Q4 2019 Earnings Call
Good day, ladies and gentlemen, and walking the CF industries Holdings fourth quarter and for your 2019 results Conference call. My name is Michelle I hope you're coordinator for today.
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I would like to turn the presentation over to the host for today Mr. Martin Jurassic C. S Investor Relations. Sir Please go ahead.
Good morning, and thanks for joining the CF industries for your fourth quarter earnings Conference call Martin Drastic Vice President Investor Relations for see up with me today, or Tony will CEO, Chris Bone, CFO, and Bert Frost Senior Vice President of sales market development and supply chain.
CF industries reported its for your fourth quarter 2019 results yesterday afternoon on this call will review the CF industries result in detail discuss our outlook and then hosting 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 are results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect our performance maybe found in our filings with the FCC drew 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.
Thanks, Martin and good morning, everyone last time, we posted our financial results for the full year 2019 in which we generated adjusted EBITDA of $1.6 billion nearly 15% increase over 2018.
We officially converted our EBITDA into cash generating over 900 million and free cash for the year.
As shown on slide six and seven of our materials, where the most efficient convert or EBITDA into cash in the industry. Additionally, we have the best free cash flow yield.
These results reflect the impact of lower year over year natural gas cost for the company higher product price realizations and outstanding execution by the CF team.
We operated our plan is extremely well all year and started a new quarterly ammonia production record in the fourth quarter.
For the full year, we produced more than 10.2 million tons of ammonia and delivered sales volumes of 19.5 million product times.
Most impressively we did all the safely.
Our 12 month Rolling recordable incident rate at the end of 2019 was 0.48 incidence per 200000 work hours. This is the lowest yearend rate ever it see us we're tremendously proud of this achievement and I want to thank everyone. It see us who make safety your top priority every day.
In 2019, we delivered a one year total shareholder return of 13%, which was well above each member of our fertilizer peer group for the year as you can see on slides nine and 10.
We have outperformed our peer group index over 1357, and 10 years for total shareholder returns and we were the single best performing company over all but one of these time periods.
We believe this consistent long term outperformance relative to our peers reflects the enduring structural and operational strengths of our company.
Our structural advantages are clear.
We provide a nutrient that is nondiscretionary unfortunate demand continues to grow.
We are among the lowest cost producers of nitrogen to the world due to our access to low cost and plentiful North American natural gas and we operate an important dependent regions.
We also have created operational advantages for our company by investing in our assets in our people.
We have the highest ammonia utilization rates in North America, and our production sites have the flexibility to switch quickly between products to meet demand and maximize profits.
We also have outstanding logistics capabilities and North America's most extensive distribution network.
These advantages have enabled us to officially generates significant cash flow.
Since the beginning of 2017, we have deployed nearly $4 billion in cash to strengthen our balance sheet increase shareholder participation in our nitrogen business and return cash to shareholders.
We believe we are the best position company in the industry to continue to build on this track record of creating long term shareholder value in the years ahead.
Looking forward to 2020, we remain focused on safe and reliable operations and disciplined management of the company.
As we've said before we believe our operational performance will consistently deliver sales volumes between 19, and 20 million product tons, each year and we expect to do this with one of the lowest controllable cost structures per product time in our industry.
With that let me turn it over to Bert we'll talk more about current market conditions in our outlook then Chris will cover our financial position before I offer some closing remarks.
Bert.
Thanks, Tony since the start of the second half of 2019, low global energy prices have supported higher industry operating rates and increase nitrogen supply availability.
This pressure global nitrogen prices in the latter part of 2018 and into 2020.
Global demand in the second half of 2019 was a bright spot highlighted by strong urea imports into India and Brazil.
India tendered for a record volumes of urea during the year due to favorable growing conditions and flat domestic production. Despite the startup of new capacity.
This demand along with the effect of lower energy prices and favorable exchange rates brought additional Chinese urea exports to the market exceeding our expectations and during the year.
The man from India should remain strong and 2020 with the next India urea tender expected in March or early April.
We also expect urea imports in demand in Brazil to increase over 2019.
Afforded by the recent idling of a Petrobras ammonia urea complex and additional planted corn acres in that country.
Just like the rest of the World North America saw lower year over year nitrogen prices throughout the fourth quarter.
This has been reflected in north American nitrogen prices as we began the year.
Urea barge values that nor nor liens at the start of 2020 were $220 per tonne compare to $275 per tonne at the start of 2019.
[noise] barge prices have appreciated recently as the industry has begun to take stock of potential spring demand.
However, even with the increase prices today are still lower year over year.
Additionally, you in prices in North America are lower than at this point last year and priced at a discount to urea due to an influx of imports. This trade flows adjust to the impact of European Union tariffs.
We expect strong nitrogen demand in North America during the upcoming spring application season, which we believe will support prices.
Last year, we saw record prevent plant acres in the U.S. and a week fall ammonia season due to poor weather.
