and that those are passed us both from a production and also a sales perspective. But as you mentioned, we did take 167,000 tons of what would normally have been upgraded to urea, which, as I said in my remarks, would be about 275,000 tons of urea. So you see the urea decrease in sales and the increase we had in ammonia.

Operator:

The next question comes from Richard Garchitorena with Wells Fargo.

W. Will:

Yes, you bet. So we had an outage and we took that opportunity to conduct the turnaround that was kind of scheduled for later in the year. And so we were able to take advantage of that downtime. But prior to that and in fact, post turnaround we're operating at rates that reflect north of what nameplate capacity has been on that or is on that unit.

Aron Ceccarelli:

I wanted to ask you, in the scenario where you go ahead with both the Mitsui plant and the JERA one or, say, a combined one, how should we be thinking about your capital expenditure phasing for the next 3 to 5 years?

Operator:

Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the call back to Martin Jarosick for closing remarks.

Operator:

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Martin Jarosick:

Good morning and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, Executive Vice President and Chief Operating Officer, and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the full-year and fourth quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non GAAP measures in the press release and the presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks Tony. The fourth quarter of 2023 was an active period for our team, highlighted by the largest fall ammonia application season in North America in years. A strong fall application season indicates a commitment to nitrogen consuming crops on these acres and robust demand for additional urea and UAN applications through the first half of 2024. This, along with strong ag fundamentals, supports our outlook for a positive spring application season. We expect 91 million acres of corn to be planted in the United States. As we continue to work with customers in advance of spring applications, we believe supply is more constrained in the North American nitrogen channel than industry expectations. Inventories were below average entering the year and net imports of nitrogen to the region are not making up the difference. The cold snap we experienced in North America during January has exacerbated this situation. We believe that there has been significant volume of domestic nitrogen production lost due to weather related shutdowns across the region's supply base. We estimate that CF Industries lost approximately 150,000 tons of ammonia production in January from our own network due to the weather, unexpected supply tightness often leads to follow on logistics challenges and early spring would further strain the supply chain. We believe that our in region production and extensive logistics and distribution capabilities will serve us well in this environment. Global grain stocks use ratios have returned to normal levels after two robust growing seasons. However, we do not project a significant impact on global nitrogen demand, given the imperative to seed growing populations. We expect continued supply constraints in key producing regions, most notably ammonia production economics in Europe remain challenging. Global ammonia spot prices continues to align with the full cost of European ammonia production, confirming Europe as the industry's marginal producer. This continues to support elevated imports of nitrogen products into Europe compared to a decade ago. Beyond Europe, natural gas availability continues to affect ammonia and UAN production in Trinidad. And based on its actions in the fourth quarter of 2023, we believe the Chinese government will limit exports through the first half to ensure supply availability and urea price stability for the Chinese domestic market. Looking ahead, forward energy curves suggest continued favorable energy spreads between low cost North American production and high cost production in Europe and Asia. We believe this will support sustained margin opportunities for our low cost manufacturing asset base. With that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for their contributions to an outstanding year. I especially want to highlight the progress our team made in the second half of the year regarding our safety performance. After a challenging start to 2023, we ended the year with a 12-month recordable incident rate of 0.36 incidents per 200,000 work hours, in line with our performance in recent years and significantly better than industry averages. Our operational excellence and significant structural advantages underpin our cash generation. This enables us to invest in the business to further increase cash generation and drive increased shareholder participation in our free cash flow. In the last three years, we acquired the Waggaman ammonia production facility, advanced high return clean energy initiatives, increased our dividend by 67% and deployed $2.5 billion to repurchase more than 31 million shares which represented approximately 15% of the outstanding share count at that time. Additionally, we have strengthened our balance sheet to provide us tremendous flexibility as we are able to grow our business at the same time as return significant cash to shareholders. This approach has had a dramatic impact. As you can see on Slide 10, shareholder participation in our business has increased 80% in the last 10 years. We're excited about the opportunity ahead of us to build on this track record. In the near term, we expect industry fundamentals to remain favorable to our low-cost production network. Longer term, disciplined investments in low-carbon ammonia production can provide a robust growth platform for the company. Taken together, we expect to continue creating substantial value for long-term shareholders. With that, operator, we will now open the call to your questions.

Adam Samuelson:

Yes, thank you. Good morning, everyone.

Adam Samuelson:

So I guess, Tony, I guess the first question is we think about the decision to pursue additional FEED studies on the Blue Point complex evaluating the different technologies. Just help us frame the increment on carbon reduction that could come from either ATR or the flue gas capture? And maybe any additional color on the policy drivers of your potential offtakers as they evaluate what threshold is needed to commit to taking the blue ammonia volumes longer term?

Adam Samuelson:

All right. That's very helpful. And if I could just squeeze a quick market question just on natural gas. As you think about the decline recently in TTF and LNG prices broadly, it doesn't seem like you expect quick restart of idled or high-cost European production? Just how are you thinking about that over the course of the year?

ChrisBohn:

Yes. And I would just add to that, that the decision goes beyond just the cash cost immediately goes into the idea of cycling these plants is not necessarily good additional maintenance that may be needed prior to starting those back up or turnarounds that are coming forward or even holding inventory at certain periods of time that have a working capital cost to them. So I think gas is obviously the primary driver, but there's a lot of other ancillary drivers that go into factoring whether you restart.

Adam Samuelson:

I appreciate all the color. I will pass it on thanks.

Joel Jackson:

Good morning. A couple of questions. I noticed in your slide deck, your new updated sensitivity table, right, that shows EBITDA for every level of gas price and urea price, it's down in every single cell by $300 million at the same gas price and the same U.S. gas price in the same urea price versus what you had in the fall. Can you explain what's going -- and it's that higher volume now. You're at 1 million tons higher volume. Can you explain the drop in EBITDA at every single cell?

ChrisBohn:

Yes. And additionally, Joel, I think the big -- one of the bigger aspects of it is the relationship between the products on a pricing basis was updated to what 2023 was. So we always use the prior year as sort of the structure benchmark from that compared to 2022. So you saw more parity between the products than maybe what was a premium for UAN prior to that. And obviously, we do quite a bit of UAN volume. So this is just based on not only the cost structure of 2023, which we saw higher non-gas costs, primarily through logistics, but then also that new relationship that we experienced over the last 12 months on pricing.

Tony Will:

Yes. Let me take the first one first, and then I'll come back to your second point. The first one, not really being a full-on question, more of a statement. So every year, we try to update the table based on what the relationship was in terms of margin per nutrient ton of the previous year. And so the table will naturally evolve up and down and sideways and whatnot based on previous year. It doesn't mean that this is precise because if UAN starts on a nutrient basis starts trading at a premium to urea then the numbers are going to go up in every cell because of the volume of UAN that we sell. So this is illustrative as opposed to a point estimate. But your general comment of the relative premium of UAN versus urea dropped last year compared to where it was the year before is the right kind of takeaway, and that's the basis and underlying the sensitivity table. On the second question, we think that the price paid for Weaver is a fair but a full price for that asset. And our view is that at any point in time where we have made decisions to expand our network. Someone could have made exactly the same argument that you just made, which is it's cheaper to buy back shares than it is to add capacity. Therefore, you should never add back or add capacity. That would have been true. Back in 2010 when we bought Terra that would have been true. When we acquired the Medicine Hat slice that we didn't know and that would have been true. When we did the expansion projects at Donaldsonville and Port Neal or even probably the Waggaman asset that was just acquired. At every stage, we have been able to invest capital and earn a rate of return well above our cost of capital. So that's a value adding transaction, whereas buying shares back at market price by definition, is sort of NPV zero. Our view is if you look at the aggregate amount of cash that we generate and shareholder participation, sort of the ratio of the number of shares outstanding. Our shareholders have been much better off based on the combined approach that we've taken to both disciplined add capacity and also take shares out of the marketplace. And that has created a lot of value relative to an exclusive pathway of one versus the other. And so we're going to continue to evaluate the attractiveness of adding capacity on a basis of can we generate returns on a risk-adjusted basis above our cost of capital because generating more cash flow simply allows larger share repurchases in the future and it's not necessarily a point in time comparison about where we're trading in that moment because as you well know, these assets go 40, 50, 60 years in length. And so we really need to take a view of do we fully expect it to be a positive IRR and PP positive transaction to invest in a new plant because we can always default to buying shares back. And by the way, because of how well the business is operating, it's not an either/or question for us, we can actually do both at the same time.

Steve Byrne:

Yes, thank you. Bert, I got a couple of questions about your near-term outlook. Could it -- could the strong ammonia fall application season you rode the spring demand for urea perhaps more than UAN. Is that why maybe your UAN production was so robust in the fourth quarter. And when you look out at imports coming into the U.S., you commented about low inventory levels. some lower production in the U.S., we're hearing that there might be a much less level of imports this spring than in prior years. Is that consistent with your view? And how much have you sold forward into the second quarter?

Steve Byrne:

And maybe just one quick one for you, Chris. in that flue gas carbon capture analysis that you're doing there's a variety of technologies out there. Are you looking at several different technologies? And are you also looking at potentially using oxygen in the boiler instead of urea?

Steve Byrne:

Thank you.

Josh Spector:

Yes, hi guys, good morning. So I wanted to follow up on the additional FEED studies for carbon capture. And I just specifically asked about if there's been any changes in what you're hearing in terms of policy in Japan. I thought Japan was kind of leading the way that clean ammonia 60%, 70% lower carbon was something they were comfortable with accepting with their first move to reduce coal intensity, maybe other countries wanted to push it further. So has anything changed on the Japan side and how that relates to your first potential investment here?

Josh Spector:

Okay, thanks. And just on Waggaman. I mean I don't believe you mentioned at all that anything update on what you're doing in terms of potential CCS at that site. So just curious if you have any thoughts there on what that could look like timeline wise? And if there's anything to note about why CapEx or even OpEx, I guess, as you think about sending it on pipeline to get sequestered if that's meaningfully different versus what you're doing in Donaldsonville or similar?

Josh Spector:

Okay, thank you.

Jeff Zekauskas:

Thanks very much. Who are the natural buyers for your green ammonia? And how do you think about the price at which you might sell it?

ChrisBohn:

Yes. And I think if you look at it, Jeff, both similar with blue and green, we're going to be the first to market with these. And as you look at the green, there's just not a lot of supply there. So as Bert mentioned, you're probably going to see a premium based on that product that is significantly above our cost, I would say, just because it's a smaller amount. As we bring on Blue will be the first in the world with any measurable amount of volume with that. And I think there's a lot of activity, as Bert said, on the demand pull side that we're beginning to see that we feel fairly confident that we'll be able to receive some sort of premium on it what that is, that is yet to be determined 100% at this time.

Bert Frost:

So how we talk about gas is just that. We do hedge and we saw that the reason why in January with the spikes up to $50 in our Iowa facilities and actual availability or lack thereof in some other facilities. So hedging and securing supply during the cold months of Dec, Jan and Feb are important. But you're correct on the reverse side of that is those hedges were taken at higher value than we are in the cash market today. So your first quarter value for gas will be over what the cash value is and more to come on that.

Jeff Zekauskas:

Okay, great. Thank you.

Richard Garchitorena:

Thanks. Good morning. My first question was just on the update to the Mitsui JV and the Clean Energy Project. So it looks like the initial CapEx estimate from the FEED study is roughly $3 billion. Just curious, where did -- does that compare to the original estimate when you signed the MOU back in early 2022, how much capacity does that entail and then also, what protocols are you putting in place to maintain that cost estimate as you progress through development?

Richard Garchitorena:

Okay. Great, thanks for that. And then just talking about the nitrogen market. It looks like you cited about 40% of ammonia capacity in Europe being shut down in early January. And that's up versus around 25%, I believe, as of early November. And this is during a period when European natural gas prices have actually come down over 40%. So I guess, what is driving that? Is that -- is part of that curtailment maintenance shutdowns? Or are these -- part of these permanent shutdowns they expect to continue through 2024?

Bert Frost:

And I think a reflection of the gas -- current gas price today is in the cash market that was not available just a short time ago. And so the reflection of 40% as a look back on Q4 and entering into Q1, and you're probably going to see some of those plans restart, especially with the Russian announcement of limiting ammonium nitrate exports that just came out today, that's going to have a substantial impact on Eastern Europe and Central Europe and probably the ability to export for the Western European producers who can export, for example, Brazil had a 1 million-ton consumer of ammonium nitrate and Central America will need someone to supply that. So let's say, today, that's $8 gas that's doable in relation to the absence of the product coming out of Russia. So things are changing. And I think the gas as well as the supply market as well.

Edlain Rodriguez:

Thank you. Good morning everyone. Maybe this is for Tony or maybe for Bert. I mean if you compare where we are today with three, four, five months ago, are you more positive or less positive on the prospect of the industry or NCF for 2024, and that's looking at some of the big drivers, like corn prices, corn acreage, the energy complex supply demand? Like anything else you want to address? Like do you see things being more -- are you more or less positive?

Bert Frost:

I agree. In terms of where we were coming into a falling market, falling urea price market in Q4 and now in Q1 are rising urea market. Why is that? Related to energy, of course, and the inability of -- or the non-economic position of the European producer and higher imports, but you're seeing in terms of the global market of a very tight market, you've had downtime in Malaysia, export restrictions in Indonesia, export restrictions in China, as well as heavy imports and continued imports into India, but heavy imports into Brazil. And we're just entering our season, as we talked about previously with a tight market and needing to be -- to bring in product and so you have a tighter global market and then that's reflected in price. For the values for the feed grains, corn at $4.60, $4.70 is very attractive, especially when you look at trend yield over 180 and yields in Iowa, Illinois, Indiana above 200, it's very profitable. This will be the fourth best year in 10 years for the American farmer. And so when you couple that all together, as well as global supply and demand, I would say we're positive for 2023 -- 2024.

Operator:

The next question is from Ben Theurer with Barclays. Please go ahead.

Bert Frost:

Yes. So CF is an active exporter of our major products, ammonia, UAN, urea and some ammonium nitrate. The UAN has predominantly gone to Europe, Argentina and Australia and urea is more spot and situational. Where we are in Brazil today with about 44 million tons of consumption of NPK and the targets for 2024 are closer to 46 million tons, you're going to need our projections are over 8 million tons of urea imports to Brazil for the calendar year. And that's a very positive move. That will push Brazil to the largest importing country surpassing India who is between 6 million and 7 million tons now. Brazil did have high levels of inventories and imports entering the year. Much of that was consumed during the Safrinha season of which is January, February and March of applications, and they are low-level importers 200,000 tons, 300,000 tons a month. Their wheat application starts in April, and then we moved to corn applications in July, August, September and then cotton later in the year and again, repeating the cycle. So Brazil is the positive, I'd say, consumption train in the world of fertilizer economies, and it's going to continue to play a major part and so the S&D right now is balanced type globally for urea.

