Q2 2019 Earnings Call
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I would now like to turn the presentation over to your host for today.
Mr. Martin Jurrasic, let's see us Investor Relations Sir Please proceed.
Good morning, and thanks for joining the CF Industries' first half and second quarter earnings Conference call I'm, Martin drastic Vice President Investor Relations for CEO with me today are Tony will CEO , Dennis Kelleher CFO , Bert Frost Senior Vice President of sales market development and supply chain and Chris Bohn Senior Vice president of manufacturing and distribution.
CF industries reported its first half and second quarter 2019 results yesterday afternoon on this call. We'll review the CF Industries' results in detail discuss your 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 involve risks uncertainties and assumptions that are difficult to predict therefore actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect your performance may be found in our filings with the FCC, which are available on our website also you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.
Now, let me introduce Tony will our president and CEO .
Thanks, Martin and good morning, everyone.
Last night, we posted our financial results for the first half of 2019 in which we generated adjusted EBITDA of $936 million after taking into account the items detailed in our earnings release.
Adjusted EBITDA increased 23% over the first half of 2018 and 63% over 2017.
Meanwhile, sales volumes have remained constant at 9.8 million product tons in each of the years 2017, 18 and 19.
Weather impact significantly the timing of fertilizer applications, often forcing shipments out of one quarter written into another but sales volumes have remained constant over the first halves of the years.
This really demonstrates the uniqueness and power of the CF industries business model.
Despite the most extreme weather on record in uncertainty and shifting of planted acres by crop type.
Our first half sales volume has been steady each of the past three years ever since our capacity expansion projects started up at the end of 2016.
North America has some of the best most productive farmland in the world.
And it will be planted each year if at all possible. Even then the year like this one.
As it is planted it requires nitrogen fertilizer the only non discretionary nutrient.
This year also demonstrates why quarterly comparisons year over year or less meaningful than the comparability of first half results.
As quarterly volume is impacted by weather, but first half volume remains constant.
Our terrific results were driven by two factors higher year over year nitrogen prices and outstanding execution by the sea of team.
Nitrogen prices increases were underpinned by a tightening global supply demand balance.
We also benefited from higher than normal in region premiums due to weather related logistical issues that limited products supplied some in limbs locations.
Meanwhile, the CF team and I work performed exceptionally well during the first half.
We set an all time record for ammonia production.
We took advantage of our systems flexibility to favor higher margin urea production over U.N., leading to all time record urea production and shipments.
And we leveraged our distribution terminals and our logistical capabilities to reliably deliver for customers.
Most importantly, we continued to work safely.
Our 12 month Rolling Recordable incident rate remained at 0.6 incidents per 200000 work hours.
Despite the high level of activity that included a record 5.7 million product tons shipped during the second quarter.
As we have stated we believe that we will generate superior free cash flow through the cycle compared to most of our global competitors.
As shown on slide six and seven of our deck.
Over the last 12 months, our free cash flow was the industry's best at nearly $1 billion.
It is clear that not all EBITDA is created equal.
Many of our competitors cash from operations is consumed back into their business to keep the lights on and the plants running.
While we converted a significantly higher percentage of ours into available free cash flow.
This efficiency of EBITDA conversion into free cash means.
That although most industry participants equity is valued within a similar band of trading multiples off EBITDA.
Investors in CF industries rewarded with significantly higher free cash flow yield than for any of the other industry competitors.
Why is that important.
Because we use that industry best free cash to increase shareholder accretion in our business.
As measured by tons of nitrogen capacity per 100000 shares.
As seen on.
As seen on slides nine and 10 over the last 24 months.
We have driven approximately 9% accretion for shareholders.
By investing in attractive growth.
Returning cash to shareholders through share repurchases and dividends.
We were also able to significantly reduce our outstanding debt levels at the same time.
We believe that we are well positioned to build on this track record over the next several years as Britt will describe in more detail. There are a number of factors supporting our positive outlook.
First we expect strong nitrogen demand in North America over the next two years as far farmer economics strongly incense corn plantings.
Second the forward curve for North American natural gas remains a very attractive compared to the rest of the world.
This will continue to provide CF industries, a significant cost advantage keeping us on the low end of the global cost curve.
And third we expect global demand growth for nitrogen to outpace net capacity additions over the next four years.
Further tightening the global supply demand balance.
Because of these three critical drivers we see tremendous opportunities ahead for us. So we will continue to support our generation of substantial free cash flow.
With that let me turn it over to Burton, who will talk more about how we delivered these strong results and our outlook for the next few years.
Then Dennis will cover the financial items before I offer some closing remarks.
Bert.
Thanks, Tony the first half of 2019 demonstrated the tremendous flexibility of our manufacturing and distribution system and the skill of CS people.
We shipped 9.8 million tons in the first half, including a company record 5.7 million tons in the second quarter.
Achieve tire prices compared to a year ago and ensured our customers receive product when and where they needed it.
We're very proud of this performance given an extremely challenging spring application season.
Historic flooding disrupted planting applications and rail and barge transportation in many parts of the United States.
Our focus under these conditions was to be a reliable supplier to our customers. We did this in three ways.
First we had strong production at our facilities, including shifting our production mix to favour urea over you and to capture higher margin opportunities.
We also benefited from having inland production sites given the transportation challenges.