Despite a challenging year. However farm income has improved for most farmers and input costs are a decade lows.
This should result in an increase in planted corn acres as a whole over 2019, it's pharmacy typical planting conditions.
We believe this should favorite demand for nitrogen crop futures continued to support an increase in the planting of nitrogen consuming crops, we estimate planted corn acres in the United States will be in the range of 92 to 94 million acres.
We also expect positive demand for spring ammonia as well as upgraded products, which typically see greater demand following poor fall ammonia seasons.
We're well prepared for the active spring application season, we see ahead, while our expectations are for normal planting conditions. Each spring brings new opportunities freeze for CF to leverage our extensive logistics and distribution capabilities.
We are ready for whatever rises and look forward to working with our customers for a successful spring application season.
With that let me turn the call over to Chris.
Thanks, Bert for the full year of 2019, the company reported net earnings attributable to common stockholders of $493 million or $2.23 per diluted share our EBITDA and adjusted EBITDA, We're both approximately $1.6 billion lower natural gas costs year.
We are your worst substantial factor in our financial performance in 2019.
This was especially true in the second half when significantly lower natural gas prices compared to 2018 supported our results despite lower product prices.
Looking ahead to 2020, we expect natural gas costs to continue to provide a tailwind, particularly in the first after the year.
There should be this should partially offset the impact of lower year over your product prices.
Our full year net cash provided by operating activities was approximately $1.5 billion and free cash flow was $915 million.
In 2019, we continue to deploy capital inline with our longstanding priorities.
Redeem 750 million in dead lowering our gross debt to $4 billion, we returned $265 million to shareholders through dividends and we repurchased 7.6 million shares for $337 billion as a result cash and cash equivalents on the back.
Once she at the end of the year were $287 million.
This is in line with her stated target of $300 million to $500 million of cash on the balance sheet.
Given our significantly reduced fixed charges.
And our Undrawn $750 million revolver. We believe this provides the liquidity we need to run the business through the cycle.
Looking ahead to 2020, we will continue to pursue the balance approach we have taken to manage the company prudently allocate capital and return to investment grade.
This includes increasing shareholder participation in our underlying business since the end of 2017, we have increased shareholder participation by nearly 10% through growth initiatives and repurchasing nearly 8% of our outstanding shares as you can see on slide 12.
Given the current share price and our strong free cash flow generation. We believe our shares are the most attractive investment in our industry.
Returning to investment grade also remains a priority we entered the year with greatly improved credit metrics on financial flexibility compared to just a couple of years ago. Since the beginning of 2017, we have lowered our debt by $1.85 billion and have reduced our fixed charges by approach.
Mm $190 million on an annual basis, we're committed to redeeming the remaining $250 million over 2021 senior secured note on or before the maturity date.
We believe this will further strengthen our case for investment grade, who also achieve our goal of a strong and flexible balance sheet that is well positioned for the future.
With that Tony will provide some closing remarks before we open up the cold acuity.
Thanks, Chris before we move on to your questions I want to thank every one of the CF for the great work throughout 2019 their focus on safety operating reliability and delivering for our customers continues to drive our success as a company.
As you've heard from Berke and Christi, lower global energy costs have private pressured product prices in both Q4 of 2019 in Q1 of 2020 compared to the prior year periods and we expect this trend to continue through the first half of the year. Despite the expected increase in corn acres.
The impact of lower year over year product prices should be partially offset by lower gas costs, but our results are much more sensitive to movement movements in product prices than they are to movements in gas cost as you can see on slide 13.
So as we sit here today in the early part of 2020 with most of the you're still still to play for.
Understanding the highly volatile and sometimes unpredictable nature of global commodity prices, we would expected full year 2020, EBITDA would fall somewhere within the range of our 2018 in 2019 results, but our focus is on free cash flow rather than EBITDA and as a reminder, in both 2018 and 29.
Team, we generated over $900 million and free cash flow.
So given that we would expect to continue executing on our capital deployment priorities of regaining investment grade, while continuing our share buyback program investing in the most attractive shares in the industry.
Longer term our company remains among the best position in the World.
Structural advantages are clear we produce the only non discretionary nutrient nitrogen.
We have access to low cost North American natural gas and we operate in important dependent regions.
We believe these advantages will continue to drive strong free cash flow generation through the cycle and enable us to build on our track record of creating superior long term shareholder value compared to our competitors.
With that operator, we will now open the call to your questions.
As a courtesy to others on the call. We ask that you limit yourself to one question should you have additional questions. We ask that you reenter the queue.
We will answer additional questions as time allows.
As a reminder to ask a question press Star then one if you'd like to remove yourself in the queue you may press the pound cake.
Our first question comes from Christopher Parkinson of Credit Suisse. Your line is open.
Great. Thank you very much regarding the you end market can you talk about the evolution of global trade flows and how you see them.