Operator:

The next question is from Andrew Wong with RBC Capital Markets. Please go ahead.

Chris Bohn:

Yes, I think as you look at any return on a project, it's a set return with a risk premium based in there. If you have take-or-pay, that's offtake on a ratable basis, you're probably willing to take a lower return profile on that. I mean that allows a lot of additional synergies that run throughout the entire network as we see with our [Mosaic] contract with them taking ammonia on a ratable basis, lower inventory, lower receivables, different things like that, lower risk involved and therefore, that allows you to have a lower risk premium and therefore, taking a slightly lower return on that.

Chris Bohn:

Yes. So the approval time line on that is really based on our partner, Exxon, and what they're doing both with the Class 6 and some of that's probably been accelerated some by their acquisition of the Denbury pipeline because it allows the other access to different states with Class 6 that may have a -- I would say, a shorter queue time than what Louisiana or some of the other states, so we are confident that in 2025, we will economically be receiving a benefit related to the 45Q and therefore, we'll have low carbon ammonia ready.

Operator:

The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Tony Will:

Yes, we're very happy with the agreements that we have in place and the partners that we have lined up to pursue these kind of opportunities with us. A lot of them that we have come out publicly with tend to be Asian focus. So a couple of Japanese firms as well as South Koreans. I would say that the Korean government and the customers as a result are a little bit behind from a time line perspective compared to the Japanese. And so we'll likely be making a decision around a plant principally targeting the Japanese market first, and then we'll eventually look at both Korean market and potentially European partners that we've discussed with as well further out. And that could be served by one in the same plant or it might have different requirements associated with it. But if we decide not to proceed, I think it's a combination of very likely just aggregate costs associated with moving forward and lack of line of sight on making sure that we can earn an appropriate risk-adjusted rate of return against that cost nut. Relative to the global S&D. I think I kind of went through that a bit in my prepared remarks, which is we're constructive on where we sit right now. Our results last year were strong. We're looking at another good year this year. Longer term, traditional applications for nitrogen continue to grow in the kind of 1.5 plus or minus percent range per year, and there's not enough new projects that are currently under construction globally to meet that requirement. Adding into the either supply deficit or demand increase is you've got some plants around the world, including Trinidad and probably Europe that are facing challenges with gas availability and gas cost. And then you've got new or potentially new applications for ammonia that are also developing. So all of those things lead to a tighter global S&D marketplace bidding in higher and higher cost of production around the world. And that provides, I think, a reasonable backdrop for us to be considering building new production capacity. But we have to, at the end of the day, be comfortable that we can earn an appropriate rate of return that's well above our cost of capital for us to want to proceed with a project like that.

Operator:

The next question is from Aron Ceccarelli with Berenberg. Please go ahead.

Bert Frost:

Good morning. Regarding the farmer income comment, what my comment was it's the fourth best in about 10 years. So when you look at -- as compared to last year, the year before, you're referencing John Deere, some of the chemical or seed suppliers, if not it's lower, but it's still at $4.60, $4.70 corn for December corn pricing today, and what was hedgeable not just a few months ago at 5.10, 5.20, very attractive, again, based on just trend yield of 180 bushels an acre, which is what we're targeting for 2024. But most high-state farmers are in the 200 to 250 bushels. So very profitable even with the drop in fertilizer prices, the drop in diesel prices. And so you have to look at the total cost structure for a farmer, whether that's owned land or rented land, variable costs against fixed costs and putting that whole structure together, it's still a good time to be a farmer. That was the point. Regarding the exports from China, we've seen a different China about every other year. And our prepared remarks and communication about what we expect out of China is that the government restrictions are in place for urea and some phosphate products. They will continue through or into Q2 and our expectations for China or they will export, they will return to the export market. And being that in the past five years, it's been between 2 million and 5 million tons we would say 3 million to 4 million tons of exports, sort of logical volume for 2024.

Bert Frost:

Plus, I'll add one more positive comment for the team, for the company and for what we are about as a company with the Do It Right culture, we have the highest onstream factor. We have the best safety statistics in the world. and we're going to lead the world in this move to low-carbon ammonia because it's the right thing to do and the government is incentivizing us and our shareholders want us to do this. And so there's a lot of positive energy going forward with that and what we will bring to the market.

Operator:

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back over to Martin Jarosick for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first nine months and third quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. The third quarter is often a period of softer demand and softer prices in North America as applications for the current crop are completed and purchasers assess their needs for the next spring. This year, purchases aggressively entered the market early in the third quarter driven by attractive nitrogen values, positive farm economics, strong interest from Europe and low inventories in the North American nitrogen channel. CF Industries built a good order book early in the third quarter and by the end of September, our UAN and ammonia order books stretched well into the fourth quarter. Strong demand early in the quarter helped drive nitrogen prices higher during the quarter. Urea barge prices in New Orleans moved up from below $300 per ton to over $400 per ton in early September. While the Tampa ammonia contract moved from $285 per metric ton, to $575 per metric ton during the quarter. We believe nitrogen inventories in North America remain low and substantial future demand will still need to be met as we enter the New Year. We are well positioned for this environment giving our low inventories today an open order book for the first quarter of 2024 and beyond and wide global energy spreads that continue to favor our low-cost North American manufacturing base. Outside of North America, we project significant nitrogen demand from India and Brazil in the coming months. As expected, India has been active in the fourth quarter so far, securing 1.7 million tons of urea in their latest tender. We expect demand for urea in Brazil will be robust through February for continence and second crop corn planting. Longer term, agricultural led demand for nitrogen should remain resilient with global green stocks expected to approach averages from the last five years by the end of the 2024 growing season. We also expect continued supply constraints in some key producing regions. Natural gas availability remains an ongoing challenge in Trinidad, which in recent years have seen the loss of nearly 1 million metric tons per year of production compared to the 2018 to 2020 average. High natural gas prices have made ammonia capacity in Europe, the global marginal producer. Ammonia production levels are 4 million to 5 million tons lower in the region compared to the 2018 to 2020 averages. This includes the impact of the permanent closure of our U.K. ammonia plants, which accounted for nearly 1 million tons of ammonia capacity. Europe has become the CF industry's top export destination over the last 18 months as purchasers bring in ammonia for upgrade as well as purchase UAN, ammonia nitrate and urea. In addition to curtailments and closures, government actions continue to restrain participation in the global market from other producing regions. The Chinese government reinstated urea export controls after Chinese producers contributed large volumes for the August India urea tender. Additionally, intermittent natural gas curtailments by the Egyptian government continue to affect nitrogen production in Egypt. And with that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all they did during the first nine months of 2023. Their teamwork continues to deliver outstanding results. In closing, I want to highlight two slides from our materials. Page 16 provides a recap of our consistent approach to creating long-term value. We thoughtfully and selectively add production capacity to our network, the Waggaman ammonia plant being the latest example, while we steadily reduce our outstanding share count. Since 2009, we have increased the participation in our business by approximately 4x, a 10% CAGR over this time horizon. I also want to highlight Page 15 that demonstrates we are the best operators in the world of these types of assets. We have a long track record of unmatched asset utilization enabled by a safety culture without peer. I'm essentially proud of our team's collective commitment to safety excellence and their focus on continuous innovation. Nowhere is this more evident than in our annual Wilson Safety Awards. Our winner this year was the Courtright Ontario complex, but all the finalists were outstanding and helped to drive continuous improvement across the organization. I encourage everyone to learn more about these innovations on the company's website. We believe CF Industries has a bright future. In the near and medium terms, we are well positioned for what we expect will be a tightening global nitrogen supply demand balance with strong margin opportunities. Longer term, our disciplined investments in low carbon ammonia production provide a robust growth platform for the company. As a result, we expect to generate strong free cash flow in the years ahead. enabling us to create substantial value for long-term shareholders. With that, operator, we will now open the call to your questions.

Joel Jackson:

Hi, good morning.

Joel Jackson:

So a big question is whether European production is the marginal cost or not. It seems like in the last couple of years that we've gone through a lot of geopolitical issues and higher gas prices, lower gas prices, sometimes it is times it isn't. Do you think that the European tons are marginal production. Can you elaborate on that? Is it seasonal? Anything else you can provide would be great. Thanks.

Bert Frost:

Yes, Joe, when you look at the gas comparisons, whether it's MVP, TTF, JKM being Europe and Asia, but also feathering in the coal costs and then equating that back to an MMBtu value, you do have just a separation. But then thinking about the age of the plans and the efficiency of the plans, that's when you get into question some of the European or Eastern European or FSU locations that are a combination of high cost and inefficient. And that's what -- how we're able to move some of those and call that the marginal ton and you're seeing that reflected in the level of imports and the inability to operate in even the current environment of $15, $16 gas against ours and others in the world of two to three. And I think you're going to see that dynamic, and it is reflected in the forward gas curve of how these plants will operate and when they'll operate.

Tony Will:

Yes. Our expectation is that we continue to run our ammonium nitrate capacity at capacity. In the U.S., our AN is really centered around our Yazoo City, Mississippi facility. And in the U.K., although we don't do ammonia production over there anymore, we're importing ammonia and then upgrading it to solid ammonium nitrate. So our expectation is our volumes are going to be the same going forward. And we're largely constructive on margins given the forward gas curve and our opportunity to bring ammonia into Billingham and get a good upgrade margin on it. So overall, AN segment, we're really pleased with. And I can't really comment on the topic that you referenced earlier, because it's a matter that's under dispute at the moment.

Operator:

And our next question will come from Stephen Byrne with Bank of America. Please go ahead.

Tony Will:

Yes. So Steve, let me start off with a question about Waggaman. The Waggaman facility has existing supply agreements that are in place and those volumes are largely spoken for. We're very pleased with the recipient customers for that facility. And so we're not looking to make any changes in that regard. And our belief is we can get consistently more out of that plant than what historically it's been able to produce. So we're excited about that plant added to the network. Relative to Devil upgrades. We tend to run the upgrades at basically full capacity, at least the urea plants and then we swing back and forth between how much of that's granulated versus how much UAN we make based on relative margin opportunities between the various products. So there's not really an opportunity to dramatically increase the amount of ammonia Donaldsonville build it to upgraded just because we're running upgrade plans full on. Relative to the product mix in the third quarter, we did have an upset at our Medicine Hat, Alberta urea plant that took some production off-line and we had a turnaround in another facility. And so the result of that was just through both planned and unplanned maintenance, lower ability to make granular in the quarter. And therefore, we ended up with a net longer ammonia position. And Bert and his team were really focused on trying to manage kind of inventory levels and took appropriate steps to make sure we could keep the plants running full rates.

Tony Will:

And the good news is we're back up out of the maintenance activities and we're running full on in terms of our urea production network again. So we're looking forward to the fourth quarter and the first half of next year.

Tony Will:

Yes, without going down the rabbit hole of technology too much here. As Chris indicated in his comments, we're finishing up the FEED study on the conventional steam methane reforming plant, basically a carbon copy of Donaldsonville #6, which I believe is the highest operating rate ammonia plant in the world. And the fact that they're so close together allow us to not only basically make a carbon copy of it and train operators just down the road, but also share common spare parts. And we think that the opportunity to get fantastic asset utilization out of a plant like that, right from the beginning is quite high. But as you mentioned, there is different appetites in different jurisdictions for carbon intensity. And ultimately, that's the notion of blue ammonia or green ammonia, this convenient shorthand ultimately, where we're going to have to get to is a measure of carbon intensity and the possibility for autothermal reforming does provide at least at first blush, a lower carbon intensity than steam methane reforming does. So we are engaged in a FEED study also on an integrated stand-alone auto thermal reforming technology plants that cost estimates from those probably won't be in for about another 12 months. We're also engaged in a study on doing flue gas capture, so that theoretically, the alternative to get to a very, very low carbon intensity number could be auto thermal. It could be a conventional steam methane reformer with flue gas capture technology added to it. So we've got a number of different potential pathways going forward. And we're excited about the developing appetite and new demand applications for clean ammonia. As I mentioned in my earlier comment, we're also very excited about the fact that even in traditional applications, we think the world is going to be nutrient short going forward. So I think the demand is clearly out there. We are -- as I said, the best operators of these kind of assets in the world. And given North America's access to plentiful low-cost natural gas and a very favorable framework around rule of law as well as carbon capture and sequestration. This is increasingly recognized as the place to be. So I think all of that sets up very well for us in terms of evaluating these different types of opportunities. And we are, as you said, engaged in conversations with numerous parties. They all look to us because we are the global leader in this space. And we think we can navigate any kind of conflicts and manage that situation through a variety of ways, including the fact that we're going to have multiple sources of decarbonized pneumonia from a production standpoint, not only potentially if we build a new plant at our BluePoint complex, but also at Donaldsonville, Waggaman once we add TCS there our Yazoo City, Mississippi facility once we add CCS there. And so we'll have multiple points of production, multiple ways of navigating potential conflict should they arise. And honestly, we're just really excited about the opportunities ahead of us.

Operator:

And our next question will come from Richard Garchitorena with Wells Fargo. Please go ahead.

Tony Will:

Yes. I mean I think the biggest synergy from our perspective is the fact that we think we can consistently run that plant at higher rates and get incremental tons that come out of it into the network. And so that's where basically all those incremental tons are purely at variable cost and therefore, at very high margins, and that's first and foremost the most important aspect of this. I think it also gives us some flexibility as we think about scheduling turnarounds and chip from ship to locations it's a plant that is on the pipeline. And so it's got access into the terminalling system in the Midwest. And it just gives Bert some additional flexibility in terms of how he thinks about minimizing aggregate logistics and transportation costs. So that's really kind of how we're thinking about the plan. But first and foremost, the biggest value is we're buying it, I think, at an attractive value for us. I think it's attractive for IPL as well, and we think we can get more tons of production out of it that should generate some very nice incremental margin for us.

Tony Will:

Yes. So all of that is baked in there. The finishing up of the green ammonia plant this year as part of this year's CapEx continuing progress and basically getting, if not to mechanical completion darn close to it on our dehydration compression project next year at Donaldsonville plus what we're expecting to do at Waggaman in the way of turnaround and process improvement is all embedded in there, as well as some of the ongoing improvement things we've got on our end from an IT and a systems perspective. So including the integration of Waggaman into our systems and our network. So all of that is rolled into the number that Chris gave you. We are very consistently year in and year out in the range of $400 million -- $450 million to $500 million and I think this is one area that, Ashraf, has brought great discipline to from an operations standpoint of being able to get world-class onstream factor and asset utilization without having to gold plate stuff, but we keep all the processes incredibly safe and high running and our people safe as well. So I would say this is an area where we really excel.

Richard Garchitorena:

Thank you.

Joshua Spector:

Yes, hi. Thanks for taking my question. First, I wanted to ask near-term, Bert, we've seen some decline in urea prices over the last month despite kind of entering kind of the stronger North America season. I guess, one, what do you attribute that to? And two, what's your view when you look over the coming months here?