Our port Neal, Iowa facility ran very well, which enabled record urea shipments that achieved higher than normal premiums to prices in New Orleans.
Second reposition product well at our distribution terminals in advance of the spring season.
This was critical to our ability to ship 1.2 million tons of ammonia a quarterly record for the company. Despite a limited window for application.
Third we put our transportation flexibility to full use to overcome river closures during the flooding.
We procured extra railcars that enabled us to rail a significant volume of urea from our Donaldsonville, Louisiana facility to Minnesota in order to capture higher margins.
We also secured additional barges that allowed us to focus on river terminals, along the Ohio River, which remained open through spring.
Additionally, we had record levels of truck shipments.
All of this activity continue through July as nutrient applications went much later than normal across the United States.
This is why we didn't launch or UAN fill program until earlier this week.
The latest we have ever done so.
As we look ahead, we believe that industry fundamentals are very favorable over the next several years.
We expect farmers to have a strong price incentive to increase corn plantings significantly in the United States over the next several years.
We believe that the U.S. will have around $85 million planted corn acres this year.
Much lower than anticipated heavy heading into 2019.
Additionally, late planting will lead to lower yields.
As a result, we expect ending corn stocks to be at their lowest levels since 2013.
It should take several years of higher corn acres to return to normal ending corn stock.
Forward curves for North American natural gas continue to be extremely favorable compared to 2018.
And to the rest of the world.
Natural gas production in the U.S. averaged a record 88 Bcf per day during the second quarter, which is almost a 10% increase over the second quarter of 2018.
Supporting continued low natural gas prices in the region.
With Henry hub forward price curves, averaging well below $3 per enemy to you through to 2025.
We expect our production cost advantage to remain robust for the foreseeable future.
Globally, we anticipate continued strong demand for urea in Brazil and India.
We also continue to expect that global demand growth will be above net capacity additions over the next four years given the limited number of projects currently under construction, including none in North America.
The flexibility that we have built into the CS system served us and our customers well during a challenging spring season.
We're looking forward to the rest of the year continuing to work with our customers and preparing for the strong demand we expect in the years ahead.
With that let me turn the call over to Dennis Thanks, Bert and the first half 2019. The company reported net earnings attributable to common stockholders of $372 million or $1.67 per diluted share.
EBITDA was nine and $7 million to $973 million and adjusted EBITDA was $936 million.
There are two items affecting our first half results and I want to highlight.
Our net earnings include an after tax gain of $35 million recognized during the second quarter on the sale of the company's Pine Bend dry bulk storage facility in Minnesota.
Our net earnings also include a previously announced net incentive tax credit of $30 million recognized in the first quarter.
During the first half net cash provided by operating activities was $693 million and free cash flow was $453 million.
We repurchased about 4.2 million shares for approximately $178 million under our current $1 billion share repurchase program.
We also distributed $133 million in dividend payments.
Cash and cash equivalents on the balance sheet at the end of the quarter or $858 million. Since the end of 2018, we have added $176 million of cash to the balance sheet, even as we have returned $311 million shareholders through share repurchases and dividends.
This demonstrates frequently see EPS free cash flow power as Tony described earlier.
Our strong cash generation has provided us the flexibility to repay $500 million in debt on or before its maturity in may of 2020.
It also allowed us to deploy excess cash in line with our long standing capital allocation philosophy that is to pursue growth within our strategic fairway and in the absence of those opportunities to return excess cash to shareholders through dividends and share repurchases.
Capital expenditures for the first half of 2019 were $154 million for the year, we continue to expect to spend approximately $400 million to $450 million.
As we noted in the press release, we expect ammonia production in the third quarter to be somewhat lower than in the first and second quarters as we enter the heaviest period of planned maintenance for the year.
With that Tony will provide some closing remarks before we open the call to acuity.
Thanks Dennis.
Before we move on to your questions I want to thank everyone at CF for their great work in the first half of 2019.
They put all of the capabilities, we've talked about for years into action to enable us to deliver for our customers and to generate strong financial results.
Most importantly, they operated safely.
I also want to recognize the team at our NC UK facility, who won the Steven Our Wilson Excellence in Safety award for innovation that protects people and equipment well servicing high voltage switch gear.
As I close I want to offer a special thank you to Dennis Kelleher on his final earnings call with US as you know Dennis is retiring from CF on September Onest. After eight successful years as our Chief Financial Officer.
Dennis has been a tremendous leader in our company and an invaluable partner to me and to our whole senior team.
As the scale and complexity of our business has grown he's played a pivotal role in all of our significant initiatives.
Our major capacity expansions.
Our capital return program, our M&A transactions, our balance sheet management and navigating some of the most challenging nitrogen industry conditions in over a decade.
We will miss him and wish him continued success Dennis Thank you.
Thanks, Tony appreciate.
As we announced Chris Bohn will be appointed senior Vice President and Chief Financial Officer.
Chris It's very familiar to many of you having led our manufacturing and distribution group for the last three years. In addition to holding other senior roles in the company since joining CF in 2009.
Chris brings deep knowledge of CF in the marketplace to the rule and will provide continued strategic leadership as we capitalize on our future opportunities.
Chris and Dennis had been working closely together the past several months and we expect a seamless transition.
Cfts future is bright.
Our unique and powerful business model has enabled us to generate and return to shareholders nearly $1 billion in free cash flow over the last 12 months.