Kind of moving in 2020, including out of the U.S. and then also the progress you feed in Latin America regarding your market development.
Efforts and then if you could hit on that.
As well as just the U.S. is net position from your perspective, it would be greatly appreciate it. Thank you.
Good morning.
You end market.
Has been growing we believe that it is a very good product due to us flexibility and adaptability and blend ability.
And we're seeing that growth taking place in South America as you mentioned.
The changes that have taken place to the global market or the recent you and.
European Union sanctions that came in place at the tail end of 2019 last year. We exported we continue to export into Europe and this year I don't think we will and that has really blocked a lot of the Russian or most of the Russian product as well as Trinidadian. We don't believe that this is a fair nor.
Just nor correct.
Result, and we think that there'll be some.
Issues and contentions and disputes regarding what the decision was but what that has causes a disruption in the flows and so our position is that it takes a while for those flows to rebalance for different companies to make different products and to develop different markets. We've been focused on that end of the of the situation.
And developing different markets.
Since we brought up the production in 2000 or before we brought the production in 2017. So we've been working in South America as well as what we were shipping in Europe, and our growth markets have been Argentina, Brazil, Colombia, Mexico, Chile shipping to all those.
And not much of that existed outside of Argentina five years ago.
And we projected that will be a million ton market.
In 2020, and growing every year from there on out.
When you look at you weigh in as a balanced product to see us portfolio, well, we start with ammonia than we make different sub products and so what we've been able to do because of the decisions. We made in construction constructing the new facilities was we had tremendous flexibility of maximizing urea or are you, a and or sub products like de ethanizer.
Patrick asset and we are utilizing those capabilities today and producing less you and so you've seen a reflection of CF, bringing unless you entered the market rebalancing, our our customer portfolio pursuing more business on the east and West coast developing some new terminals in interior as well as what.
Planed in South America. So were we feel like we're well prepared a you're going to see us continue to execute and focus on growth and opportunities and we believe that you and as a very good product and on a price differential words, a under your urea today, we believe that overtime will rebalance of equal to or greater than urea.
[music].
Our next question comes from Stephen Byrne with Bank of America. Your line is open.
Yes, just maybe continuing on this topic Bert when you look out at the spring demand in the U.S. you look at Sea channel inventories you look at the lineup of imports coming into the U.S.
Do you see the potential that urea in the spring could get short.
And Conversely, do you expect you again to remain long and how have your outlook for these products affected your your forward sales book for these products.
Good morning, Steve and so I'm always optimistic, but I always play a defensive game and that is preparing for eventual allergies and and and not to put the company in a negative physician. So it's a combination of what you just explain channel inventories, we think are adequate, especially for the first round.
As products starts moving to the ground.
But when you look at what Weve, what has happened with ammonia ammonia built being the building block Donnelly of producing the upgraded products, but to the farm community ammonia is always been up a base load for the ice dates as well as Nebraska and some of the outlying state.
And that has generally been about 4 million tonne product per year moves through our terminals and the other providers terminals.
We had a poor fall ammonia season, so that and needs the transition to spring and so we're projecting to have a healthy demand for ammonia around that 4 million ton range urea around 11 to 12 million you and exceeding 15 million tons. So for global market North America is three quarters of UN.
Demand today right around that number.
So looking at what does come in we have received too much you weigh in into the market and that's reflected in pricing, especially on some of the coastal markets and so what do we need to balance what we've added capacity and others have added domestic capacity and so there's probably about a 2 million tonne requirement of you a in imports and were.
Probably a little bit over that and again thats reflected in pricing urea.
We're importing four to 5 million tons and if you.
Look would bring brought in to date and whats in the lineup, we still have substantial needs to meet and we're preparing for that demand to materialize with our interior storage in production and positioning product.
And so we have a good order book on and we're going to continue to build on that order book and have product in place for that second round and third round when when people need just in time inventory. So our outlook is positive for the spring, especially for the interior.
Our next question comes from John Roberts of Yes. Your line is open.
Thank you could we get your thoughts on the new Gulf Coast ammonia project and what that May mean for reinvestment economics do you consider that kind of a one off situation or the sign that were late might see some future expansion from the industry more broadly.
Yes money John.
My perspective is that if your air products. This is a great projects because.
I will begin to get better utilization of their existing hydrogen production along the pipeline to get to expand their pipeline and build a new.
CR and and as long as you've got a credit worthy Offtaker you can get very good returns on that kind of business. So I can absolutely understand why your products wants to do it.
I think if you are the the back end of the ammonia process.
You know that it's a it's less clear as to the this project actually makes sense and.
Our understanding is.
The the sponsors where the Offtakers from air products suggests that they need a dramatic increase in ammonia pricing kind of getting Tampa up north of $350 per ton in order to to make a reasonable rate of return on that kind of project and you know today Tampa isn't isn't anywhere.
