Q2 2021 CF Industries Holdings Inc Earnings Call

August 10, 2021

[music].

Good day, ladies and gentlemen, and welcome to the first half and second quarter of 2021, CF Industries Holdings Earnings Conference call. My name is Christel I will be your coordinator for today.

At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of the presentation.

To pose a question at any time, Please press star 1 on your telephone keypad.

If at any time during the call you require assistance. Please press star zero and a coordinator will be happy to assist you.

I will now turn presentation over to the host for today, Mr. Martin Jurassic with CF Investor Relations. Sir you May proceed.

Good morning, and thanks for joining the CF industries first half 2021 earnings conference call on Martin Drastic Vice President Investor Relations 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 first half 2021 results yesterday afternoon.

On this call we will review the CF industries results in detail discuss our outlook and then host a question and answer session state.

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.

Thanks, Martin and good morning, everyone yesterday afternoon, we posted our financial results for the first half of 2021 in which we generated adjusted EBITDA of approximately $1 billion.

Strong nitrogen demand and lower overall production have tightened in the global supply demand balance supporting much higher prices than in recent years.

At the same time.

Energy spreads between North America, and high cost regions have expanded considerably.

Increasing margin opportunities for our cost advantage network.

These factors helped drive an increase in adjusted EBITDA of nearly 25% compared to last year and we produced our strongest first half financial results in 6 years.

Additionally, the business continues to generate strong free cash flow, giving us tremendous flexibility as we focus on achieving investment grade metrics.

On executing our clean energy initiatives.

First half was not without its challenges, including the natural gas driven production interruptions. We described on our first quarter call.

First half also saw a continued demonstration of the harm the UA on industry in the United States spaces from subsidized and dumped imports from Russia and Trinidad.

Until the last few years UN earned a substantial premium to other upgraded nitrogen products due to the higher capital investment required to produce it and the meaningful agronomic and operational benefit it offers to farmers.

As you can see from our recent results.

And now trades at a significant discount to all upgraded nitrogen products due to unfair trade practices.

We have taken the necessary steps to address this situation by petitioning the department of Commerce and International Trade Commission to initiate antidumping and countervailing duty investigations, we look forward to the result of the Itc's preliminary vote later this week.

Looking forward, we are very bullish about the next 2 years.

As Bert will describe in a moment the need to replenish global coarse grain stocks driving agricultural demand along with the impact of increased economic activity driving industrial demand should support all time record global nitrogen demand over the next 2 years.

Forward energy curves are also very favorable over this timeframe.

We expect these factors to help keep the global nitrogen supply and demand balance much tighter than we've seen in recent years supporting an extended period of higher nitrogen pricing.

And higher margins for our cost advantaged network.

Longer term, we believe increased demand for ammonia and its clean energy attributes will become a significant factor in the tighter supply and demand balance driving further value for our network.

We continued to see broad interest in clean hydrogen and ammonia to help meet the world's clean energy needs as.

As we continue to have discussions with market participants our focus remains on being at the forefront of this significant opportunity.

From positioning our network to be the world's leader for Blue and Green ammonia production to collaborating with other global leaders, where our unique capabilities can provide value.

We are pleased with the progress we've made and look forward to additional developments from the coming months.

With that let me turn it over to Bert who will discuss the global nitrogen outlook in more detail then Chris will follow to talk about our financial position before I return for some closing comments Bert.

Thanks, Tony the global nitrogen supply and demand balance remains far tighter than we have seen in recent years underpinned by strong agricultural and industrial demand plus higher energy prices in Europe and Asia.

This has created a highly favorable pricing environment that has persisted into the second half of this year.

Based on the agricultural and energy outlook, we see today, we believe a positive price pricing environment for fertilizer will remain in place at least into 2023.

Strong global nitrogen demand is being led by the world's need to replenish core screen stocks.

The global coarse grain stocks to use ratio was the lowest since 2012 entering this year's spring planting season.

Commodity prices have risen significantly in response and farmers are incentivized to maximize yield with fertilizer applications.

Given this we expect to see sustained demand in the second half led by India and Brazil.

We expect similar strength from North America, and Europe, leading into the 2022 application season, we.

We had a positive start to meeting this demand a few weeks ago, we launched our UA infill program.

We have built a solid order book for the third quarter at a NOLA equivalent price of $285 per ton still prices remain at a significant discount to urea for the reasons Tony mentioned.

Further out we expect that high demand for coarse grains, especially from China will contribute to persistent low global stocks into next year.

As a result, we believe that stocks will still need to be replenished at least into 2023 supporting continued strong nitrogen demand.

Increased economic activity is also driving higher global industrial demand for nitrogen.

In North America, we are seeing diesel exhaust fluid sales rise above pre pandemic levels.

Our first half day sales were a company record and we expect overall demand will continue to grow.

We are also seeing higher demand for ammonia and nitric acid from our industrial customers.

Globally industrial related demand in China and from phosphate producers has also increased.

While we expect demand remained strong for some time, we believe that global fertilizer inventory on the channel today is low and will need to be rebuilt.

So far in 2021 high energy costs in Europe, and Asia have lowered operating rates and reduced supply availability, particularly for ammonia and urea further supporting global pricing.

As you can see on slide 9 energy costs in these regions have increased to over $14 per <unk> and eastern European producers will become the global marginal producer for the time being.

The higher energy costs has deepened the global nitrogen cost curve substantially.

Increasing margin opportunities for low cost producers such as CF.

Forward curves suggest CF will benefit from favorable energy differentials for the foreseeable future.

As a result, we believe we have a tremendous opportunity ahead of us as we leverage our manufacturing distribution and logistics capabilities to deliver for our customers.

With that let me turn the call over to Chris. Thanks, Bert for the first half of 2021. The company reported net earnings attributable to common stockholders of $397 million or.