Joshua Spector:

Thanks. I appreciate that. And just longer term, Tony, I wanted to ask just more about the timing here for the JV with Mitsui. So you have the FEED study completing shortly from our prior conversations, talked about the milestone in Japan with Medi talking about some subsidy support or how that evolves, is that timing still early to mid-next year? And does that mean you make a decision to invest later next year, mid- to late next year? Or is there any reason that timeline will be off from how you're thinking about it?

Joshua Spector:

Okay, thank you.

Adam Samuelson:

Hi, thank you. Good morning everyone.

Adam Samuelson:

Good morning. So Tony, I mean you talked a little bit about the kind of some of the supply disruptions in ammonia in the near term, which is certainly helping kind of the overall nitrogen balance. There's also a lot of blue ammonia and new kind of project activity happening in this market, maybe with a little bit less diligence in terms of kind of the pre-engineering or customer offtake agreements than you seem to be pursuing. But how do you look at that merchant ammonia market over the next -- over the next couple of years? Are you -- do you see any concerns that there might be some blue ammonia that comes to market before some of the end-demand use really is in place yet? Or do you still feel comfortable that there's a sufficient kind of tightness in the nutrient on the fertilizer side to absorb that if needed.

Bert Frost:

And just some additional comments. This is Bert, Adam. When you look at ammonia, and we mentioned in the prepared remarks about lack of gas in Trinidad and the difficulties in Europe. But if you feather in Brazil is not operating and the [indiscernible] pipeline coming out of Russia, Ukraine is not operating. You take an additional several million tons out. So if we calculate four to five out of Europe, one out of Trinidad, and Brazil and Russia could be up to three or four, you've got a substantial amount of movable ammonia out of the market. And that's why I think you saw the reflection in the market when it hit the lows, it quickly bounced up back into the five and then now $600 range for global pricing which is a very attractive range for us. Now regarding Blue and let's just call it low carbon products will be coming on in 2025 with our Donaldsonville low-carbon ammonia and products, and we're seeing a substantial interest whether that be for industrial applications or agricultural and that's globally. So I'm very excited about the progress and the position we will be in, in the short, medium and long-term. with these products and the receptivity in the marketplace.

Operator:

And our next question will come from Andrew Wong with RBC Capital Markets. Please go ahead.

Tony Will:

So let me give just a little bit of color, Andrew, on this one, which is going back to the beginning of last year, we've purchased, I think something close to 20 million shares back, which is about 10% of our outstanding float. During that same period of time, we have invested in some new capabilities, both in terms of green production and dehydration compression, blue production and build cash on the balance sheet. So we have been able to do sort of all of the above. We do have an open $3 billion share repurchase authorization. And the approach that we have opted to go for is to be sort of disproportionately opportunistic when we see attractive valuations and as opposed to just a consistent and steady return of capital. So you will continue to see us jump in deeper during those periods of time. And then there may be weeks or months where we're kind of sitting on the sidelines. But the whole idea is to make sure that we disproportionately reward our long-term shareholders by taking out as many shares at the lowest value as we can. And I think it actually is a good strategy. I'm not really that worried one quarter to the next if we flex up or flex down a little bit. And as Chris mentioned, we expect to close the Waggaman transaction here within a month. And so $1.25 billion is already spoken for in that regard.

Tony Will:

I would also say that we were blocked out for Q1 because we were in kind of the final throes of negotiation with InsTech on the Waggaman acquisition. And so we couldn't be in the market buying our shares back. So that kind of thing may happen here or there. But we are focused on continuing to drive the underlying fundamentals of what underpins that Page 16 that I referenced in our materials, which is selectively adding capacity where it makes sense and otherwise returning capital and buying our share count down.

Bert Frost:

Yes and no. I think regarding your question, urea is a placeholder globally that is the most traded product that 190 million tons of consumption, 56 million tons moved globally on a ship. And so it becomes the placeholder that it's basically used on every continent. So it's a good measure of nitrogen values. You're correct that Europe is more of a nitrogen or ammonium nitrate, calcium ammonium nitrate consumer or UAN, but there's still a large importer of urea. I think 4 million to 5 million tons per year. So they do participate by a lot of North African and Nigerian tons and some Middle Eastern tons make it up there. And so that's what I talked about in the Northern Hemisphere moves into its high demand period here starting in January, they become a pretty good importer as well. So yes, you need to look at it that way. But ammonium nitrate is not really consumed that much on for agriculture outside of Europe and maybe Russia and Ukraine as well, maybe 1 million tons in Brazil. And so that's falling in North America, so we don't really talk about it. outside of the explosive sector in North America. So we do look at all those factors. But again, urea is more of the easy placeholder for everyone to understand.

Andrew Wong:

That's great. Thank you very much.

Benjamin Theurer:

Yes, good morning and thank you very much for taking my question. I wanted to go back to some of the demand expectations you've talked about and particularly the gap of imports or what you expect at least for Brazil and India. We've seen a lot of like peers in the industry talking about just the softness in Brazil and the more spontaneous buying as you go as you need kind of purchases. What's your level of confidence as it relates to this demand for the imports and what you flagged in the 3 million to 4 million ton range just in the fourth quarter to basically wrap this up. And then obviously, similar to India because it's also a very sizable number. So just about the level of confidence you're having for this demand?

Benjamin Theurer:

Okay, perfect. And then just coming back quickly on the capital allocation side. Just as we think about it, you talked about the buybacks to be opportunistic, obviously and accelerating here when prices are lower and dividends to be sustained. Now if we think about the projects that you have pending and you have obviously the Waggaman cost next year and then roughly $450 million to $500 million in CapEx, but it still leaves a very substantial amount for excess cash, so if it's not buybacks because you don't think price is low enough to aggregate the value, how do you think about inorganic growth opportunities similar to Waggaman? Are there any things you're looking at? Do you feel there is meat of doing something? Or with the projects you have on decarbonization and clean energy, plenty of CapEx to be spent on anyway?

Benjamin Theurer:

Okay, thank you.

Vincent Andrews:

Thanks. Hopefully, you didn't get to this to hop off for a moment. But Bert, could you talk a little bit about where you think U.S. dealer inventories are going to end this Fall season or customers behaving a little bit more normal now? Or are they still looking to have empty bins where is sentiment?

Vincent Andrews:

I'll leave it there. Thanks guys.

Martin Jarosick:

Thanks, everyone for joining us today. We look forward to seeing you at upcoming conferences.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first half and second quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find the reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. CF Industries experienced a very positive spring application season, that we believe points to a strong global demand dynamic in the second half of the year. Our challenge in the spring was managing through peak application season, with customers deferring purchases until the last possible moment. Despite delayed purchases, demand in North America during the spring was substantial, with planted corn and wheat acres up significantly compared to 2022. Even with this high demand, net imports were lower than the prior year. As a result, we believe that inventory in the North American supply chain is extremely low compared to historical norms and will need to be replenished. At the same time, India and Brazil will need to compete for urea tons in the coming months as they prepare for their upcoming planting season. As you can see on Slide 6, we project that Brazil still needs to secure 5 million to 6 million more tons of urea and India, another 4 million to 5 million tons of urea, by the end of the year. Farm economics continue to be robust and supportive of strong demand. Consensus estimates project that global grain stocks will improve slightly in 2023, but drought in the United States and ongoing impacts from the war in Ukraine are keeping grain prices attractive for farmers. The global nitrogen market has responded to these dynamics with rapidly rising urea spot prices through July with other products following. We saw a strong demand for urea. And in July, we built an order book of domestic and export sales that takes us into the fourth quarter. We also quickly achieved our goals for our initial UAN fill offer in North America and have been able to raise prices for subsequent layers. Against this backdrop of strong demand, the global supply response is somewhat muted. We do expect China to participate in the upcoming India urea tenders, with strong prices for nitrogen in China indicate that domestic demand is competing for the volume available for shipment. Russian tons continue to reach the global market, but willing buyers are limited to a few areas of the world, such as Brazil and the United States. Additionally, European ammonia production volumes remain well below normal due to natural gas prices that make the region uncompetitive globally. As we look at our own operations, our network continues to benefit from low-cost natural gas. Forward curves suggest natural gas values in North America will be $2 to $4 per MMBtu lower than last year in the second half, keeping our production costs firmly in the first quartile globally. With that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all that they did during the first half of 2023. Our teamwork continues to deliver outstanding results. We remain very excited about the future for CF Industries. We have a large structural cost advantage that provides substantial margin opportunities, coupled with industry-leading operating expertise and unmatched network flexibility. This should continue to drive significant free cash flow. We will deploy that cash to both grow our business and return capital to shareholders. We have significant decarbonization projects in flight with industry leaders, such as ExxonMobil. The Waggaman ammonia complex will fit seamlessly into our network and enhance our ability to serve customers, and we are positioned at the forefront of low-carbon ammonia into new clean energy applications, supported by collaborations with global leaders such as JERA, Mitsui and LOTTE. As a result, we believe CF Industries is well positioned to create substantial value for our long-term shareholders. With that, operator, we will now open the call to your questions.

Christopher Parkinson:

Good morning. Thanks for taking my questions. So I think when most people step back, Tony, I think on normalized EBITDA, we could have a debate on this all day, but it could be low, mid-2s, somewhere in there in terms of billions of EBITDA. But you do have, I'd say, at least three, perhaps four moving variables, which are pertinent for the next two to three years in terms of what you'd add to that. I'd say Waggaman plus, obviously, carbon optionality, you have the additional 45 queues for various projects you're working on. And then on top of that, you have a nice energy transition theme, which perhaps is a little bit later outside that time frame. But it does seem like these three buckets, which could materially add to the perception of normalized EBITDA. And I was just hoping perhaps if you could add color on those three buckets and perhaps add anything else you think is important and how the investment community should be thinking about those? Thank you.

Christopher Parkinson:

That's very helpful. And just as a quick follow-up, there's just been a lot of, let's say, variable change in terms of regional operating rates between anywhere from -- Europe seems to be plateauing a little bit after increasing earlier this year. India has been rumored to be up, but kind of has been disappointing a little bit versus the otherwise expectations. In North Africa, down. Southeast Asia, down, now potentially up. Just in terms of just how you're thinking about your own order books, in terms of just risk management not wanting to miss a potential for the rallying essentially what we've seen over the last six to eight weeks, can you just -- do you disagree with any of those? And just could you help us think about how that thought process is playing into how you're managing your book, not only to the fall application season, but also into 2024, just given all the change over the last 12 to 24 months? Thank you.

Bert Frost:

Yes. Thanks, Tony. In terms of -- you touched on -- let's talk about supply for a minute. And you touched on some of those areas where supply is constrained. It probably wasn't considered to be a few months ago. India production has been growing in terms of capacity growth on these new and revamped operating units. And so we would project that their internal production is probably close to 29 million tons, and that then the demand for imports on an annualized basis will be between, let's say, six million and eight million tons rather than the 10 million tons we saw a few years ago. And they're behind. And so this dynamic that we saw in the United States of customers waiting and waiting and depleting their inventories has -- that situation has been multiplied globally, where many destination markets did the exact same thing, and now they all need to step in and acquire those tons, that being South America, Asia, as well as North America and Europe. So now you have this dynamic that has taken place where we've had a falling market, let's say, really since February. And in June -- the end of June and early July, we started to see this recovery, and it's been more pronounced than I think the industry had anticipated. And that's also predicated on the lack of supply, like you mentioned, with lack of gas in Nigeria and Egypt, and as well as Trinidad, Europe, the European Union gas prices, Pakistan, Brazil, many places that have produced tons in the past are not producing today. And so when we look at our order book, Tony is right, we have to go into the forward market with an order book that's shippable. We have to rely on our rail partners, truck partners and moving product by vessel and barge and pipe to keep our system balanced. And so I'm pleased with our order book for what we have for Q3. And as I said in my prepared remarks, some of those products extended to Q4, and we've been able to move product pricing up along the way. So I think you'll see we're going to perform well as we always do.

Operator:

The next question is from Andrew Wong with RBC. Please go ahead.

Tony Will:

Great, Andrew. Good morning. I think we have an interesting situation of Billingham, and that we're able to import ammonia and then still upgrade it to nitric acid and ammonium nitrate. And there is a pretty substantial upgrade margin that's available between at least over the last couple of years, the deepwater price of ammonia and what the upgraded products are selling for as fertilizer and intermediate chemicals. And so for us, the option was pretty apparent. As Chris mentioned, it is margin enhancing for us not to incur kind of the relatively high and volatile gas costs as well as the relatively high carbon costs associated with operating in that region, but still be able to get the upgrade margin by bringing in ammonia. I think some plants in Europe don't have access to be able to bring ammonia into their facilities and/or they may be making urea-based products that require the CO2 in order to be able to upgrade them as opposed to the nitrate-based products. So I think for some producers -- if you look at the gas costs versus the margin available for ultimately, upgraded product, you can probably still see some level of operation during times of the year. And I think that's probably why you see this variability in operating rates for those that are able to import ammonia. And I think there are several plants out there that have done that. They've turned off ammonia production in the near-term. We've just made a decision based on the age of the equipment, the amount of CapEx required to keep it running in the ongoing carbon cost that it made sense for us to be focused purely as -- in the import ammonia and upgrade facility there.

Tony Will:

Yes. I mean I think just like happened in 2012, that there's very likely a slew of announcements about projects. And I think back in 2012, there was something like 26 projects that were announced, of which only four got built. And I think you probably saw some of that exuberance last year and into this year as well, where you're seeing a lot of announcements. And then when people really put pen to paper and need to go out and begin construction, there's a little more cautiousness that goes into it. It's easy to announce something. It's a lot harder to build it. And I think one of the interesting things about our potential new build project is that we're partnering with ultimately, folks that are going to be end users of the project from a volume standpoint and putting it into new clean energy applications. And so it's production that's not going to create the kind of overhang situation that you were just talking about. Now that's very important for us. The other piece of that is we're still collecting data on the cost side of the equation, and it's got to make economic sense for us and earn a fair rate of return for us to move forward with it. But I think that between some of the shutdowns you're seeing in high-cost places in the world, and some new demand centers that are springing up, particularly for clean energy applications, I'm pretty optimistic that we'll end up with a balanced to tight ammonia market going forward to the balance of this decade.

Joel Jackson:

Hi, good morning. It seems you did a very good realized gas cost this quarter in Q2 -- excuse me. There were concerns that some of the inventory overhang higher cost gas when your winter hedges may have pushed the realized cost close to around $4. Can you talk about what happened positively to not have such a high gas realization?

Operator:

The next question is from Josh Spector with UBS. Please go ahead.