Close to that number so my hope is that they actually are in a great return on that project because that would suggest that the rest of our business is humming along really well, but it's it's a bet on the calm and based on where global energy prices are and the amount of ammonia production is in the world, It's hard to see that.
Now that that's certainly not a bet that I would be making today and it's hard for me to believe that Theres a lot other people stepping up in line to to double down on that.
Our next question comes from Don Carson of Susquehanna Financial Your line is open.
Yes bird just trying to get a sense of how much of the fall ammonia application season, we missed and what the implications are for additional demand. This spring how much to growers have to make up how much do you think they'll make up in ammonia versus urea or UAN.
Yeah looking at the fall of 19 compared to the fall of 18 in the fall they had a wonderful run in Canada, the northern tier weaker in the the southern tier.
In 19, it was kind of a week everywhere.
The North never got started Canada, North Dakota, and that area in Minnesota.
Just due to cold wet and then snow.
And there was delayed and in the South but then we had a warming trend in December and got some some loads out in the southern Illinois area. So.
Really throughout most of the Midwest Iows, Okay. What we expect is that.
You know to for a precise number I would say several hundred thousand tons need to move into.
Spring and probably that will be made up with upgraded products, we're expecting a normal spring for ammonia, which we didnt have a 19.
And where product as price today urea is a little bit higher and you and as a bit of a value right now as well as ammonia. So it's going to be interesting to see what value plays what tradition plays what.
You know practices farmers Brac will will apply in 2019 and Thats why our balanced approach seems to work pretty well.
Our next question comes from Joel Jackson of BMO capital markets. Your line is open.
Hi, good morning, everyone.
I had a question about some of your price realizations for urea annually and on the last four or five quarters, you've achieved really good price premiums to somewhat arbitrary nolette benchmarks.
17, and 18, you, especially for you and what you're realizing versus I know a benchmark was kinda flipping up and down but you know our premium in a discount.
It goes back have you sound like some of the numbers you would a few years ago. So I guess I wanted to ask is there something going on that.
In terms of your book and the market that you know and for an export dynamic that lets you now achieve better premium and sorry, good consistent premiums to these benchmarks or maybe help me.
I understand that dynamic thanks.
Yeah, Joel I mean, my flip and respond was with spot response would be the team.
And but I actually want to give credit to the team we've over the years have built on internal team of.
Talent.
And diverse talent and with an effort towards utilizing different skills and languages and experiences and that takes time and a weve.
Put some people in some physicians that have really done a great job and I like the way our incentive program works, where we use a team everybody works towards the same goal, which is the betterment of CF industries. So we're all rowing in the same direction that really helps with a focus on if urea or UAN and dose product leaders.
Our.
I'm more focused on what's better for CF and we have that conversation everyday. The other issue is the river and there have been logistical issues, which we identified early or have been able to capitalize on later because of our distribution system and unique.
Logistical assets and so it helps to put the company that position as we prepared in the past.
And then so what we're seeing is you we have differentiated production in Canada, and northern Iowa, as well as the Donaldsonville and so we have arbitrage exports against imports and when that is advantageous to the company. We've chosen to export. So a combination of all those factors that put us in a good spot.
Our next question comes from Vincent Andrews of Morgan Stanley. Your line is open.
Hey, guys. This is Jeremy Rosenberg on for Vince and thanks for taking my question.
Just want to ask one on on China, I'm thinking about all the headlines we've been seeing on the on the Corona virus I'm wondering what your thoughts on if that could potentially you know we couldn't domestic area demand in China and free up even more tons frac spread a nice on your.
Export expectations were brought up from one to three to two to 3 million, but just thoughts on current of ours there. Thanks.
So the impact as we see it is unfolding what was announced yesterday with the additional destined disclosures is.
Scary, because it's probably spread farther further and deeper than than we're understanding so what does the impact of that it's the ability to operate the demands today that are being made to please show up to work from the Chinese government for your National duty is troubling when you're risking a.
Actual injury to you or your family members. So our take on the virus today. Its impact is on logistics in production will them lines opened their short coal today and inventory levels from our reports are at low levels and so the ability.
To move into keep that moving and then that extends into feed and just in time deliveries of feed for protein growth and so the potential as youre unravel this thing where does urea shipments to exports rank in the and the pantheon of needs is probably not very high and so I think it's going to be.
Not much urea comes out of the who they province, it's more phosphate so I think the first.
Price differential will be on phosphates because of limited exports, but in China has been the the marginal producer in that area.
But overall, we're predicting fewer exports out of China anyway, and this will just further exacerbate that situation and that's why we're more comfortable and confident with a tightening of the market China was the marginal producer more tons did come out than we had expected in 2019, we don't see that repeating in 2020 yeah.
I I completely agree I think if anything this is going to be a negative impact on supply from coming out of China as opposed to negatively impacting demand because.
On the demand side.