Or $1.83 per diluted share.

EBITDA was $994 million.

And adjusted EBITDA was $997 million.

The trailing 12 months net cash provided by operating activities was approximately $1.2 billion.

And free cash flow was $700 million.

Based on the outlook, Tony and Bert have shared we are well positioned to build on these results and continue to generate significant free cash flow.

I want to provide additional context to 2 items, we covered in our press release.

First we raised our estimate for capital expenditures for 2021.

From around $450 million to approximately $500 million.

The increase is driven primarily by our decision to pull a significant maintenance event scheduled for next year into this year.

We believe that performing this activity in 2021 is best for the asset and reduces the risk of an unplanned outage during the 2020 to spring application season.

Going forward, we expect capital expenditures to return to the range of $450 million per year.

With this additional maintenance project the high level of previously planned maintenance and the additional maintenance from severe weather in February we estimate that gross ammonia production and sales volume will be around $9.5 million tons, and 19 million product tons respectively.

Both at the low end of our forecast earlier this year looks.

Looking into 2022, we have a more typical maintenance schedule and would expect to return to approximately 10 million tonnes of ammonia production and sales volume of 19, and a half to 20 million product tons.

Second we are taking additional steps in line with our focus on achieving investment grade ratings and positioning the company to execute our clean energy initiatives.

We have announced that we will redeem $250 million of our senior notes due June 2023, which will reduce our gross debt to $3.5 billion.

We expect to lower our gross debt to $3 billion fire before the maturity of the 2023 notes.

We will also continue to return cash to our shareholders through quarterly dividend and opportunistic share repurchases at attractive levels.

With that Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Chris before we move on to your questions I want to recognize everyone at CF for their strong work during the first half.

They successfully managed many challenges in the first 6 months of the year setting us up well for the second half.

Most importantly, we did this safely with a recordable incident rate at the end of June at just 0.28 incidents per 200000 labor hours significantly better than industry averages.

As we look ahead, we expect strong agricultural and industrial demand to create all time record global nitrogen demand.

Forward curve show very favorable energy spreads to Europe, and Asia over the same timeframe, which should support robust margins and cash generation.

We see good progress on our clean energy initiatives.

Taken together, we are well positioned to create significant shareholder value in the near and longer term.

With that operator, we will now open the call to questions.

At this time, if you would like to ask on audio question. Please press star 1 on your Touchtone phone once again that is star 1 to ask on audio question.

Your first question comes from the line of Joel Jackson with BMO capital markets.

Yes.

Hi, Good morning, everyone. Good morning, Joe.

It's very rare where your second half EBITDA is higher than your first half EBITDA I think it's been a decade is that a situation you're expecting this year, maybe as you answer that maybe you could talk about what type of pricing you think.

Visibility you have on the third quarter will challenge the fourth quarter. Thanks.

So.

We're really pleased with how the year is shaping up obviously, we were disappointed with.

We're UA on.

Values were.

We're as a result of Russian and treated ADN dumped imports in the first half of the year.

And.

But as you look at our balance sheet.

At the end of the second quarter, you see our customer advances it basically.

All of that had moved through the system and when we launched Phil.

At $2.85.

For you at UA on.

That's a substantial uptick.

Thats really the price environment that we're looking at in.

On the third quarter and for the order book going forward and then subsequently we've been able to get a little bit of further appreciation on the 285 number. So we're really pleased with.

How.

On the order book is set up right now and what the back half of the year looks like we've seen.

Strong interest in.

Ammonia for the fall already urea continues to trade in a reasonable spot and as I said UAS looks very good. So we're really excited about the second half and we think that it's not just the second half, but it sets up well for both 2022 and 2023.

Okay. Thank you for that and just on maybe following up on free cash flow.

Do you think that this year, you will end up with more free cash flow than last year, obviously price are higher and you've got some working capital outflow on the second quarter cash that reversed in the second half.

Yes.

And Joel from a free cash flow standpoint, as we talked about in the prepared remarks, we expect.

To see significant strength as you mentioned in this particular quarter, we had a few working capital both with accounts receivable and then as we talked about the bleed through the customer advances which was pretty.

About a half a billion dollars.

Between those 2.

As Tony just got done mentioning we're seeing pricing strength due to the energy differential spreads that we're seeing globally for the second half of the year, we still do have.

As we mentioned our product tons will be on the lower end, probably around 19 million product tons, but outside of that we see a really strong second half of the year from a free cash flow standpoint, and overall for the year as Chris mentioned in his remarks, we are seeing higher capex this year principally due.

All of the.

Major turnaround events that we've done so.

That's a little bit of a hit relative to where we were last year, but we're really taking on.

Really excited about where we sit and what the forward picture.

Your next question comes from the line of Adam Samuelson with Goldman Sachs.

Yes. Thanks, good morning, everyone. Good morning, Adam.

So I guess.

First question on the balance sheet and capital allocation and I was hoping to just make sure to clarify just the value you see in having the investment grade rating I guess I'm still trying to get my head around the idea of repaying early got.

Got it sub 3.5% when your stock trades, I think we'd be north of 10% free cash flow yield and just where you see the value of the investment grade credit rating over the longer to medium term as you think about.

The green the green investments that Youre contemplating.

I will.

Will take a first cut at this Adam and then I'll turn it over to Chris for probably more insightful comments, but.

Hi.

There are some real frictional costs that we face in the business from not having investment grade that has to do with lines of credit and some other embedded derivatives with R. CH.

CHS venture.

Venture.

Dan.

Those frictional costs go away if we.

Go ahead and regain investment grade I also believe that there is a signal to the equity holders about the stability and strength in.

Okay.

Of the company with an investment grade rating and we think both of those things are are important.

