Q1 2022 CF Industries Holdings Inc Earnings Call

May 5, 2022

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Good day, ladies and gentlemen, and welcome to D. C. F Industries first quarter 2022 earnings Conference call. My name is Michelle 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 too.

To pose a question at any time, please press zero one on your Touchtone telephone keypad.

If you wish to be removed from the queue you May press zero too.

I would now like to return the presentation over to our host for today, Mr. Martin Jurassic would see off investors relations. Sir. Please proceed.

Good morning, and thanks for joining the CF Industries earnings Conference call with me today are Tony will CEO .

Chris Bohn, CFO , and Bert Frost senior Vice President of sales market development and supply chain.

<unk> reported its results for the first quarter of 2022 yesterday afternoon on this call. We'll review the results discuss our outlook and then host a question and answer session.

Statements made on this call and in the presentation on our website that are not historical facts are forward looking statements. These statements are not guarantees of future performance and involve risks uncertainties and assumptions that are difficult to predict therefore actual outcomes and results may differ materially from what is expressed or implied in any statements more detailed information.

<unk> about factors that may affect our performance may be found in our filings with the SEC, which are available on our web site.

Also you will find reconciliations between GAAP and non-GAAP measures in our 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 quarter of 2022 in which we generated a quarterly record adjusted EBITDA of $1 65 billion.

Our trailing 12 month net cash from operations was $3 7 billion and free cash flow was $2 8 billion.

These results reflect continuing outstanding performance by the CF industries' team against the backdrop of a very tight global nitrogen supply demand balance and wide energy spreads between North America and marginal production in Europe .

We ran our assets extremely well.

Our north American manufacturing plants at first quarter production records for gross ammonia UA on and diesel exhaust fluid.

We leveraged our extensive distribution network to serve customers in the corn belt and expanded our logistics capacity to serve customers on the east and west coasts.

Most importantly, we did this safely.

Our trailing 12 month recordable incident rate was 0.25 incidents per 200000 labor hours significantly better than industry averages.

This level of exceptional execution will continue to serve our customers and shareholders well as we expect the global nitrogen supply demand balance to remain tight for the foreseeable future.

Nitrogen demand will continue to be underpinned by the world's need to replenish global grain stocks.

We believe it will take at least two years and possibly longer to accomplish this.

At the same time high energy costs in Europe , and Asia are likely to lower global operating rates at certain times of the year. So we expect nitrogen supply to remain tight with the marginal ton being very high cost.

Russia's invasion of Ukraine has exacerbated both demand and supply situations first by impairing Ukraine's grain production and exports.

And second by creating uncertainty about natural gas price and availability in Europe .

Taken together these factors make it likely that global nitrogen supply demand balance will stay tighter for longer.

Given these market dynamics, coupled with our position on the low end of the cost curve, we expect to generate significant free cash flow in the coming years.

This will enable us to invest in our clean energy growth initiatives, while also returning substantial cash to shareholders.

We are excited about growth opportunities, we see in the clean energy applications of ammonia.

Earlier this week, we announced in conjunction with Mitsui, a potential new blue ammonia facility in North America.

We also continued to advance both our green and Blue ammonia projects at our Donaldson build Louisiana facility.

We expect to begin making green hydrogen and green ammonia in 2023.

And have up to $1 7 million tons of Blue ammonia production beginning in 2024.

These are important steps forward in the development of this exciting new market opportunity.

One where we are clearly leading the way.

In a moment, Chris will provide more details on our approach to capital allocation moving forward, including our capital expenditure outlook and a return of capital program.

But first let me turn it over to Bert who will discuss the global nitrogen outlook in more detail.

Thanks, Tony Farm returns in North America for all crops are forecast to be historically high despite higher input costs setting the stage for another strong year of farm incomes.

This includes farmers, who will be growing corn wheat cotton and rice.

As you can see on slide nine global coarse grain stocks to use ratios have not improved over the last six months driving nitrogen consuming crop prices toward record highs.

The timeline to replenish grain stocks has been getting longer not shorter.

We believe it will take at least two more years at trend yields to fully replenish global stocks supporting continued strong agricultural demand for nitrogen.

We continue to expect healthy planted acres of nitrogen consuming crops. This year.

Looking at new crop futures returns for corn exceed those of soybeans, which supports our projection of 91 to 93 million acres of corn planted in the United States in 2022, if weather cooperates.

During the first quarter, our team leveraged the flexibility of our network to ensure that we were able to serve customers by helping prepare for this coming demand.

Our rail utilization was at its highest level in years, and we increased UA and barge capacity.

We also chartered three times, our typical volume of U S. Flagged Jones act vessels to move UA and efficiently to the east and west coasts.

Rail service to some of our customers has become a serious issue in the second quarter and we continue to work through those challenges.

We believe the high crop prices and strong farm income will also drive demand for nitrogen and the world's largest urea export destinations.

We expect the recent urea tender by India to be the first in a regular cadence of tender activity in the coming months.

We also project urea consumption in Brazil to remain strong in 2022.

We do not see many catalysts in the near term to significantly increase global nitrogen supply availability.

China to reserve resume urea exports in the second half of the year. However, it is unclear how large the volumes will be given the Chinese governments focus on keeping food inflation under control and balancing the environmental impact of coal based urea production.

Marginal production in Europe that cannot export to the southern hemisphere will face difficult operating decisions during the northern hemisphere off season, if natural gas costs continued to be high.

And we expect Russian fertilizer producers to continue to export but at reduced rates due to sanctions limited internal logistics import outlets difficulty arranging insurance and vessels shifting.

CF industries remained well positioned in this environment, even as natural gas costs in North America have increased.

Natural gas forward curve suggests continued favorable energy spreads for north American producers compared to marginal production in Europe as you can see on slide 12.

We continue to work with customers on their requirements for the spring fertilizer application season as weather has largely delayed planting so far.

Farmers have proven that they are able to plant their acres in a short amount of time once that weather window opens.