With our structural and operational advantages along with the favorable industry fundamentals. We see ahead, we are well positioned to drive substantial cash generation and long term share holder value creation in the years ahead.
With that operator, we will now open the call to your questions.
As a courtesy to others on the call. We ask that you limit yourself to one question.
Should you have additional questions. We ask that you re enter the queue and we'll answer additional questions as time allows.
Our first question comes from the line of Adam Samuelson.
Of Goldman Sachs. Your line is open.
Yes, thanks, good morning, everyone running at.
So I guess.
Bertone, Dennis just interested for us just market dynamics as weak as we come out of spring and what.
This quarter in spring has shown about the U.S. marketplace.
Thinking about the premium to urea has kind of captured ticket to UAE and specifically you obviously shifted the production pretty sharply towards urea.
But still it with you and then some more limited export opportunities how do you see that marketplace evolving over the next 12 to 24 months do you just see things rebalancing is people, who can flex to urea and the nitrate premium returning just seems unusual for that to translate to sharp discount on a nutrient ton basis for for a prolonged period of time.
Yes, it's interesting.
Points out the market dynamics and what we've seen over the last several years are those dynamics in play and again back to the creativity and flexibility of the CSS system.
We've seen heavy springs, where we fit applied and fall through we played a lot of ammonia.
In the past fertilizer year being the fall to spring.
Limited ammonia and what was going to happen how were those end tons going to make it to the ground and so when you look at what we've done and what the market has done what we look to future dynamics.
What has shifted these tons has been more weather driven not necessarily agronomic decision, making driven and so we are seeing.
Small shifts overtime, urea UAN and ammonia into urea.
But when they can apply the products they they choose the products as economically or system advantageous for that producer and so that's where you see the balance that we have in our system with all the products that we make all the markets that we have access to all the rail lines pipelines is very good for us.
Specifically focusing on new add on why it is trading at a discount today ended is.
It is I think a reflection of the you anti dumping duties that is force additional Russian tons to come to the United States and during the indecision time, probably additional trinidadian tons to come to the United States.
As well as CF, we have focused on building out.
Greater access.
To the North American market for CF and that has happened. So we have repatriated more tons to the coastal regions as well as additional tanks spacing that we thought would be good for our system, where we had holes.
And then I think what you're going to see over time is as the Trinidadian have a lower.
Penalty rate will probably.
Focus more of their tons to the EU and then we'll see what happens with the market overall worse, we'll still be active in south American some of these other areas that were developing.
So I think.
Right now, it's natural that you and would trade at a discount to urea I think over time as it balances will come back into we anticipate you'll tend to trade at a parity or even a premium and the interior spreads that you mentioned this is something we have articulated year. After year that we believed that that was something that was structural to the United States and achievable as well as maintainable and this year, we prove that in spades for these expansions just went way out and we profited from that.
Adam I would add to that kind of what what Bert was saying I think one of the things that the EU anti dumping.
Duties did is it.
It led to some globally inefficient behavior. So you've got a set of new producers that are basically running full that on a on a purely economic basis ought to have been shut down.
Where at least largely curtailed so that the lower cost Russian and Trinidadian tons and even our tons.
Good of backfield into that marketplace, but sort of the real kind of irony I guess on all of this is.
What you've seen is UAN prices to the European farmers and particularly the French.
Farmers has gone through the rough.
And you and pricing in the rest of the world has been relatively maintained and so what Brussels really did is put a huge tax on the European farmers and turn it around and giving it to the inefficient European producers.
Some of which around ironically by Russian entities, so they've kind of tax the French farmers and follow the money back into the Russian oligarchs pockets. So it's kind of a.
Weird twist to the way that works, but.
Yes, Bert said, we've got a lot of.
Different levers to pull and we're navigating it as best as possible.
Thank you. Our next question comes from the line of Joel Jackson of BMO capital markets. Your line is open.
Hi, good morning team.
A question about ammonia.
I think that.
Feeling was I think a milling inventory there are higher and the country and so I think the play was to be exporting a lot of ammonia in June into July and August gas exports higher netback excuse me lower netback. Your ammonia netbacks were incredible in the quarter Q2, because of the Midwest and then premiums how should we think about that export dynamic how you're dealing with it and sort of the convergence of maybe some lagging him and premiums.
But also having to export.
Lower net back thanks.
So when we look at ammonia, we look at a balanced.
Portfolio always and so we're constantly.
Focused on the highest netback, which is our AG business and you see that we did very well in the team executed extremely well.
Part of that is in the preparation of where we placed the tons on utilizing our terminals and our logistical capabilities part of that was Chris and the plants running extremely well and so we were prepared I'm not sure if our.
The other market participants, we're as prepared as we were.
And so we did execute and did achieve very good netbacks.
But look there is a system when you look at the total consumption of ammonia per year on a fertilizer year fall to spring, it's around four to 4.4 million tons of ammonia.
And from fall, we knew that know that number was low and now we expect that the spring number was also lower than normal. So there is less or there was less ammonia consumed.
And so of all of our systems that the inventory that's higher than normal but manageable.
And we believe we executed extremely well based on that industrial export AG and then spot sales during the quarter positioned us to get to fall and then participate in that ammonia season.
And capitalize on it we will be exporting we have exported we exported more on a year to date basis than last year and like you said thats to be expected, but I don't see that significantly.
Higher.