So that's really our focus on on why to get back to investment grade yes.

I'd add to that as we look at some of our growth plans going forward with having sort of the senior secured notes, which are the 2026 does limit a little bit of some of the asset moves we can do within our structuring to get the most efficient whether it be from a tax basis.

Others in an asset so by getting investment grade senior.

Senior secured drops off of that allows us a little bit more activity, but I think really where your questions going is.

With with return of capital and different things like that I think what we see over the next several years here with free cash flow generation is we're really going to be able to.

Reduce our debt to that growth target of $3 billion invested in our cleaning clean energy initiatives, specifically those that we've announced already and then additionally return cash to shareholders I think.

What we're seeing over the next couple of years will allow us to do all 3 of those.

<unk>.

The investments that we're looking at right now both from a green and from a Blu perspective, we're not huge dollars and our managed easily with.

Our cash flow and that the issue as you mentioned on.

Yeah.

On the yield while the yield flow we've got.

We've been building some cash on the balance sheet, which is terrific, but for which we're not really earning any kind of return and so even though it's taken out something that looks nominally like a fairly low interest rate is still better than what we're generating on the cash and while youre certainly correct that the equity.

<unk>.

Trades at a higher.

Effective.

Overall cost to the business from a from a cash flow yield perspective, I think that by getting rid of.

Some of this.

Residuals.

Cost and drag on the business, having the flexibility that Chris talked about in terms of.

Internal structuring of assets to optimize.

On the tax consideration all of those things are pretty important things for us to be able to do and we wanted to do that first.

Okay. That's really helpful. And then if I can just have a quick follow up.

From the second quarter you had.

About $100 million year on year of incremental costs in the business related to kind of maintenance.

On the fixed cost absorption with higher turnaround and I'm, just trying to get a sense. How we should think about the second half in that light. It seems like the turnaround maintenance activity is going to be heavy again.

In the second half and just thinking about the P&L impact of that so the balance of the year. So.

2 big pieces I would put on.

On the cost side that I want to compare it to a year ago.

Based on the amount of.

Turnaround activity and other maintenance work that was going on we ended up with almost $60 million of sort of incremental maintenance in fixed cost write off associated with the.

With the plants in Q2 versus <unk>.

Versus last year, and then on top of that.

We ended up with about $100 million that hits cost of goods sold line through the first half of the year. That's based on purchased product for resale and part of it was based on the commitments we've made to customers with the plant outages in the turnarounds.

We needed to cover those positions and make sure we could provide reliable supply on our commitments and so we went out and purchased both urea and ammonia to cover some of those requirements.

So in an average.

Otherwise kind of normalized year, you wouldn't see that $100 million hit the Cogs line in that kind of way.

And so those are the 2 big pieces that.

I'm thinking we won't have to the same magnitude.

Second half, but youre certainly right that there is ongoing pretty significant turnaround activity in the second half of the year and that may very likely lead to some ongoing fixed costs.

8 off but.

Yes.

Probably the best way to look at that as just the total.

Gross ammonia production, we talked about at night and a half and then the product tons that 19 million tons. If you look at that is what we're going to produce in the second half of the year I think that gives you a pretty good indication of the additional work, but as Tony mentioned, we did have some additional drag here in the first half of the year that we don't expect.

In the second half.

Your next question comes from the line of P. J <unk> with Citi.

Yes, hi, good morning.

Yes.

Youre purchasing 100% fewer energy in the UK.

Could be renewable energy.

Which is a great step.

Is the cost of renewable energy in the UK and how does that compare to your prior to electricity contracts.

Hey, P. J good morning, so the incremental cost to us is pretty de Minimis actually as we're looking at it it's somewhere in the neighborhood of like 60000 to 100000 pounds.

Just to move to renewable versus what we're paying today, so the incremental cost will.

We will not be noticeable at all in the system, which is why it's so easy to per year. The 60000 to 100000 per year, which is why it was very easy to go ahead Dan.

Move to the 100% renewable on this and reduce our scope 2 emissions. We're looking at similar opportunities in the U S, where we can get some incremental.

Renewable energy into the system without significant cost to the overall operations and so we're we're trying to do this where it makes.

Good sense, we provide a really good baseload for some people because of the consistency of draw that we have the network and so we're able to negotiate pretty good rates on that.

Great. Thank you and then.

Today's Miss if you want to call that.

Came from higher maintenance activity, which you kind of outlined just now and also higher natural gas costs. So how much higher gas cost compared to your forecast and I know it can change anytime, but what's your sort of based on your hedges on all of that and forward curve, what's sort of the natural gas cost do you expect for you.

In second half. Thank you, yes, Pete PJM on the cost of gas what I'd say is.

It's more important than the absolute costs that we face is what the energy spread differential is.

And so while last year.

You saw very low gas costs, both in the U S and also in the UK. You also saw global energy costs that were dramatically reduced partly COVID-19 driven.

And as a result, although our costs were low on margin opportunity was also.

Compressed because you saw really high operating rates right now what you see is energy cost differentials between the U S and <unk>.

Europe, and Asia is like 10 or $11 per M and Btu and so you see a huge margin differential between what the high cost producers are raw.

Running at and what our network runs at and so as we think about it. Despite the fact that our costs are going up our margins are expanding much more rapidly than what our costs are going up. This is a great environment for us in fact, I think and this is a chart that will likely be producing in the in the future. We've looked at this analysis.

Is that the higher the gas cost is in.

In Henry hub, because the U S is such an important contributor into the.

The LNG market, particularly on more of a spot basis. What you tend to see is higher energy differentials in LNG import regions and as a result of that.

There is typically margin expansion when our cost structures are.

As a little bit higher this is a good thing for us instead of.

On a headwind for us, but as we look forward we tend to just.