While most customers are prepared for first applications, we will leverage our expertise and extensive distribution network to meet the top dressed and side dress demand that will emerge after planting.

With that let me turn the call over to Chris Thanks for.

For the first quarter of 2022, the company reported net earnings attributable to common stockholders of $883 million or $4 21 per diluted share.

EBITDA was $1 68 billion and.

And adjusted EBITDA was 165 billion.

The trailing 12 months net cash from operations was $3 7 billion and free cash flow was $2 8 billion.

Given the substantial free cash flow, we're generating today and our confidence in the company's long term free cash flow outlook I want to walk you through our expectations for capital allocation moving forward.

First we reached our long term gross debt target of $3 billion in April after we repaid the final $500 million of our 2023 notes.

This level of debt and the work we've done over the years on lowering fixed charges provides us with financial flexibility now and through the cycle.

We expect capital expenditures to remain in a range of $500 million to $550 million per year.

This estimate includes planned maintenance activity as well as our investments in clean energy initiatives that are in progress.

Continue to advance the Green ammonia project at Donaldson complex and have placed orders for all major equipment.

The construction of the Sidoti compression and dehydration facilities Donaldson Blue is expected to be complete in 2024, enabling us to be first to market with a significant volume of blue ammonia once <unk> has initiated.

While we leveraged our existing network to create decarbonize. The ammonia capacity, we're excited to pursue organic growth and blue ammonia capacity through a joint venture with Mitsui.

We believe the investment related to this effort in the next two years will be measured with a feed study beginning shortly.

In 2023.

The nearly 50 50 joint venture will support our ongoing commitment to disciplined investments in the emerging clean energy market and provide supply of low carbon and budget to support the global transition to clean energy.

Given these relatively modest calls on capital, we expect to have ample capital to return to shareholders through our quarterly dividend and share repurchases.

The board's decision to increase the dividend by 33% was driven by two main factors the more positive outlook for cash generation across the cycle and the significant.

Difficult reduction in fixed charges, we have achieved through debt reduction share repurchases and other initiatives to eliminate frictional cost in the business.

We also continue to view share repurchases as an important way to provide shareholders a return on and return of capital.

During the first quarter, we repurchased approximately one 3 million shares for $100 million.

This represented the ratable portion of our share repurchase program for the quarter.

Based on our free cash flow generation outlook, we expect to increase the ratable portion of our share repurchase program to $175 million per quarter.

Along with the higher quarterly dividend this positions us to return greater than $1 billion to shareholders on an annualized basis.

We are also prepared to opportunistically repurchase additional shares at attractive levels as we have in the past.

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 the entire team here at CF industries for their outstanding work during the quarter.

Our focus continues to be on operating safely and leveraging our manufacturing and distribution network to serve customers a role that is even more critically important today than ever.

The North American agriculture sector, including CF industries is poised for strong results over the next several years as we collectively work to replenish global grain stocks.

The geopolitical issues in Europe , particularly Russia's invasion of Ukraine.

Only increases the importance of the role North American farmers play as well as the rest of the supply chain and providing food for the world.

The last year has underscored the critically important role of ammonia to the world both for fertilizer and industrial applications.

It is also confirmed our belief that new demand for ammonia and clean energy applications will grow significantly in the coming years.

CF industries will be a leader in supplying blue and green ammonia to meet this emerging demand and we are excited about our progress in this area.

We have tremendous opportunities before us and we intend to capitalize on them to create meaningful shareholder value in both the near and longer term.

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

Thank you Sir we will begin the question and answer session. If you have a question. Please press zero one on your Touchtone phone if you wish to be removed from the queue you May press zero to.

If youre you think your speakerphone, you may need to pick up on your handset first before pressing the numbers.

Once again to ask a question. Please press zero one at this time.

We do have several questions in the queue. Sir the first question comes from.

Adam Samuelson with Goldman Sachs. Your line is open. Please proceed.

Yes, thanks, good morning, everyone.

Good morning, Adam.

So I was hoping to maybe taking a little bit more on the decision to pursue the blue ammonia project with Mitsui and maybe understanding that you have to still go through the full feed.

Study <unk>.

Next year could you provide some rough parameters around.

Capital costs that you've thought about even announced this how you maybe have ranked how why the blue ammonia project with Mitsui at the U S Gulf as a greenfield and the first one you would have done in <unk>.

Green lit in about a decade would have.

Ben the highest priority kind of opportunity to use of capital versus other things you could've done in the portfolio.

And yes.

Maybe I'll leave it there.

Yeah, Adam so.

One of the reasons why it's going to be a greenfield instead of a brownfield is.

We do want a little bit of geographic separation from the Donaldson Bill facility for reasons like we had last year with Hurricane Ida when it came through and we basically took the entire facility out for.

Three weeks and I think the combination of having a.

Geographically separate location to produce below ammonia combined with the blue and green ammonia projects at Donaldson Bill give us some continuity of supply regardless of weather events like that such that we can enter into very reliable long term supply agreements or production.

<unk> low and zero carbon ammonia.

With Counterparties and Thats really the reason why that put it at a different location that D. Ville in terms of blue.

Blue ammonia as opposed to a full blown.

Fertilizer plant with upgrades and everything it really speaks to both ours as well as Mitsui is conviction that this is an area of not only emerging demand, but very strong demand as we as we get out.

And to the future and so we believe the world is going to need this we think that.

Particularly given that the U S does not have a structured regulatory cost of carbon today, but most of the rest of the world or much of the rest of the world does that an export oriented facility, where we can move those tons into the international marketplace and really leverage the skill set and capabilities that mitsui.

He brings as a partner.

It is critically important and we'll will serve us really well and I think from an overall kind of you had mentioned economics our capital. The reason we're going through the feed.

The stage is to really get a much better handle on what the cost of the project is going to be but.

Just based on our recent experience both at Donaldson will important Neal adjusting for inflation that's taken place.

It wouldn't surprise me if we for a greenfield facility. We're in the neighborhood of $2 billion plus or minus for this but remember.

Basically a 50 50.

Investment for both of Us.