The people are still got to be so ER and as Bert says.
The whether its coal mines are urea plant.
Those the places where I think you're going to see a reduction in and.
Labor hours. So we would expect it to be kind of you know it nothing like this is ever at net positive but from a from a.
Humanity perspective, but relative to urea supply it probably will tighten that up and I'd say, we're positive then protein exports to China.
And then positive the feed grains and oilseeds from the United States in Brazil, So it's going to be again to the thing has to unfold, but those are the areas that I would see needs materializing from China.
Our next question comes from Mark Connelly of Stephens. Your line is open.
Thank you.
We've seen some increases in rates in a number of markets I'm curious, if that's having any impact or if you expected.
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Yeah.
Products going whether it's yours or somebody else.
Yes, the IMO.
In fact as being felt.
And you're right. There were some increases we saw more substantial increases in the liquid rates coming out of NOLA as we looked at some exports.
The South America at the turn of the year and then we believe we'll have further costs over but we think that benefit because we're such a domestic producer is increased costs for those coming to the United States and so is that a $10 20 dollar we've seen so substantial bids in the short term does that a balanced.
Longer term, but I think it will add structural costs and that would add to our cost curve for those bringing tons into noble or the either westar east coast. So for us at the net positive.
Our next question comes from Jonas Oxgaard Bernstein. Your line is open.
Hi, good morning.
Hub.
Looks like.
Natural gas price in North America, now Oh, borderline absurdly low level or is there any thoughts about trying to lock in these kind of low rates.
Long term where are you continuing to do spill.
As a study yeah no. Good question, where gas is traded today is about $1.85 has been as low as $1.76 at Henry hub, but basis weighed to CF.
Even lower so it's a very nice place to be and were very thankful for being in North American producer locking in North American gas.
But you're right. The question is do you lock in or do you play the daily or or a combination there up and that's what we've chosen to do as the play accommodation. There's time period during the year, where risk mitigation is the responsibility of the natural gas procurement team and that is winter.
November December January February and sometimes in the March we have cold weather and high demand than you're pulling gas from the storage cavities that are place throughout the United States.
Dennis sometimes base was below out blows out like we've seen in these polar vortex years, where it can be 50 to $100 over the spot price and so a combination of protecting the company is prudent but a combination of realizing that there is excess.
Gas availability and limited places for it to go until pipelines get built out were increased demand in power generation or LNG exports materialize.
Net net worth positive end of that curve and so you've seen us.
Achieved better realized values than the market as predicted and that's because we've played a balanced game of of how we acquire that gas for the company.
I can't overnight, but I think as we sit here today Jonas you know, where we're getting close to the end of winter, although it's snowing Chicago, but.
As you look at the number of cold days left.
It's been a mild winter.
Storage levels have increased gas production continues to be very high you know in our view is probably a price pressure coming instead of this is the low point and so were you know we.
A very positive in terms of buying daily or or month ahead as opposed to taking long term lock positions. The other issue. Though is you know in terms of the forward curve you can't walk two years out or you are three years out it at today's values because you know the the curve starts increasing.
And so that's why you know the experts said there's.
A bit of.
Mixed bag in terms of how we approach it but structurally were very.
Optimistic about low gas costs through the the balance of the year, what I do like is the forward spread.
To Europe, and Asia, and the NBP and JK and if you look at that we expand out to a two to $3 spread just based on forwards for each of the markets.
Thats again, when you throw in the previous question on freight rates puts us at a very good cost position for the western markets being North American South America and positions us well for the future.
Our next question comes from P.J. Juvekar var do Youve a car of Citi. Your line is open.
Yes, hi, good morning.
So you mentioned lower energy prices Incented nitrogen production last year.
As we start 2020, it seems like energy prices anyone more what does that mean for global production. This year and then I just want to make sure I heard you right. I think bark you said that you expect more imports of grades and pork into China. As the result of this Ah why this outbreak I just want to make sure I heard that right. Thank you.
So the question was speculation and so the answer was Ann Inc., a line of potential outcomes and a potential outcome clearly would be increase because the question was if urea production is unable to produce at the rate that they need and then move that into the market as they're entering the.
Spring peak demand, which is about now.
That would be a yield impact of corn, wheat, and vegetables and fruits.
Therefore, the need would be to augment or replace that that value carbohydrate value and protein value within ports, that's where I was going with thinking.
Regarding your your question on.
Yes increased.
And production happened as well as increased output in exports in that export curve, but as a combination or a selection of higher prices as we enter 2019.
The NOLA price was $275 as we entered 2020 was $220 for urea, but.
The Chinese tons that came out and went to India add one tender averaged $280 a ton metric fob. The next tender was $260 a metric ton fob. So energy prices were lower and private a product prices are higher and guess what happened overtime product prices fell to a level that doesn't make it attractive.
Enough, we believe for some of those extraneous or excess tons to make it in the market. Therefore, a correction takes place.