Believe in the forward energy.

Where the forward curve trades on the Nymex and some of the other major pricing indices.

Feeling like we don't have a lot of additional insight over kind of where the market puts forward yet P. J I agree with everything Tony just said and maybe instead of looking at the overall Cogs in total its the controllable Cogs side that was really hit by maintenance because as Tony mentioned when we see.

Expanded gas, sometimes that helps us even more from a pricing so the controllable cost per ton, which generally runs in the mid eighties.

It's significantly higher than that over the first half of the year, we expect that to get back closer to the mid eighties. When next year as we mentioned we will be back to.

Normalized operating rates.

Around 20 million product tons.

Add to that but Chris just said.

On.

We're in a normal year, we would do about 4 major turnarounds, which would be an ammonia plant plus some associated upgrades.

Because of Covid last year on trying to protect our employees and minimize the number of contractors we had on site.

We reduced it to just 2 major turnarounds last year, which is 1 of the reasons. We set an all time ammonia production record last year, because we had fewer turnaround activities.

This year, we've got 7 instead of 4 so the 2 that we were supposed to do last year that we move forward. The 4 that were already scheduled for this year and as Chris mentioned earlier, we're bringing 1 of them from next year backwards into this year to make sure that we've got.

Reliable operation on that asset in addition to it being 7 instead of 4.

2 of the turnarounds, where our major expansion plans. So our 2 biggest plants on the network on.

Both the Donaldson fill 6 on important 2 ammonia plants and.

Those tend to be a little longer and a little more expensive than the rest of the network.

The average sized plants. This is the first time, they've undergone a major turnaround.

But our expectation as a result of this is that we're well positioned to be.

Looking at potentially able to set an all time production record next year for ammonia and Thats 1 of the reasons why we.

Wanted to make sure that we got at Port Neal 2 done this year because.

Our view is as good as the pricing opportunity is right now we think next year.

It looks very strong as well and we want to make sure. We can run flat out. So what we're really doing is setting up for the future here.

Feel very good about where we're positioned.

Your next question comes from the line of John Roberts with UBS.

Hi, Good morning. This is Lucas spun on on for Joe I, just wanted to follow up on your discussion there on the gas costs if I can.

I will take your point that the differentials are Super high right now between Europe, and Asia and North America.

Just like looking at way of our Chinese colleagues, that's probably quite a bit more of a normal kind of historical spreads.

So just as we look forward Dan I was just wondering kind of what gives you.

Confidence that the European and Asian spreads again, instead of persist as opposed to come back to like a more normal level in Chinese call shifts back into paying.

National cost per day.

I mean, I think currently Chinese coal is about $9 on them a btu on the emphasized side so.

Youre still looking at a 5 dollar relative differential to Henry hub.

$5.

Place to be and we don't see indications that China is trying to reduce coal price.

If anything.

But wouldn't shock us to see further restrictions on urea exports are really trying to push that down instead of up and so I think.

Just the kind of lack of substantial availability.

And also a pretty stable price outlook on that suggests to us that.

China will always important may not be the.

Global price setter going forward again Lucas is as we look at the forward curves we tend to look at what.

Tcf in Japan are in.

As well as the Nymex on Henry hub, and if you just look at those differentials that provides a really.

Terrific margin opportunity for our network.

Yes, I think to that point the spreads right now on the DTF and MVP are $11 compared to Henry hub and next year strip has them over $7 for the average of the year, so significantly higher than the anthracite and as Tony mentioned earlier, Bert and his remarket remarks.

Apply side is so tight that you have to bid in those particular higher costs. So right now the marginal producer as European and other Asian producers and Youre seeing that in prices so the cost curve.

On a demand driven market were well above cost curve economics are right now.

Also mentioned in my remarks, we're expecting all time record global nitrogen demand next year and so.

As Chris said, what we're really talking about is the very very highest cost production that needs to be bid in and in a demand driven market, we're trading above where the cost cost curve economics are right now so again on all of that provides.

A really great operating environment for us.

Yes.

Your next question comes from the line of Steve Byrne with Bank of America.

Yes. Thank you Tony you mentioned.

Kind of a forward book on you again in the $2.85, or maybe higher in third quarter can you just comment on.

Your forward book in urea and ammonia on how much of your <unk>.

Third quarter volumes do you think you on.

Already have locked in in roughly the price.

Can you shift volumes to urea just given it's got a higher.

Gross margin per ton.

Yes.

Good morning, Steve This is Bert and were pleased with their I'd say very pleased with our order book going into Q3, as we exited Q2 and you can see from.

Our information that we had worked through our order book from the first half and entered into Q3 with very little.

Orders on the books.

We built a nice ammonia book for for fall.

The pricing the public pricing and there is a 600 to $640 at the terminal level.

And then we launched the <unk> fill program at that 285, NOLA and then stair stepped it up as we go through up through the Midwest and built a healthy order book for Q3, and now have looked at Q4 pricing.

For urea and <unk>.

<unk> is kind of stayed in the range of $420 to $440.

It will be NOLA, and then obviously stair stepped up to the Midwest and into Canada, and so we have a healthy book on for all 3 products and look forward to as Tony and Chris both articulated to their comments and questions. We see just due to the structural nature of the global markets for grains and oilseeds.

And just some of the climactic difficulties that have taken place both in the United States It from Midwest, and Brazil, and just low inventories all of these things coupled together and low inventories of fertilizer, probably see a positive pricing environment for Q4 and into the.

Next year so.

We are anticipating a nice year.

Thank you Bert.

And just wanted to drill on a little bit on the blue ammonia opportunity for you it sounds like.

The engineering to capture and treat that carbon.

It is pretty well understood and underway.

The rate limiting step to move forward in that less about demand and more about <unk>.