And it's paced out over five years, so think about that from our perspective as even though the money doesn't go out the door ratably like that but you're talking about $200 million a year in terms of capital over the next five years Thats a relatively.

It's a significant amount of money, but given the fact that we generated $2 8 billion of free cash flow in the last 12 months.

Imminently affordable and not a crazy amount and I feel really good about.

The prospects for that plant, having a fantastic return profile for shareholders.

Okay. That's really helpful color I'll pass it on thank you.

Thank you. The next question the queue is from P. J <unk> with Citigroup. Your line is open.

P. J, we cannot hear response.

Hey, sorry about that.

Tony Bert and Chris.

Just a quick question on this blue ammonia facility with Mitsui.

On top of your Blue ammonia derail any agile city.

Is the demand for blue ammonia in your mind going up or do you think you are correct. The current 45 Qs can cover these incremental costs and you can make it.

Financially attractive.

And can you give some some details on this.

It'll cost because others in the chemical industry don't agree that you can really cover the incremental cost with 45 Q credits. Thank you.

Yes P. J I think the big difference between ammonia production in most of the rest of the industrial emitters.

Is that.

As a byproduct of the ammonia production process, we capture.

And extract two thirds of the Cotwo.

From the process anyway, it's the process.

Waste stream that comes from ammonia production using a steam methane reformer.

So we've already captured that in some instances we use that.

<unk> for urea production.

And in others, we ended up inventing the excess cotwo, we don't need but.

Capital intensive and costly aspect of it.

Cotwo sequestration is the capturing the cotwo begin with and because thats already baked into how an ammonia plant operates.

What that would be incremental costs that we're looking at is really just the dehydration and compression of the Sidoti Scream. So that is suitable for injection into geological sequestration wells.

And so for us as we announced at Donaldson Bill, we're looking at roughly $200 million for dehydration and compression and it's probably going to be in the neighborhood of 5% to $10 per ton of cotwo of incremental utility costs down there and then theres going to be some some transport and.

Some injection cost as well, but that still leaves plenty of money available within the current framework of the 45 <unk> tax credit to earn a very favorable return on the incremental capital that we need to put in place, which is only $200 million.

And for us for a greenfield facility or a brand new facility.

It's basically the same plant, whether youre doing conventional or.

Or blue.

Just adding the additional dehydration compression so again call. It another roughly $200 million and again that kind of basis to 45 <unk> tax credit provides a very attractive return profile for us So thats why ammonia production.

Unique.

In the.

The industrial landscape in terms of.

Most likely able to.

To take advantage of the 45 acute credit I think if you were doing flue gas capture or other things youre talking about probably a 120 to $150 a ton.

But you would need that credit.

Credit to get to in order to justify it based on today's technologies now I do think that there will likely be ongoing improvements in development to reduce the capital and operating costs going forward on flue gas, but where we are today you need a much higher 45, Q tax credit Fortunately, we're not encumbered by that given though.

We already capture so much Seo too.

Alright. Thank you for the detailed explanation Tony I'll pass it along.

Thank you Sir the next question comes from Chris Parkinson from Mizuho Securities. Your line is open.

And the next question comes from Josh Spector with UBS. Your line is open. Please proceed.

Yeah, Hi, Thanks for taking my question just curious about some of your assumptions around China urea exports in the second half I mean, you seem convinced that there'll be at least some that hits the market I don't know if from your thinking what are some of the gating factors that.

That drives whether material comes out of China or not given the moves that they've made.

Over the past six months.

This is Barry good morning, and I think.

Some of the gating factors are real and pronounced today with what's going on with inflation and the.

The government's desire to control that internally and not really.

Looking externally for how that has impacted and there was an announcement today or.

The information in the trade publications about.

Continued enforcement of those export bans, possibly through or into 2023. So it's not clear how many tonnes will come out when they will come out the previous position was in June if the export ban will be lifted.

And so what we've seen is a very tight control of product both NMB coming out of China.

And China represents about 10% of the global trade. So a significant portion taken off the market.

What we've seen internally to China as the prices controlled almost half of what it has been traded on the international market. So again, a reflection of controlling costs to the farmers and keeping that product.

In China, So we've been open that economically and.

From incentives as a marginal producer that they should be exporting again on an economic basis, but on a governmental action basis that probably will not happen. So let's just say we would have probably expected three to 4 million tonnes it could be half or.

Less than that looking at it today.

Thank you very helpful.

Yeah.

Thank you and the next question is from Chris Parkinson with Mizuho Securities. Please proceed.

Greg can you hopefully you hear me.

Yes, yes.

Just checking alright so.

Tony and Chris you are pointing to generate a lot of free cash over the next two to three years I mean, we can all go back and forth about spreads, but I think that the conclusion, there is pretty pretty clear.

When you think about all the opportunities you have with both some of these smaller high return low risk brownfields.

Let's see we obviously share buybacks, which Chris hit on how should we think about let's say over a rolling two to three year period.

The balance of capital allocation.

First these projects versus return to shareholders versus the last three to five it seems like Youre still juggling a lot of opportunities. So I would really appreciate some intermediate to long term color. Thank you.

Yes, Chris Thanks.

This is Chris speaking here.

As Tony outlined and I did in our remarks, we have a number of projects that are laid out for the blue ammonia that will be happening over the next couple of years, but it'll take a couple of hundred million dollars, but as you point out the amount of free cash flow that we have will be able to do everything from the share repurchases.

The increased dividend that we just announced and also these projects I think the one thing is there is we're just talking about the projects that we've laid out here.

Consistently looked at other organic and inorganic.

Projects.

Over this past 12 month period, we've had almost $3 billion of free cash flow generation and as Bert mentioned some of the outlook that we see that will be even greater so I think it provides us a lot of opportunities to do a lot of different things. One is to do the growth plans that we've talked about here and then two is too old.

So move into some of the share repurchase and return of capital that we talked about not only the ratable portion, which is going to be $700 million. This year, but also the opportunistic piece and given the volatility in our share price I think we're looking at.