Tony Will:

Yes. I mean I'm certainly happy to give my perspective on this, and I encourage Chris to also jump in to the extent I step out of bounds on it. But we typically target at a minimum, a low teens kind of return, and that's been fairly consistent with how we've thought about things in the past. That tends to be well above our cost of capital, but it also takes into consideration some things like -- particularly if you're talking about construction-based projects, potential contingency on overruns and a few other things. I think the benefit of years like last year is that it meant that any of the projects we had done historically ended up looking like they were absolutely fantastic from the standpoint of capital deployed versus returns that we've been looking at. And I do think that as we talk about bringing partners in that are both adding equity into the equation in a proportionate way, but then also taking guaranteed offtake of it and moving it into non-traditional applications that de-risks the project substantially. I don't think it fundamentally changes the return profile that we expect for the capital that we put into the project.

Josh Spector:

Thank you.

Steve Byrne:

Yes. Thank you. Do you expect ammonia pricing to remain well below the unit nitrogen pricing for urea, just because of less industrial demand? And if so, do you think that that combined with what could be a relatively early harvest, might lead to a very strong ammonia application season this fall? And if so, are you planning accordingly to have a strong fall through your network of storage tanks in the [indiscernible]?

Bert Frost:

Yes. Just following-up on Tony's comments that I do believe, based on the pricing structure of ammonia. And based on the opportunity -- the revenue opportunity by planting corn for harvest in 2024, we're going to see a positive uptake in the ammonia demand. Now Tony's point of you basically have a month to move that product through the system, and that's weather dependent. So if we had an early snow or too much rain, then you would just carry that inventory and that demand into spring. But the fall pricing has basically been set, and then we see it going up from those levels that were initially offered, but I think demand will be robust given all the considerations and if we have good weather.

Tony Will:

Well, certainly, we'll have blue ammonia or low carbon ammonia available by 2025. And as that demand starts developing, we -- one of the value propositions that we offer companies like that is we'll be able to service their needs as it's developing in advance of a potential new plant start-up. And so we've got supply for them. In terms of when we're able to begin sequestering the CO2, we should have the compression and dehydration equipment on-site and commissioned and ready to go probably by the end of '24. but part of the challenge has been getting Class 6 permitting for the injection wells and getting all of that done and pipeline connections built and so forth. I think ExxonMobil has done a fantastic job of managing kind of that piece of the equation, and it's very helpful that Louisiana has been granted primacy from the EPA over their ability to permit those kind of wells. So all of those things are big steps forward. But as you know, anything around this particular area takes time and requires permitting. And I think we're all trying to push forward as fast as we can because we see the economic value of getting it completed and beginning to inject, but we're targeting right now kind of first quarter, maybe beginning the second quarter at 25% is likely when we'll begin doing that.

Adam Samuelson:

Yes, thank you. Good morning everyone.

Adam Samuelson:

Maybe first, a little bit more on clean ammonia, but maybe on the sales side. And as you work towards FID, help us think about where the key kind of pain points are still on kind of setting the contractual terms for those kinds for that kind of product? Would you be looking to FID that with a take-or-pay kind of agreement in hand with a major off-taker? How are you -- how are those getting structured? Or what are the parameters by which you're still negotiating? Just framing those discussions would be helpful.

Bert Frost:

Yes, Adam. Good morning. And we're seeing, it's interesting how this area is developing and how we're looking at it holistically and to our point of de-risking and how we manage the business. So we are in conversations with a lot of different end users and applications, but as various companies and industries look at their scope emissions and their needs to improve their profiles, low carbon products as a feedstock or as a fertilizer, adds value. And so we're in conversations and we have requests on the table today for when these products are available, that we would supply them not only to the United States, but to our European customers as well. So we're excited about the future and how we're building this capability, both with people, process, equipment, plants and customers for -- to be ready to go.

Chris Bohn:

Adam, this is Chris. As Tony and Bert, and I mentioned in our prepared remarks, we are expecting to continue to generate a lot of free cash flow here. And with that $3 billion authorization open, we're starting to move into that now. I think as we've talked about on other quarters, we're going to definitely favor opportunistic repurchases more so than the ratable. It's not to say that, that's going to be 100% that way, but if you look at this past quarter, or even year-to-date, where we purchased over $200 million or 3 million shares, in the mid-60s compared to where we're trading right now. We felt that that was a very efficient use of capital going forward. So I think for the long-term shareholder us being more opportunistic is going to provide much greater value as we look at our share repurchases. But if you look at historically, we've had share repurchase programs in over time, and we've closed them out -- over the last 12 months, we've purchased over 11 million shares for about $1 billion, as Tony mentioned earlier in his remarks. So I think it's something we're committed to doing. We're just going to do it a little more opportunistically than we have in the past.

Vincent Andrews:

Thank you. Bert, would you mind expanding on your comments earlier, just about the order book? And I guess I'm just curious, it sounds like summer fill was very well subscribed in the industry this year. So how much of the 3Q book do you think we should think about around those summer fill values versus sort of where the market has headed? And then how much liquidity is there in the fourth quarter in terms of being able to fill up the fourth quarter book where values are today?

Vincent Andrews:

Thanks so much.

Benjamin Theurer:

Thank you very much. Good morning. Congrats on the results. Two quick ones. So one, on the regulatory approval process for Waggaman. Is there anything you can share an update? Is this coming along as you expected? Is there any potential delays or maybe an acceleration of the process? That would be my first question.

Benjamin Theurer:

Okay. Perfect. And then my second question is really to understand maybe the economic background of the decision to close down the ammonia production over in the U.K. Could you maybe somehow quantitatively elaborate what you expect the benefits are going to be? Because obviously, you're going to be able to allocate more U.S. produced ammonia, but then there's a shipping component to it versus the cost of producing it over days. Have you done any sort of sensitivity analysis or just economic value-added analysis, so we understand better what benefits for the whole CF group ultimately is going to be from this decision?

Benjamin Theurer:

Okay. Perfect. Thank you very much.

Edlain Rodriguez:

Thank you. Good morning, everyone. I mean, Tony, like you've had a very uneven and a relatively challenging first half with prices going down just in time demand. As you look into the rest of the year and into next year, like what concerns you the most in terms of volume, energy costs, et cetera? And what excites you?

Operator:

The next question is from Aron Ceccarelli with Berenberg. Please go ahead.

Tony Will:

Yes. So we're somewhat optimistic here about the potential for ammonia to be a clean energy source in marine applications. We do think that it's going to take a little bit longer time, because there's some obvious EHS concerns on board, some retrofitting and then development of new propulsion systems, they're being driven off of ammonia. But there's a couple of really great developments, including some engines that are in test right now. And so our belief is this will happen. I don't think this is going to be a large center of demand in the next five years. But as you get out 10 years and beyond, I think that is going to become a real demand source for clean ammonia. I don't know, Bert, the other sort of thoughts on -- or Chris on...

Bert Frost:

And regarding your second question on Page 6 of our analysis and asking what are our assumptions, these assumptions are based on; one, our active integration and understanding of the markets and conversations with those destination consuming areas, being India, Brazil, and they're just that dynamic of most of these markets have waited to purchase and don't have the inventory in place, but they have the pricing structure for the feed grains that support significant consumption of urea. And so India, just by limiting their rice exports, that's a significant move on the international market. Why are they doing that? One, to keep pricing in control, but they're going to need the nutrients to produce that rice in an acceptable monsoon season. And Brazil in the same category with being a substantial producer going forward. You got the cotton planting season that is in Q4, and then second crop corn for first quarter of 2024, is going to require substantial products to be imported. And then when you look at the -- as we talked about earlier, the gas limitations and some of the supply points, it just puts together a very positive market for the tail end of the year and into 2024.

Martin Jarosick:

Thanks, everyone, for joining us today, and we look forward to seeing you at the upcoming conferences.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. Over the last year, the global nitrogen market has continued to change rapidly and in dramatic ways. At this time, in 2022, global energy prices reflected the shock and uncertainty brought on by Russia's invasion of Ukraine. There are fears that Russian fertilizer exports would be locked out of the global market, and we entered a period of substantial production curtailments and shutdowns across Europe, while China restricted urea exports. Today, global energy costs have moderated and global operating rates have risen. New capacity delayed by the pandemic ramped up production. Other than ammonia, Russian fertilizer exports have returned to near pre-war levels as willing buyers have continued to take the discounted product, especially in the United States and Brazil and global fertilizer trade flows is largely adjusted. As a result, global nitrogen prices have fallen from 2022 highs. This helped lead to a first quarter of 2023 that was marked by lower than typical global buying activity. Agricultural purchases in North America took a wait-and-see approach as global nitrogen values fell and weather patterns did not support an early spring. Several large importing regions were essentially absent from the market during the quarter as well. Most notably, this included India, which only had one urea tender during the quarter, in large part due to higher domestic operating rates. Additionally, European purchasers slowed import activity in the first quarter after securing substantial imports in the second half of 2022. Lower global nitrogen prices have triggered a rebound in demand from less affluent regions of the world, as you can see on Slide 13, offsetting some of the impact of lower purchasing from large importers. CF Industries was well prepared for this environment, having entered the year with a strong order book. As demand in North America held off, we leveraged our distribution and logistics capabilities during the quarter. This included capturing superior netbacks available from exports as well as positioning product at our distribution terminals for the spring application season. As a result, we had a more open order book heading into the second quarter than usual. We have managed as well as the North American spring application season kicked off recently. Pricing in North America has risen as demand emerged and all products started moving at a more normal rate. We expect this to be an active fertilizer season -- application season in 2023 with corn acres in the U.S. expected to be up about 5% and wheat acres up around 9% compared to 2022. Income at the farm gate in the United States and Canada is historically high, underpinned by an extended period of low grain stock-to-use ratios supporting high crop prices, as you can see on Slide 9. We continue to believe that this will take two growing seasons at trend yields to replenish global grain stocks. This should support agricultural-led demand as growers seek to optimize nitrogen applications and maximize returns. That said, over the next 7 to 8 weeks, the entire value chain will be walking a logistics tight rope due to the purchasing delays. And with that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF for all that they did during the first quarter of 2023. Their commitment to safety and outstanding execution continued to drive our company's performance. This is an exciting time for CF Industries. Global nitrogen market conditions, coupled with our network and operational expertise, support our outlook for superior cash generation. We are excited about the value that integrating the Waggaman facility into our network will offer, and we have positioned the company at the forefront of global decarbonized ammonia supply bringing together our expertise in ammonia production, enhanced by partnerships and collaborations with leading companies such as JERA, LOTTE, Mitsui, ExxonMobil and NextEra. Taken together, we are well positioned to increase our free cash flow generation and grow shareholder participation in that free cash flow, enabling us to continue to build on our track record of creating substantial long-term value for shareholders. With that, operator, we will now open the call to your questions.

Adam Samuelson:

Tony, Bert, I guess, this is actually a bit more of a longer-term question. And certainly, as you look at your own activity on the blue and green ammonia side, you've got a number of MOUs and projects that are kind of in various stages of development, approaching FID. There has been a slew of announcements similar to your own in North America over the last year. And I'm just trying to get your kind of current perspective on the demand growth, especially the demand growth outside of traditional fertilizer channels that you are looking at as you think about '25, '26, '27, '28. Do you think that, that demand is going to come in commensurate and consistent with some of the potential capacity that's starting to get put into the market? Or is there -- how do we think about the ammonia market surplus balance through the later part of the decade?

Adam Samuelson:

And if I just have a quick follow-up, near term with Waggaman getting funded out of cash on hand this year. How do we think about kind of buyback pace from cash flow in light in the first quarter. I imagine you might have been blacked out for part of it because of the Waggaman kind of transaction. But how would we think about kind of cash turn with Waggaman going out the door?

Operator:

The next question is from Stephen Byrne of Bank of America Securities. Please go ahead.

Bert Frost:

Steve, this is Bert. And when you look at the outlook for nitrogen for 2023 and beyond, it's positive. As we've said, due to -- on a fertilizer basis, the stocks use ratio where we are and where -- we are structurally in the grain complex. With what we've lost in production in Argentina this year, and in terms of corn and what's not being either consumed or exported from Ukraine, it's a substantial portion of the world's supply. Then you look at the Chinese demand, maintaining that 20 million, 21 million, 22 million metric tons of corn imports supporting the international market. We're structurally positive that it's going to take at least two years and possibly longer to refill that supply of grains and so fertilizer demand should be very strong, and we're seeing that now recover in some of the countries that took kind of a purchasing holiday in 2022 due to high prices, Thailand, Turkey, some places in South America where demand is recovering quite substantially. And we're looking at additional acres in the United States, additional corn and wheat acres, so additional demand. Brazil has been very strong. We're anticipating probably close to 8 million tons of imports through 2023. They've only imported one to date. So demand ahead as well as with India. So fertilizer should be, I would say, returning to its historical growth pattern of 1% to 2%, but probably greater in this year, and that's why I think you're seeing some of the price recoveries. Regarding industrial demand, we're still doing very well in terms of our industrial book, and it's diversified with nitric acid, ammonia, ammonium nitrate and DEF in North America. I think in Europe, you're going to see some -- a little bit harder situation just due to the cost structure and the complications there. But I think that's what you'll see is imported ammonia helping to balance that supply. We're looking at probably 5 million to 6 million, 7 million tons of ammonia production capacity either offline or curtailed. That's going to help support the whole industrial or the whole ammonia production globally as products move in that direction. So we're structurally positive for this year and for demand on both industrial and fertilizer.

Bert Frost:

So when looking at -- that's the dynamic that we're experiencing today. The product is tight. Through the last several quarters, a lot of the inventory has remained with the producer side or in inventory with the producers. And retail took a holiday for at least 2, 2.5 quarters of purchasing. Well, when you need that product promptly for walk-up demand, which is where we are today, you need it today, tomorrow, the next day and it is short and it is very tight. Then it's exacerbated by these river issues on the Mississippi with the lot closures and the difficulty to move product that may be in the Gulf up to the Midwest where it's needed. So yes, we went on allocation in Port Neal. We're producing every day at maximum rates, but a lot of demand came in for maybe a 30-day window contract, a lot of demand came in wanting it in the first week of the month and we're allocating that out on a ratable basis to treat all of our customers fairly. So product is tight. We don't believe there's going to be enough urea. We believe that they will have to be migrating for second and third applications to ammonia and UAN, and we're preparing for that with positioning product throughout the system. And pricing has extended from the normal spread of NOLA, let's say, $30 to the Midwest, it's between $50 and $100 today and will probably go up towards the higher end as we get to peak applications. We're pleased with our order book. We demonstrated well in Q1, what we did and our pricing reflects that. And we're equally happy with where we are for Q2.

Joel Jackson:

I have a couple of questions. Just on your answer before Bert, maybe Tony will chime in too. So we know that retail as your home words took a buying holiday for 2 to 2.5 quarters. Can you talk about that some more? They did that and it seems like they went out for a while, maybe now they're not winning, but is that going to change your strategy going forward? Like what are the lessons learned from this year in many years at your career?