Sequestration.

So would you ever consider pursuing a class 6 injection will on.

Your own property just to have control.

Donaldson will.

Steve Yes.

Currently.

Availability of class 6 permanent geological sequestration is it.

Potentially the limiting factor, although there are opportunities to sequester cotwo.

Tomorrow, if we had dehydration and compression in place on for <unk> applications and <unk>.

Even for <unk> you are.

Provided some level of the 40 <unk> tax benefit from that so it's not quite the full benefit but it's available.

Available kind of now.

If we are ready and Thats 1 of the reasons, we're pushing so quickly on dehydration and compression because we wanted to get that in place.

And really have that up and running availing availing ourselves of the opportunity available now on B.

Be able to go immediately into injection wells when when those permits are issued and they are ready to go relative to us wanting to get into that.

Not really our area of expertise.

We're that's 1 of the areas, where we will.

We look to other market participants and want to rely on their expertise.

And.

There's a lot of subsurface geology and things that we just are not set up to do and so instead of trying to replicate that we want to kind of partner and work with other people that.

Thats their bread and butter.

Although this is Tony.

Ed.

I would say there are a number of people that have come to us and said the geology within just a couple of miles of Donaldson Bill is well situated for class 6 permits that they're going after those kinds of things and so what we're talking about is generally speaking a pretty short haul run in order to get to them and.

And so that's very encouraging just in terms of what the overall timeframe and cost structure looks like to do injection.

Thank you.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

Alright, thank you.

Everyone Tony.

Tony Let last October when you sort of brought the green and Blue strategy to the investment community. Obviously, the free cash flow outlook was a lot different and obviously a lot lower than it is today and I think at the time you sort of characterized what the spending levels would be would at least initially it was going to be sort of within your annual Capex budget, you mentioned a few questions.

That you weren't talking about big sums of money.

For the types of stuff that I think you had in the press release overnight, but maybe you could just size for us over the next few years as we think about.

These efforts is there is there a dollar range that youre anticipating spending with Dan and is there a max level that you would spend or any sort of parameters you want to put put around this force, yes, so the ones that we've announced.

The green hydrogen slash ammonia project that balance and builds on the range of $100 million.

On the dehydration.

<unk> in compression systems that we're looking at for Cotwo in Donaldson.

Donaldson will probably in the range of about $200 million and that should be able to provide us with about $1 million.

Tons of Blue ammonia and I think we can get there in 2 years by the beginning of 2024.

And then we're also looking at potentially a similar dehydration compression unit and Yazoo City, Mississippi, which should be able to provide us another call. It $302.50 to 300000.

Tons of Blue ammonia and that would probably be in.

70% to $80 million range. So the projects that we've announced so far are kind of sub $400 million spread over the next 2 to 3 years.

And based on the Inc.

Creased.

On margin and cash flow that we're seeing from operations that easily account.

Taking care of just based on normal normal spending levels plus with the big slug of turnaround activity that will have in the rearview mirror here.

On next year back to more normalized rates I think we're in a good position to be able to manage all of that.

The thing Thats exciting though is.

As you mentioned a couple of our announcements both with.

The Singapore.

<unk> <unk> <unk>.

Consortium looking at ammonia, some marine fuel, which we think theres real legs to that and probably happening sooner than we initially thought along with our mitsui announcement around evaluating Blu ammonia opportunities as there is very likely.

<unk> for us to potentially accelerate some of those opportunities.

And helped this market develop more quickly and so we're certainly interested in thinking about additional investments above and beyond that.

I think again based on our enhanced free cash flow.

Generation right now.

Not worried about being able to fund that.

We feel that we're really on a great spot given our ability to leverage our existing asset base and get to blue and green ammonia.

Much more both quickly and much more cheaply than other people can replicate that.

So is it fair to say then that the.

<unk> ability of a very large scale announcement was a big price tag on it over the next day 3 years, it's pretty low.

Look we are we're excited and believe just like Mitsui and a lot of other participants that.

Blue and Green.

<unk> Blue and Green ammonia.

Are going to be in <unk>.

Short supply relative to the demand that's coming.

The world is going to need more of it than what exists today. So that suggests some of it's got to get built blue.

<unk> in particular.

If you think about it as the best ammonia operators are on the world with the largest network and where they are at significant scale advantages it for us.

So.

Im kind of not taken anything off the table I am also not saying that there is going to be something happened, we're going to see how things develop here, but we're excited that.

There is already an opportunity for us to generate significant volumes at very low dollar investment.

Very clear thanks for the update.

Your next question comes from the line of Mark Connelly with Stephen.

Thanks.

Tony expectations for corn acres, obviously pretty solid next year.

Assuming we continue to have the kinds of logistic challenges that we've had for the past year.

Materially different we would do.

Given the flexibility on your system I'm, just sort of curious if theres something you will learn as well if we had known this at the beginning moving to change this.

I'm going to cash.

On that over to Bert here in just a minute I would say we continue to look opportunistically at expanding some distribution assets and whether that means.

Incremental.

Uhm tanks or other points of in market distribution, where we can.

Either either lease them or buy them, but just.

To make sure we've got that.

That product kind of staged in market and again take full advantage of supply chain disruptions.

I think those kind of things are easy to do but ill turn it over to Bert for other things I agree you're spot on I think the biggest step. We've taken is this case with the international Trade Commission, we've been monitoring this for years and suffering for a number of years with <unk>.

Inundation of product coming in at subsidized levels, whether it be gas or freight as well as on consignment to some of the and receivers in the United States and so those 2 issues, we brought to the to the front end.

Advocated for our case and we believe will have a positive outcome with that we've been as Tony said structurally moving over the last several years in anticipation of supplying a greater amount of UAS into this market is growing it has traded at a discount to urea over the years because of the reasons we are already articulated.