<unk> opportunities not only this year, but in the coming years, where we can get in and get quite a bit of shares out.

Favorable return for shareholders.

Chris I would just add agree with everything Chris Bohn said, but.

We are now at our desired level of long term debt of $3 billion, we think.

We're well into the investment grade.

Ratings.

Even though we haven't been moved there yet, but if you just look at.

The strength of the business and how we're performing in the relatively.

Small amount of debt that we're carrying we feel very comfortable with that and so as Chris said.

Even if we were.

Ultimately decided to move forward on this this new.

Blue ammonia projected adds roughly as I said kind of $200 million plus or minus per year to a range thats $5 to $5 50 of capital per year, we don't really have additional debt reduction so call it 7% to 750 of.

Of capital going out the door that we've earmarked.

Ready and as Chris pointed out in the last 12 months, we did $2 $8 billion of free cash flow. So that still leaves a very healthy amount for a return of <unk>.

Capital to shareholders and.

I think based on how the business is performing we can do all of the above.

Got it and just as a quick follow up.

There's obviously a lot of different dynamics going on with the <unk> end market I mean, some of the major producers.

Obviously central and Eastern Europe are now completely cut off line, you've got obviously a lot of other trade considerations as well, which have evolved over the last year.

A lot of us Couldnt help it this year mixed this quarter.

<unk> how are you thinking about not just the season, but also the intermediate term outlook.

For you and versus urea and unit spreads and just how that's evolving it seems like it's pretty favorable but any.

Any additional thoughts would be greatly appreciated. Thank you.

Yes, I'll give you my just.

Quick too and then ill turn it over to Bert, but I think one of the things that we're seeing is a return to.

Appropriate valuation for UA on where it belongs compared to urea.

As a more costly product to make than urea given there is significantly more capital involved in the production process. It also offers farmers.

Tremendous product with great efficacy from an agronomic standpoint, but also gives them some efficiencies in terms of application of.

Other chemicals, whether it's fungicides herbicides or insecticides or whatever can be mixed in with the UAE and so it provides benefits to the grower, it's higher cost to the producer therefore, it audit trade.

Generally speaking at a premium to urea on a per nitrogen per unit of nitrogen basis, and Thats, where it is again and I think largely because of the fact that the.

The Commerce Department and the International Trade Commission put in.

The duties on on product that was being dumped illegally by the Russians and the Trinity <unk>.

And so our expectation and I think generally speaking as you add should trade at this level.

Premium to urea in terms of kind of our plans going forward I'll turn it over to Bert.

Yes, Chris looking at what is going on in the UN Mark and we're at the precipice of planting and applications, which are late in North America.

But product continues to flow and move to the interior as Tony said it is trading at a premium to urea and <unk>.

Benefited or move to a higher production and remained that way through first quarter of favoring UAS over urea.

And as long as that spread maintains we will continue to do that the outlook is favorable and the demand is there with 91 to 93 million acres of corn and what is taking place with restrictions.

See gains coming out of Russia, and Ukraine, the World, we'll rely on Argentina, Brazil, and the United States and to a lesser degree Indian Australia to supply the wheat and some of the corn out of South America, especially and that will take a lot of nitrogen and we're seeing growth in UA in in those markets.

And continued demand in North America, Europe is constrained with the gas spreads taking place today at $30 TTS against $708 in North America. It is difficult to produce and participate in the global market from Europe as they have in the past. So we expect trade flows to change, especially as it.

Result of Russia, and then UA and from the United States to possibly go where it's most urgently needed.

Who'd constrained world.

Okay, that's great detail. Thank you so much.

Thank you and the next question in the queue comes from.

Michael Picken, one moment Sir.

That's a little bit on kind of what's happening from a logistical standpoint with the delayed spring and some of the issues on the rail lines do you guys have sufficient urea ammonia with your in market storage up in the Midwest.

I guess, how was the delayed planting season.

Potentially playing a role into your outlook for the spring. Thanks.

Hey, good morning, Michael Burt and Youre right logistical issues have been front and center when we went public a week or so ago with some of the delays from the Union Pacific and some other rail carriers.

We have been working with our rail providers to have.

Geared up with additional UN large capacity as well as I mentioned in my prepared remarks.

Vessels to go to the east and West Coast to just expand our capability to fully supplied North America with.

Needed UA in and we've ramped up production as we talked about in previous quarters.

What I think is taking place then it gets to the delays because of weather and we have had cool wet weather, which has delayed access to the fields and that impacts ammonia and so the conversations with customers today are very real of do you have enough in place and if you are asking us to move it don't rely necessarily.

<unk> on the railroads today.

What we can do with our distribution network and I do think ammonia will be challenged and we still have a good portion of our ammonia to be applied to the ground, but I think youre going to quickly go to putting the seed in the ground, especially what we report as we get closer to the middle of May and potential yield impacts of late planting.

So yes, we have sufficient storage, yes, we have sufficient product we are running our plants at 100% capacity and working very long hours to make sure that we supply our customers with the nitrogen nutrients that they need.

Okay. We'll go with the next question. The next question in the queue comes from Steve Byrne. Your line is open. Please proceed.

Yes, I wanted to ask a little bit about this.

Our project with Mitsui.

Do you think that they will be able to secure long term contracts with the Japanese utilities.

Either.

Fixed price or maybe a fixed tolling fee.

Gas pass through so that this project.

<unk> could ultimately give you a fixed return and.

On the capital is this the Pax or auto thermal unit. So that you can capture all the <unk>.

Good morning, Steve.

I'd say, we're still in final short stroke review and negotiations with the various technology provider. So we haven't announced.

The vendor in a particular approach that we're taking out.

I think that.

We're taking all of those things into consideration as we make those final determinations.

But I couldnt be happier in terms of the partner we have here I think there is no better partner to have out there then mitsui with their capabilities and access and knowledge of the region.

And their contacts I think were.

We are in a very very strong position and we're really pleased about it we're discussing a number of different alternatives, but the one that you talked about.

Certainly is not out of the question.