Joel Jackson:

And then my second question is actually a two parter. So, is there any reason why Q2 earnings should not be higher than Q1, right? A lot lower average gas costs, maybe pricing down, but volumes higher? And my second part of that is, is there any reason why this year should be dipping out the years where Q3 pricing is typically lower than Q2 pricing? Any reason why that may not be the case here?

Tony Will:

Yes. The other thing I would just add, Joel, is that there's still basically 8 weeks or so to go here in Q2. So there's a lot to play for you at and it's probably too early to make a call one way or another in terms of how we do sequentially quarter-on-quarter. But if you look at our price realizations reported in Q1, Bert did a great job with this team of really getting some good numbers there despite the fact that you saw pricing kind of moderate throughout that quarter. And if you take a straight average, we did a great job of getting price compared to Q1. Current prevailing prices in the spot market today tend to be a bit below where our average prices were in Q1 as reported. And so again, more to play for. We do expect some tightness in the marketplace. We do expect the inland premium and product coming out of Port Neal and Med Hat and our other facilities to really trade at a pretty significant premium given some of the logistical challenges that Bert talked about, and it's also clear based on Chris' comments that our gas cost should be a lot lower than it was in Q1. So all of those things are positive, but we're starting at a point where prevailing prices are a bit below where our average price realization was in Q1. So more to play for, but some all of that together, we still expect a great first half of the year by historical standards and to generate a lot of cash over this period of time. Q3 as you pointed out, normally a reset period. But every year is different. So stay tuned, I guess.

Operator:

The next question is from Christopher Parkinson of Mizuho. Please go ahead.

Tony Will:

Yes, Chris, I'll start and then hand the mic over to Bert here in a second. But MENA is running at full rates. And so it's not like we're going to see incrementally more product coming out of MENA. It's local consumption, is relatively low in region. And so it's a pretty constant stream of product coming out of MENA. That said, our belief is it's a pretty tough operating environment in Europe. The reason why is there's a very steep contango on the gas forward curve between Q3 and Q4. And even if you see prices, the spot market moderate a little bit on gas, it's kind of hard to want to campaign an ammonia plant for 3 months or 4 months of operation. It takes a terrible toll on the equipment to heat it up and then cool it back down again. And plants don't operate well when you're pulling them up and down like that, at least on the ammonia side. And so we do not expect Europe to return to kind of historical relatively higher operating rates. We think it's going to be spotty and campaign. And I think the upgrades will run, but that means it's a sync for ammonia as opposed to producing ammonia locally. We do think that Europe is going to go ahead and continue to evaluate and look at bringing in more urea and UAN as an alternative to locally produce nitrates and I think that, that bodes well for our production network in North America.

Christopher Parkinson:

And just as a quick follow-up, Tony, it sounds a little Chris to mention this now, but we used to discuss normalized earnings many years ago between, let's say, 13% and 18% EBITDA. Now I think in most people's analysis, it's probably, let's not say quite, but almost double that. When I take a step back and I look at obviously your -- obviously, your M&A pipeline as well as the deals with JERA, Mitsui. I mean, is there -- do you have any additional thought press on just how you're enhancing and improving CF's normalized EBITDA profile not only for '23 and '24, but quite frankly, for the balance of the decade. Do you just have any insights on your way of thinking there?

Operator:

The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.

Bert Frost:

Vincent, I think that the untold story of 2022 is the volume of ammonium sulfate that did come out of China. For years, that product was available. But with the new compaction projects that have gone in and making that product more viable to places like Brazil or Turkey or even the United States in term -- well, we use ammonium sulfate, that's domestically produced. But ammonium sulfate is a good fertilizer. It's half the end of urea, but has sulfur. And so it has moved out. I don't see the growth, though, of where we're at, there's a substantial volume that has been moving out of China. Regarding the urea exports out of China, where they are capacity-wise a significant amount of capacity has come offline and been taken out over the last let's say, 5, 6 years. And then we would peg that at about 81 million, 82 million tons of capacity. Operating rates have ranged from the mid-60s to the low 70s. So taking an operating rate of 70%, you're producing about 56 million to 58 million tons of urea. Domestic consumption is in the low 50s. So there's just not a lot of urea available to export as there were maybe 10 years ago. And so we see this is all speculation today on the change in an export policy. There are some plants that are that were built for export purposes, and those are the, I think, 3 or 4 that were announced as possibly gaining those export opportunities or clearance for export sooner rather than the other plants. So I don't see a significant amount of urea coming out, out of that 3 million to 5 million tons for 2023.

Tony Will:

So I think it gives us some flexibility in terms of how we evaluate the attractiveness of new construction in the near term. And it certainly gives us an opportunity to enhance our platform from the standpoint of adding dehydration and compression and making more blue ammonia in that location without having to do a full greenfield expansion. So it gives us, I would say, a lot of flexibility in terms of how we think of if and when it makes sense to do a new project. And we've added 900,000 tons of ammonia to the portfolio. That ammonia is already being consumed in the marketplace, so it doesn't disrupt the S&D. And we can generate a fair bit of blue ammonia with a fairly modest incremental investment. So I really like the project because of the optionality it brings us in addition to just the base economics of it.

Edlain Rodriguez:

I mean this one is for Bert. I mean, Bert, a temporary ammonia prices is down to, what, $380 or so. I mean that's a level that's well below European production costs. Like what's causing that? And is the EU no longer the marginal cost producer? I mean it's just been very hard to understand what's going on there, maybe if you can help us.

Edlain Rodriguez:

And that's good. And another one on corn prices, they have come down not by a lot, but they have come down. I mean, if you look at the December futures price, it's at $5.25 or so for [Indiscernible]. Like how do you think this will impact farmer psychology. Will they be willing to pay higher fertilizer prices when they see corn prices kind of moving down a little bit?

Operator:

The next question is from Richard Garchitorena of Wells Fargo. Please go ahead.

Chris Bohn:

Yes. So we filed with the FTC and they're reviewing it. Right now, we don't necessarily have a time frame on that. We're supplying them the information that they need. We think -- we're hopeful that it will be sometime this year that we'll be able to close on that project.

Tony Will:

Yes. So timing on putting in the dehydration compression and getting access to the pipeline and being able to have that injected is probably two years out. That's about the time frame it took us to announce the project at Donaldsonville and have the equipment order delivered and installed. So it's probably about that kind of time frame. And again, we are in ongoing discussions with the partners that we have already signed and announced MOUs with and there's a series of other conversations that are happening in the marketplace as well that are not quite as advanced at the moment. But this just is another source of supply. So it both provide some diversity of supply locations in case there's an outage or a storm or an issue that would affect one location. It also just increases the aggregate volume of material that we'll have that's low carbon. So it's certainly of interest to all of those folks that you mentioned. And we are in ongoing discussions about appropriate ways to try to structure agreements that provide them attractive and certainly secure access, but also provide our shareholders an attractive rate of return on our investments.

Tony Will:

Yes. So we ended the quarter with over $2.8 billion of cash on the balance sheet. We're continuing to generate a substantial amount of free cash flow kind of every quarter as we move forward. It's going to be funded from cash on hand. And by the way, it's a relatively modest draw on cash on hand, particularly at the rate at which we're building it. So it provides us flexibility to continue to do our share repurchases as well as our growth and improvement projects all at the same time.

Operator:

The next question is from Ben Theurer of Barclays. Please go ahead.

Tony Will:

Yes. So it's a really interesting situation as we got into the back end of last year. You saw historic or near historic low water levels on the Mississippi. Fast forward to the spring and all of a sudden now we're facing such high water levels that barge. Traffic is again impacted by it. Combine that with what I would say is a relatively significant national shortage in drivers -- over-the-road drivers and so forth. You've seen logistics costs and delays in timing go up kind of across the board. And that helps us significantly in terms of the in-market premium that we're able to realize in our facilities like Port Neal and Medicine Hat because we're already in the marketplace. And generally speaking, the value of product in market is loaded on the coast plus logistics cost and maybe you get a time premium for it as well if you're in the middle of immediate application. And so all of these things really are helpful for us as we look into the meat of the application season here in the second quarter. I'd say in the first quarter, the increase just costs across the board in logistics, probably impacted us a little bit to the negative side, but I think that will turn around and play to the positive side as we go forward. And it's less important from an export perspective because vessel freights haven't moved quite as dramatically as the inland stuff.

Ben Theurer:

And then my second question is just to understand a little bit the magnitude of the inventory. You said the higher cost inventory, you still have to run through into 2Q. Can you give us a little bit of sense of timing. Is that impacting like the majority of the second quarter, just maybe half of it, only a few weeks. How should we think about what was in place as to the nat gas hedges and how this runs through on the cost of inventory that needs to run through into the usually good second quarter?

Operator:

The next question is from Josh Spector of UBS. Please go ahead.

Tony Will:

Yes. So we're really happy with the way that the contracts are structured and that we've got offtake for that -- all of that production. It gives us some flexibility in terms of how we think about the future and increasing production there and what we do with the incremental tons as we increase production. and as we move forward. But it's nice to already have a home for all of those tons at kind of market-based pricing. So we're really pleased with those. In terms of the blue ammonia and the CCS there, we have a number of companies that are very interested and have registered interest with us on securing access to decarbonized or blue ammonia. Dino is among them. And we will work with Dino and also work with others, whether it's production out of Donaldsonville or Waggaman in order to try to satisfy the needs that we see really developing in the marketplace but also realizing value for that product.

Josh Spector:

And just to clarify, I mean, just without disclosing, I guess, the remaining life of the contract, do we need to be thinking about, is there any risk of renegotiation in the next one to two years, creating different economics versus what you expect today?

Tony Will:

Yes. We don't see the kind of risk that you're talking about associated with the go-forward in that facility.

Andrew Wong:

So just going back to clean ammonia with a lot of these clean ammonia, clean hydrogen projects coming up in the U.S., along the gulf. Are you seeing any potential for bottlenecks, cost inflation around labor and construction services? And maybe taking the S&D question from the other side, like could there any tightness in the clean ammonia market, if we see any delays on build-outs and could demand come in quicker than expected?

Andrew Wong:

Okay. And then just a question on the BP deal for low methane gas earlier this year. Can you just talk about how important that is for your customers in securing some of these clean ammonia deals? And is this something that you're looking to do more of going forward?

Operator:

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back to Martin Jarosick for closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries' earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the fourth quarter and full year of 2022 yesterday afternoon. On this call, we will review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. The global nitrogen market was pushed to extremes in 2022. The need to replenish global grain stocks drove prices for feed grains to the highest levels in a decade. This supported resilient demand for nitrogen and major agricultural production regions like North America, Brazil and India. At the same time, we believe historically high nitrogen prices led to lower demand and smaller subsistence focused agricultural areas in Asia and Latin America. Industrial demand in Europe and Asia was also softer than expected due to higher prices and recession fears. Additionally, we -- very high natural gas prices in Europe and Asia significantly curtailed production in those regions. This, along with government actions restraining nitrogen trade, reduced product availability further supporting high global nitrogen prices. These dynamics were exacerbated by Russia's invasion of Ukraine, which triggered disruptions and a large realignment of trade flows. The combination of these events push global nitrogen prices to all-time highs in the spring of 2022. Through the second half of last year, the shock of these factors moderated as global trade flows of natural gas and nitrogen adjusted and the world absorbed previously delayed urea capacity additions. In addition, a mild winter in the Northern Hemisphere resulted in higher natural gas stocks, lower natural gas prices and therefore, lower global nitrogen prices. Global nitrogen prices were also pushed lower as many agricultural buyers took a risk off just-in-time approach to purchasing. This is not unusual, nitrogen prices are historically high, and demand for the spring application season seems distant. This buyer behavior has persisted longer than normal as declining global prices reinforced the wait-and-see approach. Over the last two weeks, we have seen retailers and wholesalers begin to step back into the market at attractive price levels. The decrease in global nitrogen pricing has improved farmer economics dramatically and should spur demand globally that was discouraged at higher prices. We expect significant demand to emerge in North America in the coming weeks as the value chain moves into catch-up mode that will likely last into and through the second quarter. We believe inventories are lower at the farm and retail level given the extent of the Q4, Q1 purchasing slowdown. Additionally, nitrogen imports into the US since July are lower year-over-year, while nitrogen exports were significantly higher. As a result, we believe there is a good amount of product movement yet to occur and purchases required to meet spring needs. From a longer term perspective, we believe that industry fundamentals continue to point to a tight global nitrogen supply and demand balance. As you can see on slide 9, global grain stocks did not improve from last year's growing season per weather conditions in many key growing areas along with lower production in Ukraine due to the war limited global yields. As a result, global course grain stocks use ratios remain low, supporting high global grain prices for longer. This has been farming highly profitable and low cost exporting regions of the world, such as the US, Canada and Brazil. We expect this will support resilient demand for nitrogen as the agricultural sector focuses on maximizing food production and farm incomes. We project that 92 million to 93 million acres of corn will be planted in the United States in 2023 along with strong wheat, cotton and canola plantings across North America. We believe we'll take at least two more growing seasons at trend yields to fully replenish global stocks. In our view, Europe remains the marginal nitrogen producer in the industry. While forward energy curves have moderated, the current decline in global nitrogen values suggest that producer profitability in the region will continue to be challenged. We believe this is reflected in the estimated 20% to 30% of European ammonia capacity that is currently curtailed. With European production supplying the marginal product ton in the industry, the marginal opportunity for CF Industries remain substantial, as you can see on slide 10. With that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for their outstanding work in 2022. Their expertise and unwavering commitment to safety is the foundation of everything we do. I particularly want to recognize, the more than 400 CF Industries employees, who contributed to the successful upgrade of our enterprise resource planning system, which we have had operating since the beginning of the year. This was our largest business technology implementation ever, and it was completed on time and on budget, an outcome that is extremely rare for these types of projects. And while the work may not generate headlines, it is fundamental for our future growth. We are proud of the outstanding 2022 that we had at CF Industries, but we're even more excited about the opportunities ahead. Given our operational focus, disciplined capital stewardship, positive market outlook and strong return profile from our clean energy initiatives, we expect to continue to generate superior free cash flows. As a result, we believe we are well positioned to build on our proven track record and continue to create substantial shareholder value. With that, operator, we will now open the call to your questions.

Stephen Byrne:

Thank you. I'm very curious to hear your view on – what has driven NOLA urea from $700 to $300 in five months. Is this just deferred demand at the retail level that is driving that, or are there some other things like the US is willing to take Russian cargo as a lot of countries aren't. Is there some Saudi-based cargos that are coming in and getting manipulated on price? Is there something else going on here? I don't get it. You got a marginal producer even with lower gas, it's still their marginal costs are still $500 a ton. So what has led to this? And where do you think it goes from here?

Stephen Byrne :

And maybe just one more for you, Bert, and you just said you have a good order book on. Would you say that you've you sold more into the second quarter than normal or maybe less than normal if you're expecting a recovery in pricing?