Plan on growing that and supplying.

Higher portion of the.

The U S as needs with a system that is built for the logistics on all the major railroads on the rivers.

And now with our reach in California, and on the East Coast, we feel very good about our position for the future.

And I think another thing as we've talked about blue and green ammonia and blue and Green products.

We were able to bring those products to the market, we believe ammonia in the AG market and a blue ammonia being able to create a low valued.

Low carbon value chain will bring substantial value to the agricultural community as well as to CF and that I.

I guess, 1 other thing I would add mark and we didn't we weren't specific about it although bert touched on it as he and his team have worked really hard to try to develop.

Canada.

Best relationships, we can on the rail side that can be challenging with certain carriers that sometimes but.

We have very competitive rates now, California, we've invested.

With some partners out there around tank space.

And.

Our logistics into that region.

On a really attractive for us and so our ability to go ahead Dan.

Satisfy domestic U S demand is better now than it's ever been on and again, we're really looking forward to.

The ITC verdict here at the end of the week.

Sure.

Just switching gears to Brazil for a second.

Brazil farmers clearly want to plant more corn last year didn't quite get there, but the trend is for more corn down there.

How will that.

If you look at if you look at the global cost curve.

<unk> situation.

If Brazil does finally start to see that corn tick higher is that going to improve your situation in terms of competition in the Gulf you talked about price parity issue as being out of whack every once in a while and I'm curious if that's a partial resolution to it.

But I think anytime you see international demand continued to tick up and we're seeing record levels of demand from imports in Brazil, India. This year.

Really really strong that helps take a little bit of the relief valve pressure off of the U S. Gulf in terms of <unk>.

Product trying to find liquidity out there so I think that thats.

That's always a good thing, but given where.

Soy prices are and in fact, given what we view is going to be increasing.

Movement toward.

Biodiesel.

And a lot of that coming from Oilseeds I think you will see ongoing competition between the acre, whether it's soy or corn.

And so I think all of this is as good because on the 1 hand, while we don't want to see us.

A huge oversupply of corn acres.

On driving a.

Hi stocks to use ratio and then you end up being depressed.

I think a nice healthy balance where acres are being competed for.

Is really good, particularly given the fact that now.

As economic activity is picking back up after Covid, we are seeing all time.

Me on into the industrial sector for for nitrogen products and so.

We don't need.

To see huge.

Increases.

In corn acres in fact that would be a bad thing for us I think nice steady as she goes with the increase in industrial demand is kind of just what the doctor ordered here.

Yes in terms of what we're seeing in Brazil is exciting for urea demand or I'll, just say overall nitrogen demand because when even sulphate has also increased and imports.

We're close to $7 million, a little over 7 million tons of demand and the growth in corn acres.

Negatively impacted by the drought this year and that's going to impact kind of that whole region and it has especially for shipping on the on the thought on the river there coming out of Argentina, and so what we're looking at is some structural changes that are taking place in Brazil with ethanol production, especially in the interior and then.

Combined feeding which is also consuming more feed grains. So when you look at the whole picture and what Theyre looking at in terms of it doesn't necessarily require more acres, but just higher yields higher yields are driven by more nitrogen. So the combination of looking at what theyre doing structurally in the interior and for exports for.

Higher end protein production all combine for a positive nitrogen environment for Brazil.

Your next question comes from the line of Michael <unk> with Cleveland Research.

Yes, good morning.

Wanted to get a sense for how your ammonia price realizations may trend I understand that you guys booked some product around 690 on SAP has gone up but you also have the mosaic contract so could.

Could you talk a little bit about kind of how the price realizations might look for ammonia in the third quarter.

Kind of moving forward in terms of the amount of volume you have committed on.

Cost plus.

All right.

Cost plus contract with mosaic that is.

Month by month consumption and we like that contract are very good customer on a good partner.

And you have the industrial contracts that are many of them are based off Tampa and Tampa is at a high price today, and we anticipate that continuing just due to the global issues, we articulated in our prepared as well as Q&A remarks.

Just due to the high cost structure in Asia, and Europe, they're consuming all the low cost produced ammonia, which is then shifting to those regions keeping the market tight.

And then you look at fall ammonia demand in the United States, we're really anticipating corn acreage, increasing probably over 94 million acres and last year. It on an exceptionally good ammonia season, and we've got a lot of that booked for this fall at those prices that we articulate would share in short time, you have to remember and so we have some very good margin opportunities going.

Forward and the ammonia book.

Okay, Great and then you just talked about on the call kind of being towards the lower end of the volume guidance 19 million product tons. I mean in terms of the split of where some of those tons might've come out versus last year could you give us like a rough breakdown of how much of it is going to be.

Ammonia versus urea versus uhm.

When we look at it on an ammonia basis its easy to communicate that on ammonia. Because then you are right. The upgrades are moved around but we shift.

Our production based on margin and today, we've got some very good margin opportunities across the board. So it is a fight for the ton and I would say at this point with the projections for urea in UA in that fight will continue.

So I would say more to come.

Okay. Thank you.

Your next question comes from the line of Andrew Wong with RBC capital markets.

Hey, good morning.

So just given the very strong cash flow that you will probably be generating and it seems like it's more than enough for your capex priorities and debt reduction would you consider a bigger share repurchase program or some sort of a special dividend.

Probably not a special dividend, but certainly on <unk>.

Considering.

What we would do in the way of a share repurchase program, although as Chris has talked about in the past I think we are much more likely to be kind of larger bigger chunks opportunistic as opposed to a ratable program.

That go on about it that way provides even additional leverage and return opportunity for our equity holders.

But certainly.

1 other things that that we're talking about.

Your next question comes from the line of Duffy Fischer with Barclays.