And so premiums are good market is good and we expect good things for this fall I mean, I think the other thing I'd add to that Joel is.
As Bert said, because the ammonia system ran so well and we set an all time production record first half.
We're really pleased with the volumes that.
The team got down on the ground from a from an AG perspective, because ammonia still represented a great value to farmers compared to on a nutrient basis compared to ammonia.
Are you weigh on in urea.
But.
Historically Q3 is always our lowest volume and typically lowest price quarter for ammonia and then when you get back into the application season. In Q4, you see more of that AG business come through again, and so I wouldn't expect that to be anything different this year than than it is in every other year.
And as Bert said, we've got.
We've got the right plans in place to be able to manage the inventory. It also helps that we're entering the period of the year, where we've got the most planned maintenance and some downtime and so the combination of some incremental exports. Some some of the industrial business that we've.
Taking on as well as the the planned maintenance.
We feel very comfortable with managing the inventory situation.
Thank you. Our next question comes from the line of Christopher Parkinson with Credit Suisse. Your line is open.
Hi, Good morning. This is Harris fine on for Chris.
Just given the current energy price deck and construction costs can you update us on your views on on brownfield versus Greenfield economics for both.
US and global players. Thank you.
Yes, I mean I think.
What you see is in limited locations, it's actually isn't as.
Labor cost and your ability to lock in.
Fixed costs labor is as important if not more so in some cases than absolute gas cost.
Is that you'd expect new capacity to be added where it is being added so places like.
Nigeria, Iran and Russia.
Other places, where you can actually get fixed labor cost and.
In a place like that.
Current economics, if you can get reasonable gas costs and manage with.
Manage the political risk situation.
I would expect there to be some level of build in those in those locations and I think you've seen kind of that.
Those announcements here in there, including people like Eurochem and others.
Looking at incremental units I think the challenge in North America is that.
The labor cost because its on a reimbursable basis and not on an LSW teekay basis, no one is willing to take that risk.
Is that urea prices would have to rise quite a bit over where they are today for someone to really.
Take a serious run out at and if anyone is talking about it or actually thinking about it just means they're completely inexperienced in terms of dealing with major construction projects over here or.
We're just not that financially astute because we just don't see.
The current.
Price deck.
Being supportive of new build here in North America by the way if you find someone that wants to build we will sell them will plant for the cost of new construction.
Thank you and our next question comes from the line of Vincent Andrews of Morgan Stanley . Your line is open.
Sorry, I'm still I'm still laughing at that.
[laughter] sincere offer of it.
Hi.
I believe it.
Anyway.
So my question is.
We've seen Chinese exports.
Pick up year to date and on one hand, that's a good thing because obviously you need at higher prices in order to get the exports out of the country, but on the other hand.
Chinese production is supposed to be declining for environmental reasons, and so forth. So how do you reconcile those two things and do you have any visibility on.
How much other shadow capacity might be there and sort of what incremental prices would be needed to get it out or just in general how you're thinking about the market.
I'll give you the general and then let Bert kind of dive into more of the specifics and I I think what you're seeing is.
Based on where coal prices are we absolutely believe that Chinese coal based capacity as the marginal production capacity globally, particularly given where gas prices in Europe today.
And.
And so we do think that there's a fair bit of capacity that gets campaigned and.
It runs for a portion of the year or runs at slightly below 100 somewhat below 100% rates per person.
Horses.
Portions of the year.
And so what.
Thats why theyre operating rates, depending upon what publication you look at and what the denominator. They use is somewhere in the 60% to 70% range. So we do think that there is.
Fair bit of capacity that can turn on and economically we'll turn on when and when it's profitable too.
To export.
And so.
I do know that there is a sort of the bear thesis out there that says.
Upside in.
Pricing is somewhat limited because of this overhang or this shelf of capacity and.
Say.
Yes, there probably is some truth to the aloxi urea going back to $450 or $500 anytime soon I. Just you know I think that bid and way too many plants in the in room and people can find a way to.
To make.
Reasonable money as price comes up but the price indication from.
Via deed in that production in India, China, and the world really needed those tons and I think it was our first half results indicate.
Even if price doesn't go up dramatically, we're very comfortable operating in this sort of environment, we can generate a lot of cash and.
I do think.
Our view over the next four years is a somewhat tightening SSD balance going forward, which means that we don't see prices retreating versus where they are today, they may not double but they're not going to retreat and so I think.
The the overarching view is.
I think China will be there to export when the world demands those tons it will be sort of flywheel that the gears up or down depending upon where global demand is and.
And it's really going to be cost curve, driven because they're much more economically.
Our acting in a much more economically rational way now for you guys just some.
Key points about that issue is that five years ago, where China was producing 70 172 million metric tons to today at 52 million metric tons.
They do have a domestic consumption base, which is the largest in the world of approximately 50 million tons of what I would say 48 to 50 million tons and so the disposable incremental tons that will be explored it has been consistent and the numbers that we've been talking about the last couple of years of two to 3 million tons and this year that looks to be three to 3.5 million tons on a global exportable ton of around 45 million metric tons.
You are talking about an additional million tons and so I don't think.
It's no fun being a marginal producer in the United States used to be in that position and the early two thousands and so I don't think they can gear up a system to be a major export when it's idled a portion of the year.
And let's not forget that a portion of those tons that are being exported today are Iranian tons and so many panamaxes have been loaded in Iran and.