Tony Will :

Yes, Steve, I think it's fair to say, Bert sort of manages us really well. We're comfortable in terms of the orders that we have to get us to the place where we're expecting demand to start emerging in a very significant way in the quarter. But we're keeping our powder dry with respect to being able to participate in that high-demand portion of the first half here.

Operator:

Our next question comes from P.J. Juvekar from Citigroup. P.J., please go ahead.

Tony Will:

Yes. Good morning, P.J. So the first sizable quantity of low-carbon ammonia is going to be available at Donaldsonville, as a result of the CO2 dehydration compression project that Chris talked about earlier in the agreement with ExxonMobil for transportation and permanent sequestration of that CO2. So we're going to be able to sequester about 2 million metric tonnes of CO2 a year, beginning in 2025, which is about the time frame that GERA is going to begin taking some of these volumes. And so it syncs up very well with our ability to produce it with when demand is beginning to emerge. We have a framework or an MOU around the agreement, some of the specifics of whether there's an equity investment in the project from JERA, whether or not it is strictly an off-take agreement. All of those things are currently being discussed and we're -- we've got a very good relationship and a good dialogue going but more details to come as we kind of further firm things up. But suffice it to say with the availability of the 45Q tax credit and the recognition globally of the value and relative scarcity of low-carbon ammonia, we're really excited about this development of real tangible demand showing up. And the interest on the part of consumers of this product to be involved in the equity side of the production of it as well. So to us, that's very different than people building spec plants you've got kind of the base consumers that really want to vertically integrate into the production side, and that's an exciting development.

Bert Frost:

Yes, on average, on a historical review of previous experiences, it's let's just say it's 5 million tonnes, 1.5 million has come in, probably have 3.5 million tonnes to bring in. February and March, we're tracking the cargoes are probably between 700 to 1 million tonnes for each month. And then it gets a little dicey for that importer because if you're putting a vessel on the water in April, getting here in late April, early May and has to move from a coastal import port into the interior, it's not that easy. So I think more to come on that issue. I think the other issue is demand. When you look at what the additional corn acres we targeted in our remarks of 92 to 93 and the additional wheat acres of probably 5 million acres, you've got, I'd say, 300, 000 to 400,000 tons of additional demand on top of the pasture acres that will be fertilized. So good demand profile going forward. I think the imports generally tend to be balanced. And we're well positioned with our three urea plants on the coast and then the interior to serve that need.

Operator:

We have a question now from Christopher Parkinson from Mizuho. Christopher. Please go ahead.

Tony Will:

Yes Chris. I would say the good news here is that there should be plenty for all of the above. The investments that we're making on the decarbonization and in particular, the dehydration compression are relatively modest compared to the amount of free cash flow that we're generating. And so our expectation is that we can continue to do all of the above. Now, I would say, given the return profile of some of those projects, particularly in light of the 45-Q tax credit that -- our first call on capital is going to be investing in these kind of projects that have returns way above the cost of capital. That's good for all seasons. But I don't think this is a choice that we have to make as an either or.

Tony Will:

I also think -- and I just want to highlight one of the things Chris said is while we're looking at a host of different clean energy initiatives and low-carbon ammonia opportunities, we are partnering with people to bring those things to reality. And so the example being if we built a new ammonia facility, our BluePoint complex in Louisiana, we're doing that with Mitsui, who is in for almost $0.50 on the dollar. So it really does -- and as you think about cash going out the door, that's spread over four, maybe four and a half years, it really is relatively modest in the grand scheme of things, and that's why we feel we can do all of the above here.

Tony Will:

Yeah. So I would say by historical standards, we're very happy with where the ammonia pricing is. Arguably, it's a good value out there in the market today. I would say some of this goes back to the point that Bert mentioned earlier, which is a little bit of reduction of economic activity. We've also seen a reduced demand on ammonia going into industrial applications. So that certainly had somewhat of an impact on it. But look, by any standard other than a period of time last year, the ammonia market that we're looking at right now is absolutely phenomenal.

Christopher Parkinson:

Thank you so much.

Joel Jackson:

Hi, good morning. Maybe following a bit on risk here. It seems like ammonia has been trading with the marginal cost curve, marginal cost for months and months and urea is not, in fact, there's a negative margins, right, to upgrade from ammonia. Can you talk about that? And is that really sustainable? And Bert, Tony, have you seen this before because I don't think I've seen this before in a long time. It's lasted for this many months?

Chris Bohn:

I mean, I think the ammonia S&D is tighter than the urea, one for the points that Bert just mentioned, one is the additional urea plants, upgrade plants that have come on this past year. And then additionally, just the reluctance right now, purchasing prior to the application season. But I think the expectation is you start to see that tighten up as well.

Tony Will:

Yeah. So Chris, I'm happy to give you a little bit of background on this, and then I'll invite others to jump in here as we go. But basically, or Joel – yeah, sorry. Basically, there are typically involved when you're doing E&P some fugitive methane emissions that you get slipped in terms of both around the wellhead, as well as in the transportation and pipeline system. And BP has developed and has implemented and invested in some technologies and approaches to dramatically reduce the amount of methane emission slip at those sources. And Nathan, as you know, is a very potent greenhouse gas. And so by them investing to reduce the amount of fugitive emissions that has a pretty dramatic impact on our Scope 3 emissions. Because they're investing in reducing their emissions profile, there is a premium on the gas, but it is really small. It's de minimis. And so this is a way that we can go after another piece of our emissions profile, do it in a very cost-effective way and do it in a way that's good for the environment. And so we're excited about this partnership and continuing to move forward with it.

Operator:

Okay. We are going to continue with a question from Adam Samuelson from Goldman Sachs. Adam, please go ahead.

Tony Will:

Good morning.

Tony Will:

You bet, Adam. So one of the places that we have a significant amount of CO2 that's currently being vented, and it's partly because what we're primarily producing there is ammonium nitrate is our Yazoo City facility. So there's a lot of CO2, we end up venting and we are in active discussions about finding solutions from a transportation and sequestration options there. That was one of the two initial ones that we highlighted when we announced kind of our movement into Clean Energy and de-carbonization. And as you pointed out, in Medicine Hat, the City of Medicine Hat has been granted the rights to the poor space in that area. And so we're in active discussions with them about developing a sequestration option. And that's -- it's a different kind of benefit for us on like the 45Q here in the US. The cost of carbon, as I'm sure you're aware in Canada, is already high and it's going to get a lot higher going forward. So there is really good economics around a potential investment there where we can also dramatically reduce our aggregate emissions profile. And we are continuing to evaluate in other areas as well. The one challenge at a place like Port Neal because the amount of urea and UAN that we're producing, we're using most of the process CO2 that we produce. And so it's fairly low the amount that ultimately gets vented there. And so the prospect of doing a CCS project is small. Verdigris on the other hand does have some reasonable amount of CO2. And we are looking at it across the network for other opportunities, including going after some of our N2O emissions from our nitric acid plants, the N2O side is also really carbon intensive from a CO2 equivalent standpoint.

Adam Samuelson:

Okay. That's helpful. And I guess just a separate follow-up on the Billingham plant in the UK. I think the guidance for the full year was 9.5 million tons of gross ammonia production. Does that assume you actually are able to restart ammonia production in the UK? And if not, kind of how long would you be comfortable not running ammonia there before that starts creating issues at the plant?

Adam Samuelson:

Okay. That's all. I’ll pass it on. Thank you.

Edlain Rodriguez:

Thank you. Good morning, guys. Just a quick one on buyers psychology. Like, what do you think buyers are still wait and see buying pattern when they can clearly hear you saying that they should expect prices to be going up soon, like shouldn't they be wishing to buy ahead of those higher prices?

Edlain Rodriguez:

Okay. Thank you. That’s all I have.

Jeff Zekauskas:

Thanks very much. Your tax bill to Canada is about $500 million. How much do you expect to get back roughly from the US government and when? And to the same tax problems continue into 2021 and 2022 taxes?

Tony Will:

And Jeff, the other thing is we did go ahead and make estimated payments for the period of 2012 through 2021 in order to stop the interest ticking as Chris said, the Canada charges a much higher interest rate than the US. And so that's where some of the frictional cost comes from. But our expectation is that we'll get much of the money back. And again, the 2006 through 2011 money faster, the rest of it is going to likely have to go back to another round of arbitration when you're talking about 2012 through 2021. But we're obviously going to put all efforts forward to recover as much of this as possible.

Jeff Zekauskas:

Great. Okay. And in the Donaldson complex, you want to transport in store 2 million tons of process CO2. How much CO2 does the Donaldson complex throw off, or maybe put another way, how much CO2 was thrown off per ton of ammonia you produce?

Jeff Zekauskas:

That’s a pretty good answer. Thanks very much.

Will Tang:

Hi guys. This is Will Tang on for Vincent. I'm wondering if you could give some additional color on, I guess, what's happening with respect to Chinese new exports and why you're expecting them to be flat to down on a year-over-year basis in 2023? And then as a follow-up to that, you guys gave, I guess, what they would be on a looser export restriction level of three million to five million tons per year, which is a little bit lower than what the been exporting between 2019 and 2021 of around five million tons. So I'm wondering, if you could bridge the difference there. Is that just higher demand from the region, or are there other aspects influencing that estimate?

Bert Frost:

I think you covered it well. And the key thing for me was a very good governmental action to protect. This is reflective on 2022. The export controls, an inflation control mechanism and a cost control mechanism for the Chinese farmer to have available nutrients and it worked, and they did. And so when the price of the global market hit $800, the price in China was $400. And so I think that was a successful program. And we see Chinese exports moderating, you're right last year, they're just below three million tons and probably expect that same level to up to maybe five million tons. But today, the Chinese price is higher than the global market. So there is not an incentive to export those tons. And they're going into their spring season, just like we are in the Northern Hemisphere, and I expect demand to be robust. China has been a very active purchaser supporting the global agricultural structure of corn and soybeans and refined products for the -- for now decades. And we expect that to continue as they rebuild their stocks, as well as their protein stocks, as well as their feed grain stocks. So we don't see a big change coming out of China on the export front for urea in 2023.

Operator:

We have a question from Andrew Wong from RBC Capital Markets. Andrew, please go ahead.

Tony Will:

I mean, I think that's one of those situations, where you never fully 100% in balanced where demand develops at exactly the same rate as new production does. I think what we'll probably see is as demand develops, if there's not enough production, initial implementation using conventional or gray ammonia with a desire to shift towards blue as it becomes available. And as you have a project or two like this that comes up, if for a while, you get a little bit of excess availability of that product, it's chemically identical, so it can certainly go into any of the uses. My sense is on the margin, there will be desire on a broader industrial application basis to start making use of low-carbon ammonia as it becomes available. And again, I think the thing that's very different about some of the announcements going on today as compared to what happened in 2012 was there was a lot of spec plants that were being announced by people that were not industry participants at the time, just because they thought, hey, this is a great thing that we want to go do. Most of the announcements that you're seeing today are from people that are well-capitalized already in the business, understand it. And you also see a number of people that are ultimately going to be end users of the product or other participants in the channel that want to be involved as well. And so it's got a very different feel to it. And again, as we look forward, the JERA MOU is really just the first piece of tangible demand that is emerging, and we expect a lot more to come. So our sense is that for ammonia really to take off as a clean energy source, we're going to need the production capability, that are represented in some of these announcements. And the number that are announced versus the number that get billed is ultimately a – it's less than one for one. So we'll see how all that develops. But we're – we're very pleased with kind of where we sit in terms of the leadership, not only on global ammonia production, but also the actions – the early actions we've taken to de-carbonize our network and produce low-carbon ammonia.

Chris Bohn:

I think a lot of the announcements, Jeff, that you're hearing are actually blue ammonia projects, which are effectively gray ammonia production that just has sequestration areas around it. So I think it's why you're seeing the activity in the Gulf Coast with the ability to sequester it. So, obviously, the transition to blue ammonia given the incentive structures that have been put out there, allow you to make that incremental capital. So that's why I think you're seeing it is because blue ammonia projects with the enhanced 45Q become very close to what a conventional production would be.

Andrew Wong:

Okay. Thanks.

Josh Spector :

Yes. Hi. Thank you. Just on natural gas quickly. I mean, I know you guys normally don't do much hedging further out, but given where prices are, I mean, do you take a different view over the next six to 12 months. It's hard to see that you'll be very wrong on the low end of that. So, just curious on your thoughts.

Josh Spector :

Okay. And just quick on CapEx. I mean this year makes sense. I guess, I mean assuming you guys go forward with FID on the facility, assuming your share of that's roughly $1 billion spent over four years. I mean, should we be thinking about if that plays out, your CapEx is in the range, $700 million, $800 million the next four years, barring you don't do any additional further projects?

Josh Spector :

Okay. Thank you.

Richard Garchitorena :

Great. Thanks having me in. Just one high-level question. You've made a lot of announcements on the clean energy initiatives in the past year. And considering you have strong free cash flow, it doesn't seem like that's a constraint. When do you think your plate will be full in terms of like how many projects do you think you could have going on at the same time between now and 2027 or so where you feel comfortable you can manage that? And then I guess, just also in terms of what your priorities would be in terms of managing those? Thanks.

Chris Bohn:

Yes. And the only thing I would add is the projects that we're doing really play into the core competencies. And that's why this strategy makes so much sense for our organization. It's not as if we have to go out and build a whole bunch of new infrastructure. A lot of that exists and we're making add-ons to that. So I think that also alleviates the size of these projects and then additionally, partnering in areas that we don't have those core competence -- allow us to maybe take on a few more projects than we would if we were doing them all by ourselves.