Yes. Good morning, just a question on the timing around the anti dumping so a favorable versus unfavorable decision coming up here.

What are the steps after that and then if it's favorable in the near term.

You will see a similar phenomenon here with you again like we saw with phosphate where the.

Other parties. This is against extensively just stopped delivering on.

What this until some kind of conclusion on what should we expect I guess from this process before its final and its impact on the market.

So good morning Duffy.

The decision I think is coming out on Friday, our expectation is.

That if we.

We get a favorable outcome.

We would expect UA on to go back to the historical practice of trading at a premium to other upgraded nitrogen products, that's really where it should trade as I mentioned in my remarks.

It is both more capital intensive.

Therefore, you need to earn an appropriate rate of return on that incremental capital investment to Inc.

Send people to make that product and it also has significant agronomic and operational efficiencies for farmers and so because it's both good for the grower and has higher cost to produce.

It ought to carry a premium and Thats, where it was and Thats really where it should be in the absence of dumped tons.

So that's.

That's where we think it goes to.

Longer term the U.

Yes.

Domestic manufacturing capacity is.

Sufficient to serve the U S demand.

So.

Theres really no need for those imported particularly the subsidized tons to show up over here.

And so I think we're well positioned to satisfy U S demand and what it does then is it just means we don't have to export.

Those terms like we used to.

In terms of.

Overall timing on kind of win.

Imports would stop showing up.

I think thats, a little bit TBD, but we're talking about relatively short term on that.

In the event that it is not a favorable outcome I think it's just business as usual because thats.

The world that we're living in currently so its not like Theres Dow.

<unk> side too.

<unk> today is that we.

We're operating with all of those tons coming in today, and we're finding a way to navigate it. Despite the fact that it's challenging.

Are you able to your thoughts on timing.

Well, we've kind of been given some timing.

And expectations in <unk>.

I shall first responses on Friday, and then something by early Q4, we're expected to have a result, and then final decisions could go as long as into Q1 of next year.

But I want to address more of the customer physician, we have long term relationships.

There are obviously a decades long but also.

Kind of contractually laid out and some soft contractual commitments that we worked very closely with our customers on supply and so those who have been with us or against US in this case, we've been talking to will continue to work with and that's why we did a fill program in anticipation just as a good faith.

<unk>.

Appropriately price based on the constraints of today, which again are high levels of imported subsidized product, but going forward, we will still work with our customers and be aligned with what is an appropriate price in the market and continue to communicate and support and help them grow their business, which in the long term helps the American farmer in the <unk>.

<unk> economy.

Your next question comes from the line of Jeff <unk>.

Nicolas <unk> with Jpmorgan.

Alright, thanks very much.

My understanding is that in.

On the third quarter on it from other times, you sell ammonia to industrial customers on a cost plus basis.

Should those legacy contracts day revisited that is are you, giving away too much in this environment can you move the contractual terms or are you just stuck because they buy seasonally.

And a weak quarter for you in terms of volume.

So Jeff most of our industrial business part of the reason that tends to be lower price does it's ratable it doesn't tend to be seasonal and so.

<unk> has some level of our business that is on a.

Cost plus basis.

A lot of those contracts either come up every year every couple of years for reevaluation and we think about what the market dynamics are from an F&B balance in terms of how much of that business we want to.

We want to look at and what the how big the pluses in terms of the adder.

Are those contracts at various points in time were pretty attractive to us.

Obviously right now the ammonia supply agreement with mosaic as far in their favor, but for a number of years. It was way in our favor and that was.

Helpful kind of contract when the rest of the business was under pressure.

To have.

Enhanced margin coming out of that so some of those end up being sort of a natural hedge for us which isn't a bad thing at all but it's certainly 1 of those things that Bert and his team evaluate how much and how high.

And.

Those are the things that will come.

Probably under a little bit of pressure more than anything else as we see ammonia applications in clean energy.

On.

Beginning to expand and so when we're able to make.

The blue ammonia that were talking about earlier and are able to service the.

On the demand that will pay appropriate premiums for it the place that's going to come out of is the relatively lower value industrial business that we serve today.

On the reason Q3 ammonia to lowest generally is because Q2 and Q4 are AG ammonia movement periods and there will obviously at higher prices so that the actual.

Price throughout the 12 months for our industrial book is fairly consistent gas based or Tampa based but.

But you will see that I think do well just based on where the Tampa average is today.

And then from my follow up.

I realized that CF has been.

Pretty good stock this year.

But if you look at it over a longer period on the share price has struggled.

And.

It sounds like you don't really want to buyback shares in that you wanted to.

Fight them into more attractive price.

And historically CF really not interested in raising the dividend.

And the market doesn't seem to want to pay a high multiple for your cash flow.

Whatever reason.

So.

What do you do like how does how do people make money in CF over a longer period of time, you don't want to lever up.

What is the what are the needs better.

That are going to lead to an above average return overtime or are those out of your hands.

No Jeff I appreciate that question and I think you have to look at our return in the context of other companies within the AG space or within the nitrogen space and I would say if you look at I think 10 year return kind of numbers. We're at the top of the heap in terms of what our where our peer group.

<unk> has been.

And I think that.

Certainly there has been some challenges in the interim during that period of time, but I also think we've done some things that make the company stronger today than it's ever been in the past and if you look at how much cash flow, we're generating today and how many shares that are outstanding the ratio.

Is better today than it was even back in.

The highest priced day.

As of the stock and or.

The highest EBITDA that we were generating in the company's history.

So.

I think.

The sector it may not be in and how much favor right now in the marketplace, but I think the fundamentals of this business are better than they've ever been in the past and I would also say we've taken out I think over 50 million shares out of our share count.

Through repurchases.