In terms of more of a.

Okay.

Gas plus arrangement that earns.

Their rate of return on the capital being deployed.

For us, but there is there is a number of different things that we're taking into consideration.

And more to come so stay tuned.

And then maybe a question of balance here.

Use of free cash flow.

The outlook relative to what you have is a commitment for share repo.

Leaves a pretty big opportunity in gap.

Would you say that.

You're just keeping your options open.

Thus could engage in a much more aggressive share repo.

Or do you want to keep your powder dry in case, you want to go more aggressive on capacity expansions and or do you see any M&A opportunities down the road.

Yes, the good news here, Steve is I think we're generating so much cash into all of the above but.

We're focused right now on.

The first $1 5 billion.

Repurchase authorization that the board put there given that our debt is now where we want it to be and we're generating.

But so much cash our expectation is we will get through that in pretty short order here and then don't be surprised if we put another one in on the heels of it with Tony on that one Steve that I think there is enough to do a lot of different things both organically.

Organically inorganically, but from a share repurchase standpoint, as I mentioned earlier.

The volatility that we see in our shares that really arent backed by the fundamentals we've seen that all the way back to December where we stepped in pretty heavy and bought $500 million worth of.

Shares within like a 20 day trading period so.

I wouldn't be surprised to see that type of activity when we see disconnects along the way, but even doing that as Tony mentioned. These next few years with what we see from a free cash flow generation.

And really with where Capex is in a pretty.

Pretty manageable band, we should have plenty of opportunity to do some share repurchases and return of capital.

Thank you.

Thank you. The next question comes from Andrew Wang with RBC Capital. Please proceed.

Hi.

Morning.

<unk>.

Has there been any.

Change in some of the conversations you had with potential customers around the low carb and ammonia.

Market and or maybe potential for long term agreements and that's what kind of gave you more confidence to kind of move forward with.

Pretty large project here.

Yes.

Sure.

<unk>.

Conversations on a daily basis, with all kinds of potential customers and other.

Others that are working through.

Technology innovations and applications.

And I would say the first two that we see developing in pretty large quantities are ammonia being co fired with coal.

For electricity generation and I think both Japan, and Korea are going to be the the epicenters for where that begins but it's likely to spread.

And then as a marine fuel because it's got zero carbon emissions and so I think.

Those are the places where we see demand developing in the marine application.

Is so large that it could.

With pretty I would say realistic assumptions double the amount of ammonia that is used in the world today and so we're really focused on those two applications again I think we've got the right partner with Mitsui to go after them and our intent is.

To lead from the front on this.

Okay, that's great and then maybe just more of.

Around some of the more near term operations kind of question.

Given that we're seeing higher prices internationally.

Are you considering more export sales.

This year and then just also with the wet weather.

Turning to the planting season, and maybe a little bit slower.

Do you have any view on the inventory levels as we exit the spring season.

Yeah.

Yes, so this burden when youre looking at the market. We're as I said earlier, we're at the precipice of planting and Youll have stages of applications, whether that be for corn wheat cotton rice canola.

And as we move from south to North.

The applications are already taking place in Texas, Oklahoma, and Kansas, and we will I.

I'd say this next week be going very strong in Iowa, and then up in the Dakotas in Canada.

So when we're looking at.

Where we're going to move our product.

That's where it's most urgently needed and where it is highly valued.

And we continue to do that to look at our opportunities and leverage each of those were in conversations with people globally, and we have very solid strong relationships with our customers.

I want to make sure they're well supplied thats why we have inventory throughout the United States and in Canada prepared to ship.

And we have logistical assets locked up and Theyre moving daily.

And so when we look at the opportunities for CF, there Theyre very positive and we will continue to be we believe for the next proceed I'd say for the next couple of years.

Great. Thanks.

Thank you Sir.

And just as a reminder, if you do have a question. Please present zero one on your Touchtone phone.

The last question I have in queue. At this time is from Vincent Andrew Your line is open. Please proceed.

Alright, Thank you Tony.

Tony maybe I could just ask a few more questions on the Mitsui situation could.

Could you maybe tell us a little bit more about the site and I guess, what I mean by that is you threw out a $2 billion potential total number could you talk a little bit about how much volume you are anticipating for the $2 billion in the site that Youre looking at maybe you don't want to tell us too much about it but.

How much expansion capabilities are there is this sort of.

The opportunity to have multiple phases over an extended period of time.

And so maybe we could just start there, yes, you bet Vincent so.

We are actually.

Some pretty advanced conversations with.

Governments, both at the state and local regional levels in a couple of different areas.

That will dictate where we ultimately end up we've got sites in different states that have been identified and.

This should be a competitive process like anything else is and so we're we're heading down that path to get there.

The best terms that we can because this is a significant economic boom to wherever it is that we end up putting the plant.

The sites that have been identified are capable of supporting multiple units I would say four to five.

Units based on the original.

Land acquisition with possible.

<unk> beyond that.

If and when appropriate.

Fantastic logistics in terms of deepwater dock access to to make it.

Export oriented and so thats really our focus.

In that way.

Around the export marketplace.

I don't want to go too much more specific on location because we are.

Coming to the again the short straws here in stroke in terms of.

Negotiating package deal that looks attractive.

Okay, no understood, but just on the amount of volume you think youre going to get for $2 billion any any insight there.

I think.

If you think about <unk>.

Level and.

Volume.

The new Port Neal.

Ammonia to plant would be the low end of it and.

Donaldson Bill.

Ammonia six new plant would would be sort of the higher level of it that's really the state of the art in terms of volume today.

But again, we haven't really finalized the technology provider in the different firms have slightly different approaches and rates and so forth, but in that range.

A million $2 million for.

Tons a year is.

Is kind of what we're targeting.

Okay, great. Thanks very much.

Thank you Sir and the last question I have in the queue is from Jefferies. A caucus from Jpmorgan. Your line is open.

Alright, thanks very much.

There is so much constrained.

Fertilizer production trade in all the three major new trends.

Do you think that these constraints will have any effect on.