Operator:

Ladies and gentlemen, this is all the time we have for questions for today. I would like to turn the call back to Martin Jarosick for closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Martin Jarosick:

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the third quarter and first 9 months of 2022 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. The operating environment for CF Industries remains positive as near the end of 2022. Agricultural-led demand continues to be robust due to the need to replenish global grain stocks. At the same time, energy prices in Europe and Asia have remained high, causing an unprecedented level of ammonia curtailments in Europe during the third quarter. Trade flows have adjusted rapidly with the rate of nitrogen imports into Europe over the last 3 months approaching those of the two largest import regions, India and Brazil. Foreign energy curve suggests that producers in Europe and Asia will face high energy costs into at least 2025. This will likely continue to challenge producer economics in those regions and lower global nitrogen supply availability. Producers in Europe with the option to import ammonia have been able to run upgrades profitably. But for those who cannot, the European winter is likely to be very difficult. Global supply also remains limited by government actions. Since October of 2021, Chinese government policy has materially restricted urea exports. Ammonia exports from Russia are also well below prior years. In contrast, the supply of upgraded fertilizer products from Russia has returned to near normal levels as trade flows have adjusted over the last two quarters. Looking ahead, we expect demand for nitrogen to remain resilient as the agriculture sector focuses on maximizing food production in the face of increasing food and security. Global harvests are not projected to make meaningful progress in 2022 towards rebuilding global grain stocks as key producing regions suffered from poor weather during the growing season. This includes the U.S. where crops were negatively affected by extended heat and drought this summer, leading to yields that are expected to be significantly below trend. As a result, crop futures prices for corn remained strong relative to the last decade, which should incentivize farmers to apply nitrogen fertilizer to maximize yields in 2023. As we have seen so far this year, margin opportunities can shift rapidly between regions where product is needed most. Typical seasonal demand from India and Brazil and higher-than-usual demand from Europe continue to drive today's market. This has enabled CF to build our largest export book ever, and we are receiving strong interest for first quarter export shipments as well. Further out, we expect high corn and wheat planted acres in North America in 2023 due to strong crop futures prices and healthy farm economics. In line with this outlook, we have a strong order book for the fall ammonia application season which has begun. Low water levels on the Mississippi River have challenged the industry's ability to move product northward late in the year and will have an impact into 2023. This is likely to increase the importance and value of product manufactured in and close to the Corn Belt as we enter 2023. As you can see on Slide 11, we expect these broad industry supply and demand dynamics to continue to support a steep global nitrogen cost curve during 2023 and, in our view, well beyond. The wide estimated cost range suggests continued volatility in global nitrogen prices. With our manufacturing network firmly rooted at the low end of the cost curve, we are well positioned for a strong margin opportunities even as prices fluctuate. With that, let me turn the call over to Chris.

Tony Will:

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for their outstanding work in 2022. Their expertise and unwavering commitment to safety is the foundation of everything we do. One of the ways we put a spotlight on this commitment is our Annual Wilson Award for excellence in safety, which honors the most impactful safety innovation development within the company. I want to recognize our Yazoo City complex for winning this year's award. They improved the process of ammonia plant boiler startups, reducing the potential for unsafe conditions to arise. As we approach the end of an outstanding year for CF Industries, I want to put our performance in context. Over the last 10 years, we have invested to grow our production and cash generation capacity while strengthening the balance sheet and significantly reducing our outstanding share count. Our unmatched execution ability, along with a positive operating environment, have amplified the returns from these investments. As you can see on Slide 8 of our materials from the perspective of shareholders, free cash flow participation has more than tripled over this time period. Given our strong operational focus, disciplined capital stewardship, favorable outlook and strong return profile from our clean energy initiatives, we expect to generate superior cash flows. As a result, we believe, we are well positioned to build on our proven track record and create substantial shareholder value in the years ahead. With that, operator, we will now open the call to your questions.

Chris Parkinson:

There's been a lot of movement in trade flows, including ammonia coming out of North America and heading to Europe, which is easing a lot of the supply shortfalls that the region is facing. Just I'd be very curious to hear your assumptions on how this materializes into, let's say, the first quarter into the springtime demand season and whether or not you believe there's going to be an eventual disproportionate demand pull on Middle Eastern suppliers as we begin to supply, let's say, the Northern Hemisphere markets into the spring? Just any kind of comments on that updated dynamic would be very helpful.

Operator:

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Bert Frost:

This is Bert again. And I think these are the important salient topics that we are discussing with our customers today is how do we meet North American demand due to some of the difficulties. And you're right, the river issue with -- it's not just the Mississippi, but it's the Arkansas, the Ohio, the Illinois that are limiting shipments and water levels are at 30-year lows. So barges are not only being light loaded, they're taking double the amount of time and then to merge on those barges. So the cost of moving a ton from to the Midwest by barge went from, let's say, $15 to $70. So that's why when we say the value of internal tons like our Port Neal or our Canadian tons or Inland tons in North America are going to be valued and needed, and we're working with our customers to move those tons as we speak.

Bert Frost:

Yes. And just some additional comments. Thanks for that is, we have gone out and procured additional railcars as a reflection of the difficulties of the rivers as well as working with vessels to efficiently move our products globally. So we're excited about what's coming in Q1 and Q2.

Tony Will:

Yes. I mean I think the way we approach that or have approached that is, Bert's got a really good order book. And Donaldsonville, we can export everything we produce there. And so we have plenty of international demand. There is available vessel outbound loadings. And we're not in a situation where we're concerned about being able to run Dville. Our in-market plants because they're already in market, a lot of them have access to just do truck delivery and don't require significant rail outbound loadings. And so we're in a really good position relative to not only capturing that in-market spread because of the high cost of bringing imported product into the Corn Belt but also given our logistics and distribution network and our storage capacity, we're relatively unaffected by a rail strike, but that would have dire consequences for the rest of the industry and anyone who's counting on bringing imported tons in is real trouble in the event of both the combination of low river levels along with the potential rail strike.

Operator:

The next question comes from P.J. Juvekar of Citi. Please go ahead.

Tony Will:

Yes. I mean I think what we're seeing right now is there clearly is some level of demand destruction. And I would say, most prominently on the industrial side in Europe, where you've got very high energy costs and it's well publicized that BASF and others are running facilities at greatly reduced rates. And so -- and that really has to happen in this environment because you don't have enough nitrogen to go around. So price tends to be a good arbiter of where the value sits and what things don't get it. And so that's necessary. But as you point out, we don't expect high operating rates in Europe based on where the forward gas curve is and at least where current product pricing is. So that's further going to constrain supply going forward. And that really calls into question or highlights potential food and security issues and some of the most vulnerable parts of the world. So that's a real challenge as we look at high energy costs and relatively lower operating rates. And we're conscious of that and trying to navigate that. But from our standpoint, given where the strategic location of Donaldsonville is, we do have the option of exporting it. And we'll sell those tons domestically if the price is attractive relative to other options. And if Europe is a more attractive option for us and are paying higher prices, then I think price is the best arbiter of who values the tons the most, and they ought to So we're aware of it. But I think that's one of the reasons why we're fairly bullish as we look forward. The outlook of high energy costs in Europe and Asia means lower operating rates. They still need the product given where grain markets are and grain stocks to use are. So we expect very strong agricultural-led demand and a tight supply/demand balance on nitrogen, and that's why we're so bullish about the go forward.

Operator:

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Bert Frost:

Again, China has been an enigma wrapped inside of enigma. It's been very interesting to watch their various governmental policies over the last several years from massive expansions and capacity to ramping that production down and becoming a basic domestic supplier, especially of urea, going from 13 million tons a few years ago to 5 and now down to 1.5. So a dramatic change that has tightened up the global S&D. But ammonium sulfate has been a surprise. That's come out in multiple millions of tons. And ammonium sulfate is a good fertilizer because you're combining nitrogen and sulfur to sulfur deficient areas. So it's been -- a lot of those tons have moved to South America as well as to Europe and have replaced some of the urea and ammonium nitrate tons in Europe. So we expect that to continue. Those haven't been sanctioned by the government and they have come out and that's probably reflect -- some of that production is a reflection of caprolactam. Other is a reflection of pollution control equipment to make that product. And so it's been a surprise, yes, and we expect it to continue.

Operator:

The next question comes Joshua Spector from of UBS. Please go ahead.

Tony Will:

So Lucas, I think our expectation is that nitrogen exports remain sort of near historic levels, and there isn't that much variation. The one difference is probably a little lower on the ammonia side because a lot of that ammonia used to go via pipeline down to Odessa or usually and then come out to the Black Sea and that route is not really available right now. So there is some reduction in ammonia exports. But as you point out, the other forms of nitrogen are pretty flat year-on-year. And our expectation is that their operating rate at least for the next year or so is going to be fairly consistent. I think it's really dependent upon how long the conflict goes on and how long you see various sanctions in place. At the moment, we're not counting on there being a big fall off of Russian ton availability due to maintenance problems. On the new plant build, our expectation is those plants once they've begun will eventually start up, but they will likely be delayed for a significant amount of time. And so I think it's fair to push start up on a lot of those plants back at least 18 months, if not two years. But again, our expectation is that they start up. And also, the world really is in a deficit situation right now with respect to the normal demand growth in nitrogen year-on-year and the amount of production capacity coming online. So ultimately, the world really does need those plants to show up, particularly when we start seeing alternative uses of low-carbon ammonia, whether it's as a marine fuel or as co-combustion for electricity generation with coal. Historically, those demand areas have not required ammonia. And if we see those things develop and start pulling away available ammonia, we really do need those new plants to start up. So our expectation is that Russia is, for the most part, status quo with a little bit of delay on the new stuff.

Joel Jackson:

I'm going to ask a few questions together. Maybe Bert, what would you think if the Togliatti pipeline comes back online? What would that do for ammonia in the world? Number two, Martin always like to yell about Q3 politely though, but Q3 ammonia netbacks tend to be weaker because of the heavy industrial mix. You had some quite weak urea and UAN prices relative to so benchmarks. Can you talk about -- was that just the export dynamic there? And number three, the $3 billion buyback over three years, it's a good number. Can you talk about, Tony, why is that the right number? What the Board was thinking about all the different commitments and how you got to $3 billion for over three years?

Tony Will:

Yes. And I would just tag on with that one. Joel, back to Martin's point that he's spot on. Q3 is our lowest quarter from an ag demand perspective because the Northern Hemisphere is not applying and everything for the most part is going into inventory. And so really, it's also proportionally our largest industrial quarter. And as he points out, right, we saw whether it's the Mosaic contract or other industrial contracts that we have, those don't trade typically at the same level as ag demand does, particularly ag demand in season. And so you got to make sure when you're thinking about third quarter, you take those factors into consideration. But I'm with Bert, I'm really pleased with our price realization, our volume. I mean, $1 billion of adjusted EBITDA is the strongest third quarter we've ever had by a long shot. And that really lead us into the second part of your question, which is $3 billion. Why is that the right number? And I would just say, over the last 12 months, we've done $1.6 billion of share repo. And we're nearing the -- closing out the existing repurchase authorization that we have. And so we want to make sure that we got another authorization in place so we didn't have any dead period in there. And this is one of those things that it's going to be a rinse and repeat, not this is the end of it, right? So if things develop the way we expect them to and how we're seeing the first half develop, we could easily finish that well faster than the three-year time horizon that it's on, and then we'd go back and layer on another one on top of it. But the good news here is based on energy differentials and based on where stocks to use are, we see a prolonged period of very significant cash flow generation for the business without huge CapEx requirements. And so it really gives us a lot of flexibility in terms of how we think about deploying capital and returning capital to shareholders. And I'm just excited about what that means for the future.

Operator:

The next question comes from Andrew Wong of RBC. Please go ahead.

Tony Will:

Yes, Andrew, I think what's going on a little bit is there's a wait-and-see approach being taken by a lot of people right now. They know that they're going to need nitrogen next fall. They're looking at prices are. And despite the fact that farm economics are still very favorable, the view is nitrogen price is relatively high, and therefore, I may want to wait. I think what we're seeing is that that's a tough situation or potentially a tough situation given where energy prices are in the rest of the world. The other issue is in some parts of the world, less so in North America and Europe, but there's also a big working capital commitment at the current levels of nitrogen pricing out there in order to build a position for next year. So I think people tend to live a little bit more hand to mouth on that. But there's still plenty of demand, as you say, based on where grain prices are, we think ag demand is going to be very strong as we head into next year. And we're very optimistic about where that goes.

Operator:

The next question comes from John Roberts of Credit Suisse. Please go ahead.

Tony Will:

Actually, I don't think we missed any I think if anything, the view from other people on the outside may not contemplate the normal cadence of this business, which is there's no ag demand and product going to ground in the third quarter, and therefore, it's industrial really mix of business that is much higher and industrial contracts because of the ratability of them tend to trade at a lower rate. We've talked about the Mosaic contract and others. And honestly, having $1 billion of adjusted EBITDA in the third quarter is absolutely fantastic. We launched at the highest price we've ever launched at and realized prices well above that. We had a fairly muted fill program because we saw the demand for that product internationally. And I'd tell you $1 billion of EBITDA in the third quarter is absolutely outstanding. There's nothing I'm disappointed or apologetic about it all.

Tony Will:

Yes. And Ali, I would just say one other thing. We don't really give guidance, right? We have it internally, and I'll tell you based on what our internal thought was, we knocked it out of the park. So I'm really pleased with the performance of this organization.

Stephen Byrne:

I'd like to hear your view on nitrogen inventory levels in various channels. So maybe starting with the U.S. corn belt. Clearly, you exported more than normal this year. And I'm sure you have visibility into your wholesale and retail customers. How would you assess their inventory levels right now versus normal? So that would be the U.S. comment or question? There's some comments out there that Europe has full inventory levels of urea. I'm not sure that's logical, but would to hear your view on that one? And then with respect to Brazil, do they have enough urea to head into [Indiscernible]

Operator:

The next question comes from Ben Theurer of Barclays. Please go ahead.

Bert Frost:

Yes. So I'll start with the last part first of the current price and why is it lower. We're in a commodity business. In a commodity business, that's not board traded. That is determined at different pricing points, whether that be NOLA, Paranagua or in the Middle East are dependent on different things. And so as I just -- with the last caller talked about there are areas of the world that are high demand areas that are plugged and have an inability to receive new tons. So what has happened, that has happened into NOLA. And with the difficulties of the river system, a lot of traders and buyers have wanted to get out of their positions and they just sold them down to a level that we believe is artificially low. And guess what happened this week, we saw a $50 rebound because those tons now may be going to India because India did a surprise tender announcement today. And so this is a dynamic market, and this is what the beauty of the CF system of our ability to pivot very quickly, participate in all these different markets have the spread of the distribution terminals and the flexibility. You have to remember, we have 5 different modes to ship, pipe, barge, rail, truck and vessel. That gives a lot of flexibility. So that's why we believe our pricing structure is consistently at or better than the market. So our expectations are still the same. You have a product constrained market, a little bit of the demand deferral and demand destruction, but a need for the world to be fed and cloth. And that will only happen with nitrogen fertilizer being readily available, and that's the question we're heading into 2023 is how and when that will normalize. So the structured price, we would say where we are today and probably trending higher into 2023, and it's going to be a positive market next year.

Martin Jarosick:

Thanks, everyone, for joining us today. We look forward to seeing you at the upcoming conferences.

Martin Jarosick:

Good morning and thanks for joining the CF Industries' earnings conference call. with me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development, and Supply Chain. CF Industries reported its results for the first half of 2022 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website are not -- that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Tony Will, our President and CEO.