And the slowdown, which we're seeing and production.
China has run a based on let's say 78 million tons of static capacity has run between 55 and 70% and that's how we get to our numbers of what was produced exported and consumed internally and that and some other questions I think with like Brazil, the Petrobras plant shutting down.
And some others that are experiencing higher gas values and an ability to bring in this this low valued LNG will correct. The market then so.
Yeah, I am I, just think that's where we're going to be above our expectations of trade at higher values as we progress.
Year on year.
Our next question comes from Michael Picken, Cleveland Research Your line is open.
Hi.
Just wanted to talk a little bit about your strategy on now you weigh in here in the U.S. and I know you had the initial at summer fill program and you had a recent fill program. Maybe you could talk that's about you know kind of you know how that program sort of reached EUR expectations, and how you sort of balance the needs at some of your customers and making sure they're not.
Underwater versus the need to keep imports out I know, it's always a tricky balance thanks.
Yeah, we are a north American participant.
A large 90 plus percent of our volume is directed focused and attended to this market and we do participate in the export market and we build some great relationships, but we utilize that as a as a arbitrage when the value is attractive or timing is attractive for example, when we're in a low demand period and some of those plays there and how.
Your demand period.
So are you and strategy is isn't has been focused on the United States. However in previous years before our capacity expansion. There are areas due to logistical difficulties, we had we weren't able to reach and so we added capacity.
We have rebalanced, our our system and then have worked with some of our logistics providers to access some of those markets and then started targeting a places where we should participate and we're adding some tanks in California, converting some tanks and other areas that are already own leasing some tanks in other areas where we.
We think we should be participating and Cincinnati is a good example, we were not active in Cincinnati today. We're it's several hundred thousand tons for CF, a very good market. We will continue to grow in areas like that utilizing our domestically produced to tons where were logistically favored.
And then the remainder is what will export so we feel pretty good about that we work with our customers. We have a extensive customer list from.
A few hundred tons per year to a million tons per year, and you're right dead conversations we want our customers to make money they need to make money. That's so the business that they're in the serving the farmer, we serve the wholesaler the retailer the co ops that serve those farmers and so that's a combination of conversation and understanding where they are and what farmer economics.
Next our to make sure our products are appropriately priced and generally against imports that is our competitor and a position.
And then our marginal ton and some of the coastal markets were competing directly with Russian and Trinidadian production will continue to do that.
Our next question comes from Adam Samuelson of Goldman Sachs. Your line is open.
Yes. Thanks, good morning, everyone, maybe continuing in you again.
So different light and Bert Tony is hoping to get your thoughts on the UN cost curve I mean, it it obviously different.
Focus Trinidad U.S., Russia, or the principal producers with NOLA prices kind of where they are in a in the one tend to 120 range.
Our some of those producers now underwater I mean, how do we think about capacity rationalization, there that that might be.
Getting forced at these price levels and and or just on the other side. The demand response domestically have you I and trading has such a big discount to urea I'm just trying to think about how this price disparity kind of closes overtime.
Yeah, I mean, I I think I'll, Adam I'll give you sort of my quick take and then I'll I'll throw it over to bird for the the real answer.
But.
My view on this one is.
The the company is that or are the the region that is probably the most at risk from an economic standpoint, I think is going to be Trinidad because most of the favorable Caribbean gas indexed.
Contracts are kind of rolling off for or have rolled off and the renegotiation with NGC as happened debt.
Our price levels, you've seen a couple of plants on on the island actually close as result of not being competitive anymore and given that you're there is no longer a really a destination option for that production I think that puts a pretty big you know challenge on those play.
Yes.
Relative to to Russian production and and in the U.S.
We're you know we're still fine if you look at you weigh in the margin structure is still you know well superior to that of.
Of ammonia and.
On a dollar per nutrient ton you know it it's still a very attractive product for us to make relative to having excess ammonia.
The you know I think anyone know that has an ability.
And flexibility in their system to upgrade into different product types like we do into producing more urea urea liquor DCF and nitric acid and not making you weigh on that turned out to be a great margin opportunity for us and I think you know some of the Russian producers are making more amen.
And I'm doing some other things with upgraded products as well so.
Our view is the on over the longer term I think you're right given where values are today to up to a farmer you might see incremental growth in terms of switching toward you weigh on it in a in the near term over the longer term because it is a more capital intensive.
Process to make you laid out and then it is urea you've got to earn a fair rate of return on that incremental capital otherwise people stop investing in it and so we would expect margins to kind of once you get through the trade flow rebalanced to get back to as bird said earlier kinda net neutral between.
Uhhuh didn't urea or even positive you weigh on so I think this is kind of like what we saw in 16 and 17, where the new capacity came on and it took a year or two to offer trade flows to rebalance and for us to really kind of get our sea legs under us and the same things going on right now globally with you weigh on in the European anti.