Global yield.

The major crops over the coming year.

Hey, good morning, Jeff This is Bert.

You've asked you're asking the question that we've all been trying to answer.

And have been doing a lot of work globally to put that quantitatively together to make decisions on movements of products and expectations for the forward curves.

And when you.

Look at what's taking place with restrictions out of the Black Sea.

On grains, and oilseeds and even processed products.

The world needs to increase the rest of the world's production and ability to ship and that needs to happen.

The northern hemisphere in the spring and I think thats going to be constrained in Europe , just with some limits on nutrients.

We are fully supplied in North America, and having good weather would be very helpful to our bountiful crop and then it moves to South America, who plants in September October November December January for second crop and then the harvest thereafter, so it's to US it's a 2023 issue.

When these potential shortages can can materialize.

It could be constrained because of lack of nutrients with what's going on with restrictions.

Our sanctions out of Belarus and Russia.

And then you factor in.

100% limitation because of the war out of Ukraine, and then shipments out of the Black Sea.

And then a governmental restrictions from China <unk>.

You've taken out of urea at 25% of the urea supply. So you didn't need to move things around maybe use more ammonium sulfate.

It's a different application and price probably will have to impact some of that I do think some of your third world countries that are planting non dollar denominated exportable products <unk>.

Probably will.

Have yield impacts that will require food imports that's still to happen.

So these are things that we are watching paying very close attention to and talking to our industry partners, whether that'd be great companies processing companies.

As well as distribution companies to make sure. We're at the forefront of supplying the nutrients that we're capable of supplying on time and with a reasonable cost.

Okay.

You mentioned at the start of the call that Tcf price in Europe was $30 <unk>.

If you look at the curve I think next year.

<unk>.

Do you have a hedging strategy and.

Europe for gas or do you have a philosophical view about gas.

And thank.

In terms of the data.

<unk>.

Urea and ammonia shipments out of Russia today could you describe them.

What's coming out of the Black sea, what's coming out of the Baltic.

There are two questions.

So Jeff.

Jeff.

View is because Europe is not.

Self sufficient in the way of gas.

If you don't count for Russian supply as part of native European production.

Yes.

Dan.

Logically during periods of the year is going to be in the third and fourth quartile.

On the cost curve.

And that's why our view is that those assets will be running more intermittently and youll see lower operating rates as a result of it which ends up.

Yes.

Making the supply demand situation globally tight on an ongoing basis and even when it runs pretty high cost marginal tons that are coming out of Europe .

And the spread of.

Even if this spread collapses down to $10 between North America and Europe .

$10 times 34, <unk> per ton of ammonia times 10 million tons of ammonia you are talking about $3 $4 billion just in ammonia value for.

For us before you even get into the upgrades and the value of the logistics network and that is only on a $10 spread on a 20 dollar spread obviously, it's twice that.

So that kind of energy curves that we're looking at going forward give us a lot of confidence about the cash generation of this business and.

Our UK assets are pretty de Minimis in terms of the contribution they make to the overall profitability of the enterprise as well as the.

The ammonia production volume.

It's really North America that carries the freight in terms of.

What drives this company. So we are okay running our European business.

Our UK business and assets when it's profitable to do so and we're also okay, taking those plants offline when it's not profitable to do so and so our view is we want to be generally speaking more.

Daily buyers of gas in Europe , given where they sit on the cost curve and not try to take a long position on.

<unk>.

On gas hedging there because we think those plants opt to cycle on cycle off given where they sit in the global cost curve.

But.

General question on gas.

Gas and hedging and.

This is Bert we are students of the market globally, just like we are with fertilizer as the key component of our cost.

<unk>.

It behooves us to be.

Watching that diligently and buying in positioning ourselves appropriately and today as Tony said that spread from North America to Europe is over $20, but even on the 'twenty three 'twenty four forward curve. It's still is $20. So thats why youre going to see European production continued to be <unk>.

Strained and especially in the absence of Russian gas as we approach winter this coming fall and winter I think can be very challenged your question about Russian shipments yes.

Yes, we are tracking whats being loaded and where its being loaded.

And I think the.

There are several limitations and as you take away the logistical capabilities of movements and flexibility of the Russian producers coming out of whether that be Siberia in the prime area or where theyre loading internally to move to the external market.

There is a tremendous change that has taken place due to the invasion and thats. The limit of ports. So you had black sea ports Nicolai of Odessa, and others that have been load ports, but that product has to get through there. Those are no longer available same thing with ports that have been like in Riga in other places in the north.

We're not Russian owned or accessed and so when you take the port capabilities.

Down to probably 30% of the available outlets that then has a backup process of logistics backup processes storage.

<unk> ability to consistently move nitrogen phosphate and potash out as they did before that will become more material. As we move forward. Then you layer on top of that insurance cost and vessel and ability to get vessels are vessels not desiring to load in those ports and thereby pushing pricing up.

Today it's.

<unk>.

St. Pete to Brazil is close to $200 a ton that was less than 50, just a few months ago.

And so these issues will continue to constrain Russian production on top of sanctions as we roll forward and if the sanctions do continue to be applied through 2022 and forward.

Thanks, so much.

Thank you. The next question in the queue comes from Joel Jackson with BMO. Your line is.

Hi, good morning.

Bert.

When you look at application rates for nitrogen spring can you talk about any trends youre seeing anybody and farmers maybe dialing back. The end I mean are you seeing any difference between maybe higher yielding acre versus lower yielding acres or anything you've seen please let us know.

Sure I mean that is the that's actually a global question as well as our domestic question domestic North America.

And today no we're not seeing at $8 corn and even looking at 'twenty two 'twenty three a decent 740.

These 23 it I don't know 640, those are incredibly attractive and with ethanol running at its current operating rate of close to 90%.

The attractive price positioned for protein being beef and pork do you have a heavy demand.

Drive domestically as well as now exports because of the issues, we've articulated about Russia, and Ukraine and their inability to move corn.

And we out so no we're not seeing a decrease in applications. However, it is late and as I said earlier soil.