Bert Frost:

Thanks, Tony. The first half in second quarter of 2022 saw a continued positive operating environment for CF Industries. Strong global demand and high natural gas prices in Europe and Asia pushed global nitrogen prices to all-time highs. As a result, we achieved record average selling prices for all segments, even as poor weather affected the North American planting and application season. As we look ahead to the second half of the year, we believe the environment will remain favorable for our company. European and Asian producers are facing extremely high natural gas costs, creating supply uncertainty at a time of resilient agricultural led demand. Last week, prices at the Dutch TTF natural gas hub exceeded $60 per mmbtu. This would put ammonia production costs for efficient plants in Europe above $2,000 per metric ton. At current product prices, this production is not sustainable, which is why we have seen several producers in Europe, including BASF, Yarra, OCI and Fertiberia curtail ammonia output. Producers with the option to import ammonia, maybe able to run upgrades profitably for those who cannot, the European off season is likely to be very difficult and we can see further containments and increased nitrogen imports into Europe. At the same time, government actions continue to play a role in limiting global supply. Since October of last year, Chinese government policy has materially restricted Urea exports. We do expect a seasonal increase in Chinese export volume in the second half of the year, but it appears total exports in 2022 will be well below the level of last several years. In contrast, the supply of fertilizer from Russia, outside of ammonia has returned to near normal levels as trade flows have adapted over the last several months. This environment, together with typical seasonal demand led by India and Brazil, has created substantial demand outside of North America for all nitrogen products. We evaluate these opportunities on a daily basis. For the past several weeks, the value of all major nitrogen products has been substantially at parity on a nutrient basis. This allows us to use our manufacturing system flexibility to optimize our product mix and meet global demand in the form and location that maximizes margins. As a result, we have built our largest export book ever across all our products. Given the demand outside of North America, we offered a limited UAN fill program this year. We launched it at a price point about 40% higher than last year and completed the program quickly. Between Phil and our export book and our fall ammonia position, we are well positioned for the months ahead. In the coming months, we expect the highest margin opportunities to shift rapidly between regions where product is most needed, with resilient demand and constrained supply, the global nitrogen market is likely to be short fertilizer it needs if product prices do not incentivize greater production in high cost regions. With that, let me turn the call over to Chris.

Tony Will:

Thanks Chris. Before we move on to your questions, I want to thank everyone at CF Industries for their outstanding work during the first half of the year. We ran our plants extremely well, leveraged our logistics and distribution capabilities and made continued progress on our strategic initiatives. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.21 incidents per 200,000 labor hours, significantly better than industry averages. Our consistently strong operational performance, along with nitrogen industry conditions favorable to North American producers have led to record financial results over the last year. In the last 12 months, we have begun investing in our clean energy growth initiatives, retired $750 million of debt and regained investment-grade ratings, and returned approximately $1.4 billion to shareholders. This includes $1.1 billion to repurchase more than 15 million shares, representing 7% of shares outstanding at the start of the period. We are well-positioned to build on our track record of shareholder value creation going forward as we focus on our mission to provide clean energy to feed and fuel the world sustainably. With that, operator, we will now open the call to your questions.

Joel Jackson:

Hi, good morning, everyone.

Joel Jackson:

Can we talk about the gas price differentials in Europe? I mean, obviously, what it seemed to me if there's enough demand right now to get into the European supply, we'd have a lot higher nitrogen prices, so can you talk about what's been going on there? What are the marginal costs around the industry? Is it just a seasonal thing? And as demand picks up later in the year, we'll get into where European gas costs are, or do you think about differently than the way I'm laying it out?

Bert Frost:

Joel, this is Bert. When you look at what's going on globally, it's not just the gas, it's what the gas is changing and forcing and that's a change in trade flows, a change in movements and probably even a change in the type of fertilizer you'll be using because of an inability possibly to get ammonium nitrate, for example. Europe today represents 15 million tons of ammonia, probably 9 million tons of urea, 4 million tons of UAN and probably 9 million or 10 million tons of ammonium nitrate, that is a substantial amount of nitrogen that's constrained. And so, you're going to see the North African tons move that direction. But even from other places, they have to be supply in Europe. And so, like Tony said, either prices have to move up or you're going to see Europe become much more of an import-dependent market than it already is, both bode well for prices.

Operator:

Our next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Tony Will:

Good morning Adam.

Tony Will:

Yes, you bet. And I'll start, and then I'll give the mic over to Bert here in just a second. But the -- as Bert said in his remarks, the way product pricing sits kind of in the moment, we're kind of margin indifferent between the type of product that is being produced, which is unusual that ammonia pricing and margins are so high on a nutrient basis. That's pretty unprecedented. But it also means that there's no reason for us to make UAN and sell it at fill pricing into tanks or inventory at this point when the world is going so short ammonia. So, yes, we do have record exports. We are exporting some UAN. We had a very limited UAN fill program, specifically because our focus is on ammonia and exports right now. And I think that's going to bode really well for us, not only in the near-term based on what demand and margin opportunities look like, but also when it becomes spring time in the Northern Hemisphere next year because all of those skill tons are not going to be sitting in the system and the channel in the US. So, we're very constructive about what the forward looks like.

Operator:

The next question is from Joshua Spector with UBS. Please go ahead.

Tony Will:

Yes. Normally, the bulk of our turnaround activity is Q3 and to some extent in the Q4, just given that, that's seasonally in the Northern Hemisphere that tends to be the weakest point of the year, both from a pricing and a volume perspective. And so, this year is no different. Our expectation around gross ammonia production, which from our perspective is really the critical driver on the rest of it. We make decisions about which products to upgrade based on instantaneous margin opportunities. But the one thing that if you're not making ammonia, then you don't have those other options. So, our focus is really on running our -- the ammonia assets at maximum capacity and onstream factor. And we're still in kind of 9.5% to 10% range on that for the full year. Again, as you point out, with a little heavier turnaround activity here in Q3. But Ashraf has the plants running really well and safety is terrific and relative to product mix, that's really a function of where margins are. And right now, we're favoring ammonia and we're favoring exports because that provides both the best instantaneous opportunity for monetizing the product and also just sets us up really well for come spring time.

Stephen Byrne:

Yes, thank you. I was wondering if you had a view on how much nitrogen consumption was globally in the first six months of this year relative to historical levels. And two follow-ons to that. One being, what do you think that the impact might be on global crop production in 2022? And then secondly, do you expect a tighter market this fall, particularly in the US as you are – you have a strong export book?

Tony Will:

And I would just add to that, Steve, that I think your point is a really good one, which is globally, there's no doubt that nitrogen consumption was down in the last 12 months because there was constrained supply. For periods of the year, you had Russia, Egypt, Turkey, China, all with export restrictions, and you had significant curtailments in Europe and Asia. And so the world just had less nutrients to go down. And I think from that perspective, we're not anticipating that there is any kind of substantial makeup relative to global stocks to use Suncor screens which is why we see this persistent demand on the ag side for longer. And I think it's really going to be an interesting proof point when all the harvest information is tallied globally around where yields come in, but our expectation is we're going to be in a deficit situation for quite a while and that just provides a longer runway relative to ag demand.

Operator:

The next question is from P.J. Juvekar with Citigroup. Please go ahead.

Tony Will:

Yes, you bet. So, P.J., just to correct a couple of things there. The green ammonia project that we have is at Donaldsonville, and that's a 20-megawatt electrolyzer that's in process, and we expect that to be online in the 2024 timeframe. And that will be producing about 20,000 tons of green ammonia per year. So, it's a little bit of a modest first step in that direction, but we want to get comfortable and confident on the technology and the process and also really testing the market to see what the demand and the price premium is for green ammonia. The Mitsui agreement that we have is really about a brand-new blue ammonia project, so carbon capture and sequestration. And we're in the process of finalizing site selection and trying to get appropriate incentive packages worked out with state and local authorities to make that happen. And we're anticipating that would be about 1.3 million, 1.4 million ton a year ammonia plant that incorporates carbon capture and sequestration to produce blue ammonia. And yes, I mean we're really excited about the competitive position that North American natural gas affords and the ability, both from a regulatory regime, but also a geological perspective to be able to do carbon capture and sequestration here. We think it's great to be able to participate and take advantage of the natural advantages that we have here in the US. And we're – that analysis is going to be very site specific about what is required for that ammonia plant and also to get a pretty tight estimate on cost. And then we'll use that information and a thoughtful, disciplined way around making the investment decision or not. But our expectation is, particularly given where the cost of hydrocarbons are in the rest of the world and how chronically short Europe is and what the cost of building out and replacing existing capacity with green is that, that project, at least initially has terrific economics associated with it. And we just need to prove it out before we go ahead and greenlight it and move forward. But our expectation is, yes, we are absolutely going to be participating in the demand growth in this space. And what we like is being able to participate in the clean energy aspects of low-carbon ammonia. So that probably is not going to be an upgrade plant for fertilizer consumption. It's really going to be a clean energy plant. Relative to debottlenecking the existing system, we've done a lot of that over the years, and we've kind of hit sort of natural breakpoints on a number of our plants in terms of – it really makes more sense to invest in new capacity at this point than it does to continue to try to squeeze more out of what's already there because you end up hitting the limits on heat exchangers and other things that then you end up with reliability problems. We're very proud of the reliability and the on-stream factor of our network. We're running it really well, very safely and it's kind of finely tuned right now. So, I think you're more likely to see us do new plants than you are debottleneck existence.

Operator:

The next question is from Chris Parkinson with Mizuho. Please go ahead.

Tony Will:

Yes, Chris, I'll start and then give it to Bert. But I think all of it is driven on gas availability and gas price into Europe and Asia. And if you're looking at $60 gas, those urea plants and just the pure ammonia plants, they're not going to run. You can't make that math work when you can import it instead. So, I think it's very sustainable. Everything that we're seeing in terms of the forward gas curves in those regions suggest the situation is not going to resolve itself soon. And that's of the reasons why we believe the is going to remain wider for longer and also gives us a lot of confidence around, kind of, what the intrinsic value of our asset base. And even though you didn't ask this question, I'm going to answer it anyway, which is why we stepped up share repurchases in the quarter because around how much -- what the demand looks like for our products, where the supply points are, what the energy spread differential and the margin opportunity is, and it makes us very bullish. So, that's my point. I'll turn it over to Bert.

Operator:

The next question is from Jeff Zekauskas with JPMorgan. Please go ahead.

Chris Bohn:

Yes. So, Jeff, this is Chris. I'll start with the hydrogen credit and production for ammonia. So, ammonia – the hydrogen is just an input into the ammonia production process. So, it's our understanding, we would be able to receive the tax credit that would – if one were to pass related to the green – the green ammonia with the hydrogen tax credit, which is quite substantial based on a number of criteria that we'd have to meet, but would make it definitely much more economical going forward. Related to your second question was some of the methane slip and such that may happen upstream. What we're talking about is, the blue ammonia is what gets the 45Q. So, we would be taking the CO2 with the dehydration and compression projects that both Tony and I spoke about sequestering that long term and getting that credit, which today Class 6 permanent sequestration sits at about $50 per metric ton, but is proposed in this latest inflation reduction to go up to $85, more than enough to cover the incremental operating costs and expense that we have in there. So, we're pretty bullish about the direction that the clean energy, low hydrogen or I mean low carbon ammonia is going.

Jeff Zekauskas:

Thanks so much.

Michael Piken:

Yeah, good morning. Just wanted to talk a little bit about your expectation for UAN imports into the US in light of the CBD ruling. How quickly can those imports arrive? And do you just expect that it may just be Canadian trade flows if you can end up potentially getting more to Europe or to other export markets? And where do you see your biggest growth potential in terms of UAN exports in that type of scenario? Thanks.

Tony Will:

But our focus is less around UAN per se, and it's more around what's the best margin opportunity once you've made ammonia, and that might be selling it as ammonia, might be making into granular urea, might be making UAN, but we're not fixated on UAN per se, and that's one of the reasons why, as Bert said, not only are we exporting, but we're heavily focused on ammonia right now because the value prop is better for us right there. So, that's why, again, our focus is not on 19 million or 19.5 million product tons. It's on 9.5 million to 10 million ammonia tons because that's really where you make the value, which is the conversion of methane into ammonia.

Ben Isaacson:

Thank you very much and good morning. One more question on the ammonia market. You talked about 15 million tons of capability in Europe. We're also hearing about demand destruction in various pockets of ammonia, whether it's on the nitrogen side or the industrial side or phosphate. Is it possible that when the Northern Hemisphere reengages in the fall that we won't need the Europeans at all? And essentially, they will be temporarily kicked off the curve. And if so, what does that mean for Asia's marginal cost of ammonia production? Thank you.

Bert Frost:

Yes, this is Bert. When you look at global capacity for ammonia, it's about 235 million, 237 million tons, but running at 80-plus percent onstream factory, you have about 190 million tons of supply and trade is about 17 million tons. So then taking out that whatever number you want to put to Europe of 10 million to 15 million tons of a lack of that supply, like Tony said, it just – it tightens it up and there's only so much available. And then it's where is the gas that's available to produce that ton, it's going to be tight.

Andrew Wong:

Hey good morning. So, we always hear a lot about European NAT gas. You touched on Asia NAT gas a little bit. Can you maybe just like speak to that a little bit more, we don't get a lot of visibility into that part of the NAT gas market as much as Europe. How much if you added it up like the higher cost production in Asia plus Europe, like how much does that make up of your global supply and on your cost curve? And then just maybe separately, on industrial demand, what are you seeing there?

Operator:

The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Tony Will:

Good morning Vincent, so I'll give you -- sorry, just a quick high-level perspective and then let Bert jump into some more of the details given that he's more actively involved in some of those conversations. But I think there's certainly a question and a risk off from just inventory cost position when you're carrying it for a long period of time, that does create a little bit of hesitancy. I think you also tend to, in some cases, trade last year's news. And if you looked at where we were trading last year, at this time, pricing was 40% or more lower than where we are today. And so I think that there is a general expectation of, well, this year is going to end up looking something like last year or the year before. And it's not really predicated on current situation of what's going on with gas spreads globally. And they don't have an urgent immediate need for it. So, the thinking is will it hold off because maybe tomorrow will be cheaper than today.

Tony Will:

And Vince, I would just add that the longer you see high gas prices globally, the bigger the snap is going to be when it comes in terms of the price move because, first of all, with North American customers showing a little bit of hesitancy and the export book that we've laid on and the lack of availability of tons elsewhere in the world, it's just going to make it that much bigger of a price impact when the realization hits home.

John Roberts:

Thank you. I think you have five years left on the Mosaic ammonia contract. Do you think the changes in the ammonia, like we accelerate the renegotiation of that contract or might we have to wait to the expiration before you get a renegotiation?

Operator:

The next question is from Ben Theurer with Barclays. Please go ahead.

Tony Will:

Yes. I think most of what we've seen so far is curtailment as opposed to announcements of permanent closures. There have been a number of kind of green ammonia projects that have been announced, although those are probably at least five years away, and the cost of replacing existing conventional ammonia with green is very high. So, I'm not sure how much of that capacity actually gets built. But we have not seen a lot of announcements or at least I'm not aware of a lot of them that have talked about permanent closure of facilities. It's more been curtailments at this point.

Operator:

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back over to Martin Jarosick for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.