Discharged that's a loose word into China, and then re exported or mood reflagged to other locations and so I'm not sure all of that 3.5 billion tons is really Chinese.
And so if that is the case and let's say a million tons of Iranian product has been moved and then we're still back to that original thesis of two to 2.5 million ton.
And Thats digestible by the international market.
Thank you. Our next question comes from the line of Don Carson of Susquehanna. Your line is open.
Thank you I just want to go back to the very high end market premiums. We saw this year recall seeing what you sold some product out the gate at Port Neal for 401, no. It was below 300.
Does that become a headwind next year on the on pricing along with somewhat lower gas costs offshore. So could you quantify what that in market pricing benefit was to you in EBITDA this year.
So we did experience a very nice position in our end market premium and.
What we're seeing over time is like I said earlier that premium expands and contracts and so it has maintained over the years with this new capacity because we're an import market.
And you are bidding in tons that have freight and have costs and so as you have difficulties moving tons, whereas you have delays or advancement of the season, let's say we have an early season next year those those issues come into play and come into value.
You're exactly right in terms of a tailwind on gas gas has been as low as 215 on Henry hub and on a basis weight. That's below that's actually very cheap in Canada and the some of the places that we produce like in Oklahoma. So those are Tailwinds I don't necessarily see this issue as a headwind in terms of the end market premium.
Don't you get something to execute I mean, I think Don in that regard the U.S. remains.
Import driven marketplace and.
We need to attract still a fairly sizable amount of tonnage coming here, particularly when when birds team is exporting out of deals even requires more tonnage coming this direction and.
It's always a question in terms of where those exporting regions go with their tons. They are looking for the best netback and so.
The us has to bid those tons away from India from Brazil from Europe from other places in order to get them here and then someone's got to get them into the marketplace and what we've seen.
During periods of time, even during a fairly what I'd call normal operating conditions is you get some spikiness in market.
Depending upon.
The particular year in question and it has to do with availability of product when and where people are applying and planting because theres a high urgency factor when when they're doing field work and so that's one of the benefits that we have with.
The end market plans and the distribution network that we've developed which is we typically can.
Capture some of that when when it pops up it just happened this year it was a little bit more prolonged but we've had river issues in the past we've had rail line embargoes on some of the major rail carriers other things like that that have created these kind of opportunities on a more spot basis. This year I'd say it was a little more widespread but that is kind of the power of our system, which is we can capture that when when the opportunities present themselves, yes down. The other thing I'd add is you asked about the cost curve can you think about lower gas price internationally and lets just focus on LNG and western Europe .
Western Europe is not the marginal producer and I think that we that's proven by the fact that it's taking high prices that we're seeing currently to bid tons out of China. They are produced by coal people.
Coal based manufacturing.
So that really hasn't changed much and I think if you look at our slide.
And in the deck, you will see that the cost per ton of ammonia whether choosing.
Whether you're using anthracite coal in China, which is basically the marginal producer today or TTF gas on a forward basis average for the year.
Yes, we still have a very substantial cost advantage and we expect that to be maintained the gas prices. We saw earlier in the year in western Europe like $4 ourselves at our plant Gate I think if you think about into the great Britain, the marginal MB two being seaborne LNG.
At $4 plant gate, our plants, it's very clear that in that value chain. There are people, who are not getting paid and so we don't view those prices as sustainable Andy If you look at the forward curve in fact, it rises quite significantly above that.
Thank you and your next question comes from the line of Mark Connelly of Stephens. Your line is open.
Thank you.
Tony a couple of quarters back you commented about non U.S. producers, making some sub optimal decisions about where they were shipping and international parity.
And clearly since that time the opportunities into the U.S. haven't been that good but as as things normalize do you think we're going to continue to see producers favored the U.S. over markets, where they might have better economics.
Yes, Mark I think in a lot of cases, the U.S. acts as a little bit of a clearinghouse for some of the tons where there's.
Timing.
Differences between when Theres enough inventory for exporters to send it out and where the demand regions actually need to consume it.
So I think that during those shoulder periods no level, probably trade at a bit of a discount to the international parity just because there is not that much demand in some of those regions.
And I think Theres other times of the year, where no one is going to trade.
At.
At at parity, if not a bit of a premium.
If there is high demand periods like like we saw earlier this year.
I also think that trade flows are realigning a bit better.
Than where we were a couple of years ago I think there were an awful lot of.
Traders importers in the us that really lost a lot of money over the last couple of years and I think you've seen a number of the big names dramatically scaled back trading operations and some of that activity.
In response to that and I think there's just more discipline because the people in that channel that are taking inventory positions.
It's not it's not to their benefit to see prices fall. After they've already committed so I think people are being a little bit more responsible about the volume of tons that are bringing in and the inland price back to the earlier comment from from Don It wouldn't surprise me to see a little bit of a gapping out between inland price them and NOLA prices. Just if you end up with no love being kind of again the liquidity clearinghouse for the world.
During periods of time I don't think you will see that price necessarily reflected back inland because.
You don't have.
The.
The the bad behavior that existed before so I think theres a lot more rationality, taking place and Thats a good thing.
Thank you and our next question comes from the line of Steven <unk> of Bank of America. Your line is open.