Soil temperatures and application of nitrogen is delayed as well as P and K. It is going to be a very tight logistical window and this is where CF shines, we have all the capabilities and the positions in place that others don't so we'd have a lot of customers, calling in sitting down and wanting to move products promptly and I can.

Tell you, where we're busy and working long hours to make sure that happens.

Tony Chris Me they could app.

The question about capital allocation, a little bit differently talk.

Talk about $175 million a quarter ratable radar 700 million. This year can you talk about maybe $1 billion spend possibly over five years for your part of that new JV.

Youre going to generate so much free cash the next bunch of years and people have had on this call already and this might be the best year ever going to have given everything you just said in your other project that you have.

So much.

Cash on the balance sheet is going to build here why not in this peak year or I don't want to compete with.

To get there lets say why not be a little more aggressive on the buyback.

What are you really saying what it looks like billions of dollars for well.

Well, let's not be too hasty to call. This the top of the cycle I mean, I think there's a lot of runway left and a lot of uncertainty out there in the longer.

You see these kind of energy spreads and the longer you have got.

Which obviously is.

The tragic terrible situation with conflict, but the longer that persists.

More pressures, both the demand side because of green availability as well as the supply side in terms of gas cost and availability and so.

I would hesitate to call them.

This is a one year situation.

I think it puts us in a very enviable position and as Chris said.

We are.

Focused on on a ratable basis now between the dividend and the.

Ratable portion of the.

Share repurchase.

Program, returning over $1 billion, a year to shareholders and that still gives us a lot of capacity to go in.

Drawn when we see drops in the share price and discontinuity is like that.

When when a couple of weeks ago, there was a rumor of a ceasefire we dropped 15 box.

In one day and then we ended up catching some of that back through the course of the day, but we have a highly volatile stock and we want to be able to absolutely capitalize when there is drops in the share price that are not connected to the fundamentals of.

The financial performance of the business and.

Our belief is that that is actually going to be in the best interest of our shareholders and if that means we carry a little bit of extra.

Cash on the balance sheet from time to time, so be it.

Think when they see us.

Like we did in the fourth quarter, taking out as many shares as we did at the average price of 60 some dollars.

It's a pretty attractive move and so.

The fact that we can continue to do that and return a big chunk of cash on a ratable basis, just again proves I think the value of this organization and company in the asset base that we've got here.

Thank you.

Thank you and the last question. The Q comes from P. J D of Macquarie. Your line is open. Please proceed.

Yes, hi, good morning.

Thank you for taking my question. So my question is on your dividend, which we increased substantially.

33% to $1 60 per year.

That's a big signal from a cyclical company because looking back you would not have earned us a dividend in 2017 2018 and 2020.

Five years.

So I.

I mean to make that move are you signaling that the nitrogen markets have stepped up permanently.

That's sort of my question on capital allocation. Thank you P. J. This is Chris I would say Theres two reasons, one we do think that the nitrogen market.

Stepped up here.

<unk> given some of the supply constraints that we're seeing even prior to that some of the geopolitical events was tightening and those are things that burden Tony have been talking about for over the past year. So we've seen a fundamental shift in what our outlook is on that and seeing that for a longer bit of time then maybe.

Even what we saw a year ago, but then additionally, I think it's all the work we've done on our fixed charges over time.

The mantra we've had over the last three years is really to reduce our fixed charges both through not only the debt reduction, but even the share repurchase where we had lower amount.

Aggregate dollars going out for dividends and then additionally, the work that <unk> and his team have done through manufacturing to get our controllable costs down. So when you work all those things together I think.

It's allowed us to increase the dividend without really changing our fixed charge outlook all that greatly and then that coupled with where we see the nitrogen market fundamentally shifting too.

Made us feel very comfortable in.

And I think the board as well with their approval of it and I would just add one other factor P. J.

That is.

Where the shares are trading and should trade too we believe based on our financial performance and outlook.

The old dividend was not as relevant from a dividend yield perspective, and we want the dividend to be realm.

Irrelevant.

And.

Comparable to other S&P companies.

Frankly under 2%.

Yield is.

It is certainly at the low end of that range and so.

While im not forecasting.

Another increase it Wouldnt surprise me a longer term based on the factors that Chris said.

Both lower fixed charges as well as better industry fundamentals and a high share price meeting a low dividend yield that you wouldn't see it go up again at some point so we're very bullish.

Looking forward and I think all of the.

The moves that we're making.

Our tangible evidence of how we feel about this business in the marketplace the ordering.

Thank you.

Thank you ladies and gentlemen, this is all the time that we have for questions today I would like to turn the call back over to Martin Jurassic for closing remarks.

Thanks, everyone for joining us this morning, and we look forward to seeing you hopefully in person.

Upcoming conferences.

Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

Okay.

[music].

Good day, ladies and gentlemen, and welcome to D. C off industries first quarter 2022 earnings Conference call. My name is Michelle 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 zero one on your Touchtone telephone keypad.

If you wish to be removed from the queue you May press zero too.

I would now like to return the presentation over to our host for today, Mr. Martin Jurassic would see off investors relations. Sir. Please proceed.

Good morning, and thanks for joining the CF Industries earnings Conference call with me today are Tony will CEO , Chris Bohn, CFO , and Bert Frost Senior Vice President of sales market development and supply chain.

<unk> reported its results for the first quarter of 2022 yesterday afternoon on this call. We'll review the results discuss our outlook and then host a question and answer session statements.

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 quarter of 2022 in which we generated a quarterly record adjusted EBITDA of $1 65 billion.

Our trailing 12 month net cash from operations was $3 7 billion.

And free cash flow was $2 8 billion.

These results reflect continuing outstanding performance by the CF industries' team against a backdrop of a very tight global nitrogen supply demand balance and wide energy spreads between North America and marginal production in Europe .

We ran our assets extremely well.

Our north American manufacturing plants at first quarter production records for gross ammonia UA on and diesel exhaust fluid.