Nothing.
Situation bird.
I think that's good.
Our next question comes from Ben Isaacson of Scotiabank. Your line is open.
Hi, This is the add on for Ben Thanks for taking my question.
Just maybe.
Back to the inventories you were talking about earlier I believe you were describing them as like adequate inventory levels now and how the system kind of demands about 4 million tons of ammonia could you talk maybe a little bit about what those inventory levels are specific to that in light of the week application season specific to ammonia, where Pete where farmers have been consuming other.
End products kind of make up for that thank you. Both the ammonia system from an inventory standpoint is you know that theres a a cap on it because it's really sitting for the most part with three major producers.
Okay nutrient in CF are the ones that have the you know the cryogenic.
Storage tanks are terminals in market and while there were some storage at plant locations generally speaking, it's you know, it's not more than 50 or 100000 tons.
So the vast majority of the you know the inventory sits with with the three producers and there's a limit in terms of what that looks like so in order to get the you know the 4 million tons out you actually need relatively given a week fall you need to be able to.
Re supply some of those tanks. So if you end up in a situation where weather is not cooperating in terms of being able to dump the tank and then re supply it and and get more than one turn in a in the spring it's going to push farmers toward.
Upgraded products simply because you can't get the amount of nutrients that you need to from a from the ammonia system that said given the you know the week.
Overall, we think the the tank situation has relatively full and ready to go. So I think in terms of whether you get to the 4 million tons is really dependent upon kind of you know how early.
The field to open up to begin ammonia application and how long that last four and if you have a situation like we had last spring youre not going to see anywhere close to 4 million tons going down.
And when you look at the.
You know what how that system is balanced it's a it's in combination with your our our and others logistics or industrial customers and those that are have a ratable 360.
Day demand and we supply that as well as exports. So we've been exporting and then rebalancing the system through shipments to our terminals or our plans and that gives us a benefit or we had the benefit of our logistical options. We have the ammonia barges. We have the ammonia pipeline, we have our own railcars and we lease or.
Work with our truck providers to move that products, we feel very good about whatever we will take place in the spring that we'll be ready.
Our next question comes from Andrew Wong of RBC capital markets. Your line is open.
If you're telephones mutant please on mute.
Hey, good morning, sorry for that.
So with investor interest in the us she picking up a lot over the last couple of years.
Can you just maybe highlight what CF can do or maybe has already done to raise its profile in the area. Thanks.
Yeah, I mean, I think from an E.S.G. perspective, there's the you know there's four or five planks here that we're you know that we're focused on.
The first is that nitrogen is actually up a product that is very beneficial to from a global perspective.
Carbon emissions and the reason for that is even though agriculture sort of depends upon which agency look at is estimated somewhere between 25 and 30% of.
Responsible for 25% to 30% of aggregate greenhouse gas emissions. The vast majority of that comes from land use and so as you are cutting down carbon sequestering for us in order to cultivate those acres you are releasing a lot of carbon and you. Furthermore don't have the.
You know that the mechanism to further sequester carbon going forward and so the use of nitrogen allows you to increase crop densities increase yield per acre, which means that in order to feed the world's population you need less acres and in use and.
Net net you know the world is a much lower carbon footprint by producing using nitrogen than you are not producing nitrogen and cutting down trees in order to feed the the growing population. So you know so that's number one which is actually our product on a net basis is beneficial.
That of the negative.
The second issue is particularly with our new plants were among the lowest carbon intensity producer globally and with our plants you know turning on you've got Chinese coal based plans that shut down and you know that again is sort of good from a global perspective, So I think this.
It is one of those questions you have to ask writ large instead of you know very locally now and in addition to that we're very focused on responsible use of the product and have invested heavily in kind of the for our plus program, which is teaching farmers best management practices to both reads.
Use nitrogen loss to the environment, but also reduce volatile elevation in a way that creates nitric oxide or other admissions that you know our hi from a carbon intensity perspective, and then finally, we are investing in our asset base in order to further.
Reduce of what our for footprint looks like on a you know sort of act locally kinda basis, and so I think if you look across all of those things that we're doing we have an exemplary you know, yes, yes, G standpoint, and we're reporting on a.
Comprehensive GR I basis from a.
Transparency and disclosure perspective, we're one of a very few number of companies that actually reports on the G.R.I. index on on a comprehensive basis instead of just on the spot or you know line item basis. So we feel very good about our yesterday profile.
Our next question comes from Jeff The Cosco of JP Morgan Your line is open.
Hi, Thanks very much.
Since the beginning of the year the price of Brent has gone from I don't know $68 a barrel 64.
How much of the difference do you think that makes to the global nitrogen fertilizer costs cars.
And secondly in fourth quarter 2019, there were a very large [laughter].
Imports of urea into India.
And how do you see India urea imports in the first half of 2020 and for the year versus the year ago period.