Hi, This is actually Luke washer on for Steve I wanted to touch on the farmer and North America did you see a shift in ammonia applications. The side dress. This half and growers do you think growers applied more than normal perhaps due to wet weather anticipation for some that would be lost and just general commentary on if you saw any changes in the farmer behavior compared to last year would be appreciated as well. Thanks.
So regarding.
North America, Yes, we did see shift to side dress and we had ammonia going out in the July four side dress.
So the change in behavior was that was a behavior driven by.
Economics, as well as weather and decision, making there comes a point in time, where you have to plan and get your seed in the ground no matter what crop replanting.
And when.
I state as well as I guess, even northern corn states.
Our trying to put seed in the ground.
Mid to late June you better have the nitrogen there and ready to go what happened was they came to the point, where you could do a preplanned application wait and then plan they had to get the seats. So you.
We saw a lot of movement.
Late in June and early July of ammonia.
As side dress on once you had emergence.
And so.
Did they apply more no I don't think so and we can see this from.
Some of our own crop inspections and work with other people and just.
Information on how much and was applied.
On average and some of the places that we watch and you're seeing that hold to historical averages.
The interesting thing for me is going to be yield.
You Sta still projecting hi acre number as well as a much higher yield number that we think is possible and I still think there at 166, and I think you'll be lucky to be at 160, and it's going to significantly impact the stocks to use ratio.
Coming into this harvest season and so.
We also harvested acres, where I mean, there was 91 and a half where do you think thats what were our internal numbers, probably 84 $85 million.
And so that's what's really still to play and again getting back to the nitrogen what was applied and up and was taken up by the crop will be represented in yield.
And so we'll see we'll see but I don't think more was applied this year than any other year I mean that the other.
I think point to highlight is the side dress of ammonia extending out is not unprecedented before we've had kind of late wet springs, and you see ammonia application on the side dress that through the ice states in particular that is moved out through.
June into July and as Bert said, if you look at the total amount of nutrient tons that went down.
It is more reflective of the kind of numbers that were thinking about from acreage not.
Quote unquote over application of nitrogen in anyway.
Thank you and our next question comes from the line of Ben Isaacson of Scotiabank. Your line is open.
And then your line might be on mute.
Good morning, Hi, can you hear me now.
Yes. Thank you I just a quick question on ammonium nitrate I noticed your volumes were down year over year and everything else was was so strong was that deliberate and maybe you can just talk a little bit about how that market's doing right now.
When you look at ammonium nitrate for CS we produce in the UK as well as the Yazoo City and so as we talk about flexibility. This is now on the North American side Yazoo City, Mississippi. The flexibility we have at that specific site is we make agricultural grade ammonium nitrate industrial grade ammonium nitrate nitric acid you a in ammonia and yes.
So it's a very versatile plan for us and so.
During this period, we saw some opportunities and some of the other products that.
We were able to segment and then move tons to that direction.
The other side is the.
UK assets, we have two plants, there that are that make ammonium nitrate and NP case.
And in that side of the business, we focused less on exports and decided to produce at a different.
Mix, we also make ammonia at that location or.
I make and sell ammonia at those locations and so that was a little bit of the balance change, but not I don't think it was a big shift.
Yes, and I actually think of first half volume was was up not down so.
As soon as Q2 that was down but overall it was first half was up and again, we really think about this business and has not in quarters.
Because I think that there was pretty good shipment and you know in Q1, we'll engage their AG season started Berlin early so.
That think about.
Half snack quarters.
Thank you. Your next question comes from the line of PJ Juvekar of Citi. Your line is open.
Thank you Ben is first of all congratulations on your retirement thanks.
You know I would comment than a question. My comment is first of all kudos to you guys, but executing in this difficult environment.
I mean, how could you urea volumes go up.
If you have 10 million RIN blending acres.
And so I will do to us so what that farmers couldn't get the practice out.
You know the on the you have volumes you saw do you think that was applied on the ground or do you think some of it is sitting in some of the bins.
And distributors.
And then secondly for Tony.
With your strong free cash flow any any thoughts on M&A possibilities.
So first of all thanks for the.
You know the comment.
I think the whole team did an outstanding job this spring and and.
You know, we we do well when things are good but really when is challenged when there are challenges out there is when the flexibility the network really and the capability of the people really shine.
Barry you want to handle that.
The urea did it go down or inventory question. So in looking at the whole system, obviously were up quarter on quarter six months on six month and feel very good about that again. It goes back to a lot of the discussion that we had in the prepared remarks and as well as some of this Q today, the whole issue of preparation and when it became apparent to us that the ammonia season would be challenged we called in extra railcars, we had already gone to maximum urea with an interesting side note that we didnt realize was how do you move all that urea just from the plant to the.
Logistical asset barges railcars and I give the team a lot of credit with coming up with creative ways working with Artko, our barge supplier to fleet as well as power enough barges and get extra margin capacity. So we started working on this in April and with a flooded river or at least the high river at that point slowing barge movements.
We focused on getting those barges up into places, where we could unload them and not send them up to St. Louis where they thought they would be embargoed and they ended up being so but another side note is we had a record truck shipments. So another issue to work with our customers and truck providers.
We had urea during the peak of demand we know some of urea. Our urea went 1200 miles to meet spot demand and is means trucks are driving a long distance. We designed the port Neal facility to load up to 10000 tonnes a day by truck and that happen. So when you take all of the individual movements in totality as well as building inventory from Q1 to Q2 on purpose that set us up to be in place and back to how we executed and achieved some of these record high prices and premiums because we were a supplier that had product that could deliver on time and but I think PJ. Your question about did it go to ground versus is it sitting in a shed some place.