We leveraged our extensive distribution network to serve customers in the corn belt and expanded our logistics capacity to serve customers on the east and West Coast.

Most importantly, we did this safely.

Our trailing 12 month recordable incident rate was 0.25 incidents per 200000 labor hours significantly better than industry averages.

This level of exceptional execution will continue to serve our customers and shareholders well as we expect the global nitrogen supply demand balance to remain tight for the foreseeable future.

Nitrogen demand will continue to be underpinned by the world's need to replenish global grain stocks.

We believe it will take at least two years and possibly longer to accomplish this.

Russia's invasion of Ukraine has exacerbated both demand and supply situations first by impairing Ukraine's grain production and exports and.

And second by creating uncertainty about natural gas price and availability in Europe .

Taken together these factors make it likely the global nitrogen supply demand balance will stay tighter for longer.

Given these market dynamics, coupled with our position on the low end of the cost curve, we expect to generate significant free cash flow in the coming years.

This will enable us to invest in our clean energy growth initiatives, while also returning substantial cash to shareholders.

We are excited about growth opportunities, we see in the clean energy applications of ammonia.

Earlier this week, we announced in conjunction with Mitsui, a potential new blue ammonia facility in North America.

We also continue to advance both our green and Blue ammonia projects at our Donaldson Bill Louisiana facility.

We expect to begin making green hydrogen and green ammonia in 2023.

And have up to $1 7 million tons of Blue ammonia production beginning in 2024.

These are important steps forward in the development of this exciting new market opportunity.

One where we are clearly leading the way.

In a moment, Chris will provide more details on our approach to capital allocation moving forward, including our capital expenditure outlook and a return of capital program.

But first let me turn it over to Bert who will discuss the global nitrogen outlook in more detail.

Thanks, Tony.

Returns in North America for all crops are forecast to be historically high despite higher input costs setting the stage for another strong year of farm incomes.

This includes farmers, who will be growing corn wheat cotton and rice.

As you can see on slide nine global coarse grain stocks to use ratios have not improved over the last six months driving nitrogen consuming crop prices toward record highs.

Timeline to replenish grain stocks has been getting longer not shorter.

We believe it will take at least two more years at trend yields to fully replenish global stocks supporting continued strong agricultural demand for nitrogen.

We continue to expect healthy planted acres of nitrogen consuming crops. This year.

Looking at new crop futures returns for corn exceed those of soybeans, which supports our projection of 91 to 93 million acres of corn planted in the United States in 2022, if weather cooperates.

During the first quarter, our team leveraged the flexibility of our network to ensure that we were able to serve customers by helping prepare for this coming demand.

Our rail utilization was at its highest level in years, and we increased UA and barge capacity we.

It also chartered three times, our typical volume of U S. Flagged Jones act vessels to move UA and efficiently to the east and west coasts.

Rail service to some of our customers has become a serious issue in the second quarter and we continue to work through those challenges.

We believe that high crop prices and strong farm income will also drive demand for nitrogen and the world's largest urea export destinations we.

We expect the recent urea tender by India to be the first in a regular cadence of tender activity in the coming months.

We also project urea consumption in Brazil to remain strong in 2022.

We do not see many catalysts in the near term to significantly increase global nitrogen supply availability.

We expect China to reserve resume urea exports in the second half of the year. However, it is unclear how large the volumes will be given the Chinese governments focus on keeping food inflation under control and balancing the environmental impact of coal based urea production.

And we expect Russian fertilizer producers to continue to export but at reduced rates due to sanctions limited internal logistics import outlets difficulty arranging insurance and vessels shipping.

CF industries remained well positioned in this environment, even as natural gas costs in North America have increased.

Natural gas forward curve suggests continued favorable energy spreads for north American producers compared to marginal production in Europe as you can see on slide 12.

Sure.

We continue to work with customers on their requirements for the spring fertilizer application season as weather has largely delayed planting so far.

Farmers have proven that they are able to plant their acres in a short amount of time once that weather window opens.

With that let me turn the call over to Chris Thanks Bert.

For the first quarter of 2022, the company reported net earnings attributable to common stockholders of $883 million or $4 21 per diluted share.

EBITDA was $1 68 billion and adjusted EBITDA was 165 billion.

The trailing 12 month net cash from operations was $3 7 billion and free cash flow was $2 8 billion.

First we reached our long term gross debt target of $3 billion in April after we repaid the final $500 million of our 2023 notes.

This level of debt and the work we've done over the years on lowering fixed charges provides us with financial flexibility now and through the cycle.

We expect capital expenditures to remain in the range of $500 million to $550 million per year.

This estimate includes planned maintenance activity as well as our investments in clean energy initiatives that are in progress with.

We continue to advance the Green ammonia project at Donaldson Bill complex and have placed orders for all major equipment for.

The construction of the Cotwo compression and dehydration facilities Donaldson Blue is expected to be complete in 2024, enabling us to be first to market with a significant volume of blue ammonia once <unk> has initiated.

While we leveraged our existing network to create decarbonize. The ammonia capacity, we're excited to pursue organic growth and blue ammonia capacity through a joint venture with Mitsui.

We believe the investment related to this effort in the next two years will be measured with a feed study beginning shortly.

In 2023.

Nearly 50 50 joint venture will support our ongoing commitment to disciplined investments in the emerging clean energy market and provide supply of low carbon <unk> to support the global transition to clean energy.

Given these relatively modest calls on capital, we expect to have ample capital to return to shareholders through our quarterly dividend and share repurchases.

The board's decision to increase the dividend by 33% was driven by two main factors the more positive outlook for cash generation across the cycle and the significant reduction in fixed charges, we have achieved through debt reduction share repurchases and other initiatives to eliminate frictional.

Costs in the business.

We also continue to view share repurchases as an important way to provide shareholders a return on and return of capital.

During the first quarter, we repurchased approximately one 3 million shares for $100 million.

This represented the ratable portion of our share repurchase program for the quarter.

Based on our free cash flow generation outlook.

We expect to increase the ratable portion of our share repurchase program to $175 million per quarter.