Jeff Let me handle the first part of the question I'll throw it over to bird to to deal with.
With India, which is as you think about Brent I'm coming down there's no doubt that anyone that's receiving oil index based LNG or for gas you know is in a more favorable position today than they were year ago. That's sad that you know the real marginal production cost.
Globally is still Chinese anthracite coal and Brent price does not really affect Chinese anthracite coal price directly and in fact, you know as bird indicated whether its corona virus or other things going on you've seen actual coal price strengthen a little bits of the high end of the cross curve.
Has gone up or stayed flat relative to what looks like a bit of a windfall for some other people in more third or early fourth cortile.
So you know, it's not really affect thing.
Global pricing today, the fact that Brent has come down.
I remember you want to deal with a India situation sure. So weve, India surprise to the upside importing well close to 10 million tons. When you include they'll myfico tons.
So almost a 30% increase over the previous year production stayed relatively flat.
About a 2% to 3% increase and stocks are a little bit higher so a healthy consumption base. Good monsoon seasons, and then good demand big country and they've got to feed themselves and some exciting things are taking place in India with the Modi government regarding investments info.
Structure and you know in terms of an educated population growing population. So when I look at we look at a the going forward, we expect to another tender probably in late March early April and kind of running on the same pattern whether being equal of continued.
Import and being the largest importing country in the world. There are two plants that are set to come on.
[noise] stream.
At the to end to kind of this year early next year and generally those plants have been late and then there had been issues with feedstock supplies and so not sure when that overall production will come on but there are some old especially.
The NAFTA base plan, so our suspect and so even with the increased production in 2019 or run rates. They they have been fairly stable in their production really over the last five to eight years and so we see good things and we mentioned, both India and Brazil in our prepared remarks on in terms.
Of growth growth of demand and not necessarily too much of an increase in supply. The yes. The one thing with respect to that is despite new production coming on in India. The Bird mentioned this earlier.
You saw aggregate production within India remained relatively flat and so that means whether it's because of production problems that the older plants or just the fact that they're not economic to run them relative to be you know importing you haven't seen this negatively impact.
India is imports and so that that I think as a very optimistic sign around.
Global you know SMB balance going forward.
Our next question comes from Chris well exit or make global your line is open.
Good morning. Thank you for taking the question I was just curious or with the length in the market and I recognize there's a pretty big spring potentially on the offering know why would you have just cut back some ammonia production maybe idled some production.
Fall, one you know idled throttled back a little bit some of your a derivative products. This to tighten things up a bit as we move into the spring and I'm just wondering about the right what was the rationale behind doing a tender in the European market like you.
Chris I'll I'll handle the first one on the production side and then I'll, let Bert talk about our you know are are you I am programs.
They were among the lowest absolute cost producer globally, and so you know our assets should be the last ones to turn off not the first.
And you know that there is.
Enough production out there on a global basis that if we were to curtail you know I wouldn't expect that to move the the market.
A bit.
Because there's you know there's sufficient supply elsewhere in the world.
So our you know our business model is all around asset utilization are up crime and production efficiency and Onstream factor is among the highest in the world and certainly the highest in the U.S. and because we're able to.
You know achieved those kind of levels, we basically got.
Under the equivalent doesn't additional ammonia plant worth of production compared to the the asset utilization.
Rates that that our north American competitors are able to achieve so that's a huge competitive advantage. When you think about the capital that goes into it and even it at the low prices that.
We're seeing out there for ammonia, it's still a very attractive product from a margin standpoint for us.
And you know the again, where we would be kind of Alaska.
Producer to the shutdown.
I'm not the first and on a full year basis last year, we still generated 21% gross margin in in our ammonia segment, which is pretty remarkable that in a lot of businesses to talk about that being you know a depressing situation for an industrial business to you know.
Achieved 21% gross margin for the full year is pretty outstanding result.
Regarding the you and tender.
Are always seeking ways to effectively communicate with our customers different messages and up and treating our customers equally and so there are times when it's.
There are times when some people are willing and ready to buy and want to and so announcing a tender where we have a specific period, where we're receiving quotes are offers.
And we go through that and then select what's attractive with kind of a price point in mind.
Allows us to have a conversation directly with customers as small as several hundred tons and up to several thousand or even larger than that and so we've utilized that now for the second time at different points and at a I think a unique form to have that conversation that sparks further.
Our conversations you know this isn't a static market because we're a commodity that is used to make a commodity but we're buying it why do you have all these interactions as well as logistical interactions and time and values are different at different times and that's why we want to interact as much as possible and have that dialogue to make sure.
We're positioning our company correctly.
Ladies and gentlemen that is all the time, we have questions for today I'd like to turn the call back Martin traversing for closing remarks.
Thanks, everyone for joining us today, we look forward to your follow up calls and seeing at the upcoming conferences.
This concludes today's presentation you may now disconnect everyone have a great day.
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