Our experience with you weigh in.
Which is the.
The vast majority of product that we shipped out in July was for prompt.
Delivery and application, which is why we didnt launch the UAE unfilled program until just earlier this week, because we were still seeing.
Demand at spring pricing level.
Indicates that people weren't stuff in this.
Product into into bins and and tanks.
Because typically there is a price reset when you leave the application season and move into the shoulder season.
So all the stuff that we were selling through.
Through June and even into July was that spring pricing, indicating to us that all that was going to ground. There was no. One that was going to put that stuff into into a warehouse because that the long hold period for relatively firm pricing our channel checks for urea and UAN in ours as well as.
Our customers is low.
And we believe that that's represented like you just said Tony on.
All this immediate demand.
But you just talked about for you and with the same issue for urea.
We do think based on.
No knowledge of barge and barge loadings and that there is a high level of P and K in the market, but not of urea or UAN and especially on the river.
And in PGS on your second question around free cash flow and how we think about that.
We we have a very very high.
A conversion rate of EBITDA into free cash on this asset base and.
And so it puts a high bar out there for us in the way of acquisitions, because our focus really is.
You know cat.
Cash flow per share, that's what we want to drive accretion on and.
And so are we interested in growth absolutely are we interested in M&A sure.
Does it have to be accretive on a cash flow per share basis. After we're all said and done it absolutely does so we're looking at things, but if it doesnt pass that test that we're not going to executed and by the way. We've got great. Other options, which is you know a share price that yields a free cash flow yield that is still two to three times better than anybody else in the space. So I think we've got a long way to go in terms of our own share price and we don't we don't feel like there's a gun to our head that we have to go and do something that is dilutive.
Thank you and our next question comes from the line of Duffy Fischer with Barclays. Your line is open.
Hi, Good morning. This is stronger margin on for Duffy. Thanks for taking the question.
Just real quickly could you maybe give us your take on how we should start thinking about your overall volumes in the back half year in 2019.
Kind of given the late start planting and maybe the potential for a late harvest.
And I know you mentioned kind of your 2019 view on corn acres, and I know new trend kind of peg.
Next year's corn acres around $95 million curious if you had to view there. Thanks.
Yes, I mean, I think on the Duffy on the tonnage. If you just look back the last couple of years, we're sort of between 19, and 20 million product tons, given sort of what the maintenance schedule looks like in the particular product mix, that's not a bad estimate because we basically are as long as the plant turned down for maintenance.
They are running 24, seven and over the course of the year, we we ship what we make so.
Just like the first half of each of the last three years, where we had been a $9.8 million. The back half has been relatively consistent as well so I think thats a pretty good.
You know.
Got guide for for what the volumes are going to look like second half.
I'm pleased with our order book I think we're in a good position with our products were in good position.
With managing inventories in the production rates, we talked about ammonia being a little high but we have so many options at our disposal that I agree with you Tony that that we'll manage to what the market demand. However, I think your point on a late harvest.
It is interesting I was just in Canada last week, and then driving through Michigan, and Ohio and did some walks and runs as I go through for corn fields, and I was shocked and what I saw with knee high to waste high and.
The field the need of nitrogen and not that many heat degree days left so the likelihood of having.
And that's driven by a heart by Frost date, and if we were to have an early for us to do you're not going to see maturities and so that product can be cut for a silo Georges will be a low yielding so the late harvest it depends on dry down and then how much people want to spend on propane.
And so the 2020 acres were bullish I think 95 is as a low end.
And don't want to give a higher end, but when you look at stocks to use ratios, where we are we're back to 2013 type levels, where corn was up to $7 now corn today is trading in the 410 range. So what could corn go too, but I think it's going to go up but it's going to be I think people are waiting to see on these harvests result acres results, but it's a positive economic proposition for a farmer today to focus on corn for 2020, and those acres will be available and especially the acres that weren't planted on the preventive plant or the silence acres. Those we planted early so you're going to see ammonia going down I think just as we do normally and if we have a late harvest or in dry down and.
We have ammonia generally always applied in December that can happen again, I mean, I think it's also fair to say that we're probably more bearish on both yield and acres than than you sta or in fact than a lot of people are so to us that says acres next year both both.
Corn price, where it goes off the board this year after harvest and and acres next year going to be in our opinion stronger than where the market is putting pegging. It today.
Thank you and our next question comes from the line of Andrew along of RBC capital markets. Your line is open.
Hey, good morning, So I guess just following on to that.
Sounds like from your commentary, we expect pretty strong nitrogen demand in North America over the next several years not just next year and.
I mean, it's pretty clear next year is going to be a really big.
Corn acreage year, but I'm curious about your thoughts on how the crop balance sheets and the pricing changes over the next several years given your confidence on providing some of that guidance. So far thank you.
Yes, I mean, I think when you look at stocks to use down in the mid single digits, which is where we believe there.
It's going to end this year.
That you need 95, plus acres just to get back to where you began this year, which is also a relative low and so.
We had this year at least initially.
You know intentions be inserted 90 to 93 million acres in and I would expect if next year's 95, you are probably back in the 90 to 93 the year after because I just think.
It is the price signals are there I also think.
We expect ongoing and continued weakness in beans, and whether that's because African.