It's probably even more than 50 million shares and that actually has not.

Theme too.

Led to a.

Yeah.

Any kind of drew.

Dramatic improvement and so I am not sure share repurchases. The answer I think what really does drive value for investors.

In the near term, it's the fundamentals that we're looking at which are better than anything we've seen in the last.

7 or 8 years and in the longer term. It is the fact that ammonia and hydrogen I think are really clear.

Clean energy sources of the future as economies Decarbonize and we're in the best position to capitalize on that and as demand starts ramping up and exceeding supply I think what youll see as asset values will turn toward replacement cost, which is way above where they are today and so it gives us the opt.

<unk> to think about how we want to participate in that marketplace and it puts growth clearly back on the radar screen whether that.

Inorganic or organic but the fact of matter is I firmly believe that.

You move the clock forward several years and ammonia is going to be in tight supply and people are going to be racing to need to build it and when that happens you see a dramatic uptick in terms of asset value. So we're very optimistic about.

About the the return profile that we offer to our investors.

Your next question comes from the line of Adrian Dan Mike.

With Barrington.

Hello, Good morning.

Question on the UAE on volume.

When down much less than we are in.

And more ammonia.

In Q2.

Can you explain the why.

And.

It will be more subject to relative to other.

Yes, the UA on volume.

We did a very good job of moving that product, but as Tony mentioned in 1 of the first questions the pricing was lower than we.

Had a book to carried in from Q1 and Q4, and then finished out in Q2.

And so as we've talked about.

We have a competition for for value in the company and add to the freeze offs in February we stepped in and purchased urea a substantial amount of urea compared to our historical actions in that market to cover our customer commitments, which we.

Value and make sure that we do cover because of our ability to produce more UA and so it is not easily available to go into the market and purchase UAS, we chose to purchase urea and some ammonia and run you added a very high level to meet customer commitments. So across the board on every product we were able to deliver on time.

And even with the substantial disruption that took place in February and March and so that's why you saw a volume uptick and we covered the volume deficit with urea.

<unk>.

You will see how that goes going forward.

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

Thanks, everyone for joining us this morning, and we look forward to speaking with you in follow up calls and also on upcoming conferences.

This concludes today's conference call you may now disconnect.

[music].

Good day, ladies and gentlemen, and welcome to the first half and second quarter 2021, CF Industries Holdings earnings Conference call. My name is Crystal and I will be your coordinator for today.

At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of the presentation.

To pose a question at any time, Please press star 1 on your telephone keypad.

If at any time during the call you require assistance. Please press star zero and a coordinator will be happy to assist you.

I will now turn presentation over to the host for today, Mr. Martin Jurassic with CF Investor Relations. Sir you May proceed.

Other industries reported its first half 2021 results yesterday afternoon on this call will review the CF industries results in detail 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.

<unk> 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.

Thanks, Martin and good morning, everyone yesterday afternoon, we posted our financial results for the first half of 2021 in which we generated adjusted EBITDA of approximately $1 billion.

Strong nitrogen demand and lower overall production have tightened in the global supply demand balance supporting much higher prices than in recent years.

At the same time.

Energy spreads between North America, and high cost regions have expanded considerably.

Increasing margin opportunities for our cost advantage network.

These factors helped drive an increase in adjusted EBITDA of nearly 25% compared to last year and we produced our strongest first half financial results in 6 years.

Additionally, the business continues to generate strong free cash flow, giving us tremendous flexibility as we focus on achieving investment grade metrics and executing our clean energy initiatives.

First half was not without its challenges, including the natural gas driven production interruptions. We described on our first quarter call.

The first half also saw continued demonstration of the harm the UA on industry in the United States spaces from subsidized and dumped imports from Russia and Trinidad.

As you can see from our recent results you and now trades at a significant discount to all upgraded nitrogen products due to unfair trade practices.

We have taken the necessary steps to address this situation by petitioning the department of Commerce and International Trade Commission to initiate antidumping and countervailing duty investigations. We look forward to the result of the ITC is preliminary vote later this week.

Looking forward, we are very bullish about the next 2 years.

Forward energy curves are also very favorable over this timeframe.

We expect these factors to help keep the global nitrogen supply and demand balance much tighter than we've seen in recent years supporting an extended period of higher nitrogen pricing.

And higher margins for our cost advantaged network.

Longer term, we believe increased demand for ammonia and its clean energy attributes will become a significant factor in the tighter supply and demand balance driving further value for our network.

We continued to see broad interest in clean hydrogen and ammonia to help meet the world's clean energy needs as.

As we continue to have discussions with market participants our focus remains on being at the forefront of this significant opportunity from.

From positioning our network to be the world's leader for Blue and Green ammonia production to collaborating with other global leaders, where our unique capabilities can provide value.

We are pleased with the progress we've made and look forward to additional developments from the coming months.

This has created a highly favorable pricing environment that has persisted into the second half of this year.

Based on the agricultural and energy outlook, we see today, we believe a positive price pricing environment for fertilizer will remain in place at least into 2023.

Strong global nitrogen demand is being led by the world's need to replenish coarse grain stocks.

The global coarse grain stocks to use ratio was the lowest since 2012 entering this year's spring planting season.

Commodity prices have risen significantly in response and farmers are incentivized to maximize yield with fertilizer applications.

Given this we expect to see sustained demand in the second half led by India and Brazil.

We expect similar strength from North America, and Europe, leading into the 2022 application season.

We had a positive start to meeting this demand a few weeks ago, we launched our UAS fill program.

We have built a solid order book for the third quarter at a NOLA equivalent price of $285 per ton. So prices remain at a significant discount to urea for the reasons Tony mentioned.

Further out we expect that high demand for coarse grains, especially from China, who will contribute to persistent low global stocks into next year.