Swine fever, calling of.
The Hong population or ongoing kind of trade concerns or just other related issues and also bumper yields and other growing regions on the bean side.
I think you end up with very very strong incentives on.
Certainly a mid term basis short and mid term basis for farmers.
To grow corn and so were.
That really is the backdrop against our bullish view of of corn and also.
Nitrogen demand in North America for you guys.
No I agree I think your numbers, you're spot on and where you see a positive market.
Thank you and our next question comes from the line of John Roberts of MBS. Your line is open.
Thank you and congrats to Dennis as well and also the Christopher.
I wanted to go I wanted to go back to your earlier comment that prices are not high enough for expansions was that directed just towards greenfield since nutrients announce some small expansions recently and I would guess your new plants have some pretty low cost incremental debottleneck opportunities.
Yes, I mean it clearly.
What I was talking about John with respect to expansions are.
Putting in a whole new.
Ammonia urea complex not incremental de bottlenecks, because I think generally speaking once you've got the infrastructure in place to de bottleneck is going to have much favorable.
Economics.
Two.
To building a whole new plant and it was really whether it's a greenfield or brownfield building, a new ammonia plant and then upgrade facility, but we're certainly evaluating.
Similarly, debottleneck opportunities and additional flexibility I think this year in particular highlights the value of.
Product flexibility in the more the more levers bird can pull in order to manage what the product slate mix looks like the better off our returns are and given our strong cash flow and ability to.
Invest some of that into some high return projects that that add flexibility to the network, but are still fairly low cost in terms of the scale of the new plant is a great. It's a great returns. So we're looking at that kind of stuff too.
But most of that can be accomplished within the framework of our normal capex budget. When we say 400 to 450 that includes some growth capital in there and.
I think thats, a pretty good number for us going forward and gives us some.
So some upside in terms of.
Both product mix flexibility margin and absolute tonnage.
Thank you. Our next question comes from the line of Jonas Oxgaard of Bernstein. Your line is open.
Hi, good morning, guys.
We early on you talked about the economics of new plants and the.
Completely agree that the economics for urea plant doesn't really make sense today.
But.
But we're also seeing is LNG prices have fallen so much in urea is now the most profitable use of natural gas.
And so two part question.
Are you seeing any indications from places like Trinidad that they're going to allocate more natural gas toward urea over LNG. So reversing the trend for the last several years.
And second what do you think the risk and outlook is for.
Okay. Good luck, you ran or Trinidad to sanction urea just to find the least add version to get rid of that we're trying to export their method.
Yes, I mean I think.
Trinidad in particular.
Has had some challenges with respect to.
Gas availability at the low cost that they.
You know had a promise long term contracts on and so and most of those Caribbean based contracts have come up for renegotiation.
They've been reestablished at you know a fundamentally different kind of profit sharing as well as floor price than than initially envisioned.
And it's not clear to me that there's enough new gas available in terms of the supply price that they are willing to offer that would intent.
Capacity going into Trinidad again, I think that you are much more likely to see that into places like.
Nigeria, and and Russia, and and so forth.
Relative to if there is some sort of.
A reallocation of the hydrocarbon molecules in some of those regions. So that they can generate more tax.
Revenue I think you don't have to look very far to figure out that the returns on on urea are far superior to methanol today and if there was going to be some sort of as you say embargo or whatnot I think you'd see.
Some rationalization of.
Methanol operating rates in favour of urea, but there aren't.
There aren't a lot of urea plants in those regions that are sitting idle today everything is running full launch. So it's really more of a four year fix because you'd have to build a new ammonia urea complex and.
Now.
But that's a long time in the future to be looking at that you certainly could go through a methanol cycle that reverses course in that time horizon. So.
No that's not one of those things that we look at in our terribly worried about.
Thank you and our next question comes from the line of Michael Picken of Cleveland Research. Your line is open.
Yes, Hi, just wanted to touch base a little bit on.
I ran and your expectations for 2019, Iranian exports and today, sending a lot of product into Brazil. We had heard so just your thoughts there and how you see the potential for.
Exports trending not just this year, but over the next couple of years, depending I mean, our.
Morning.
Michael I think look I.
Our view has always been that theres too much money at stake for those those plants to run or not run.
That theyre going to run and they're going to find some way to get those tons out whether its sentiment, China and re export them send them direct to India, or Brazil, and Bard or do something in the way of an exchange.
Our view is those those plants have been running and will continue to run and I think the only time, where you may see any sort of upset in that process is.
If.
If they go down for maintenance or turnaround issues and are not able to get either technical support or.
The catalyst or are the critical vessels to to bring them back online.
And so I think thats really where you might see a pressure point, but that's that's a little bit longer wavelength thats not.
This quarter next quarter I Wouldnt anticipate so I think those you know those plants have been running that continued to run for you.
Yes, just the there has been the various behavior you've seen these tons as Tony mentioned for a price people do.
Certain things and those prices have been low so they are not very attractive business for the Iranians.
But they have been creative in bartering reflagging re exporting from China.
And I do think there tonnage will be lower as a result at these sanctions continues.
But they have been creative so far.
Thank you ladies and gentlemen, this is all the time, we have for questions for today I would like to turn the call back to Martin Jurassic for closing remarks.
Thanks, everyone for joining us and we look forward to seeing you at the conferences over the next few months.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.