CF Industries Holdings Inc (CF) — Q4 2018 Earnings Call Transcript

Good morning and thanks for joining the CF Industries 2018 full year and fourth quarter earnings conference call. I'm Martin Jarosick, Vice President; Investor Relations for CF. 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 full year and fourth quarter 2018 results yesterday afternoon. On this call, we'll review the CF Industries results in detail, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about the 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. Last night, we posted our financial results for 2018, in which we generated adjusted EBITDA of $1.4 billion, a 45% increase over 2017 adjusted EBITDA of $969 million. These results reflect a backdrop of tighter global nitrogen supply-demand and generally lower North American natural gas prices. But it was the hard work and outstanding execution by the CF team that allowed us to capitalize on the market conditions. Even though it was the efforts of the entire CF team that delivered these great results, I want to highlight Chris’ and Bert’s organization in particular. Let me call your attention to slide 7 of our materials. This data taken from an analysis conducted by CRU indicates our superior operating performance. We've talked about being great operators in the past, but this may be the first time we've quantified the impact for you. We've been able to achieve a 10% greater utilization in our ammonia plant production than our North American competitors. Based on the size of our network, that translates into roughly 800,000 tons of incremental ammonia per year that we produce versus what our competitors would be able to do with a comparably sized asset base. Or said another way, we basically have a full additional world-scale ammonia plant worth of production every year based on our operational capabilities. Given that a world-scale ammonia plant in North America would cost over $1 billion, our operational expertise is a significant competitive advantage. On the supply side and on the supply chain and marketing side, we realized higher selling prices across all products year-over-year. We also achieved lower costs of goods sold for the year. This execution across all parts of our business enabled us to generate an increase in adjusted EBITDA of 45% versus 2017. We operated well and most importantly, we did so safely. We ended the year with a recordable incident rate of 0.6 incidents per 200,000 hours worked, and we accomplished that despite a very heavy turnaround and maintenance schedule. I am really proud of the CF team for a truly fantastic year. Looking ahead, we're excited about 2019. As Bert will explain in a moment, we see a continuation of the favorable market conditions from last year. Based on January and February, actual gas costs along with the forward strip 2019 gas could be lower than 2018 by almost $50 million. Additionally, year-to-date index pricing at the U.S. Gulf for major products as reported in the publications is also running ahead of last year, and we anticipate a substantial increase in nitrogen demand in North America given our expectations for increases in both corn and wheat acres compared to last year. All of that suggests a strong first half of 2019. Weather will have a big say as to if that materializes in the first quarter or the second quarter. But either way the first half in total should be strong. The second half of the year is always a reset and therefore somewhat uncertain as we sit here in February. But, we continue to be bullish about the long-term trends that extend out to 2022 and beyond. New global nitrogen capacity is growing more slowly than demand, further tightening supply and demand. And the forward curve from North American natural gas looks really attractive compared to the rest of the world. So our story is more than just about a great opportunity in the first half of 2019. We are very well positioned for the next four to five years. In 2018, our business generated $1.5 billion in cash. We deployed that cash consistent with our longstanding capital allocation philosophy. We invested in sustaining and improving our existing assets. We grew by acquiring the previously outstanding units of Terra Nitrogen LP. We paid our regular dividend and we returned our excess cash to shareholders by announcing and then completing a $500 million share repurchase program. As shown on Slide 9 of our materials, the share repurchases by themselves should drive roughly a 5% accretion in 2019 over 2018. We closed the year with almost $700 million in cash on the balance sheet, and given our positive outlook for the next four to five years, our board has authorized a new $1 billion share repurchase program that runs through 2021. In addition, we again reiterate our commitment to retire the $500 million in debt honored before its maturity in May of 2020. With that, let me turn it over to Bert, who will cover our market outlook and then Dennis will discuss our financials before I return for some closing thoughts.

Thanks, Tony. The CF team performed well throughout 2018 with total sales of 19.3 million product tons. This included a record volume of urea and near-record volume for UAN. Ammonia sales while benefiting from higher prices were notably lower in 2018 compared to 2017. This was due both to a higher number of plant turnarounds in 2017 and a fall ammonia season negatively affected by poor weather. Global prices reached 2018 highs in October. Since then, they have been under pressure; first due to moderating energy prices in Asia and Europe, and then due to seasonally low demand in the northern hemisphere. We believe that as demand begins to materialize, industry fundamentals will support global nitrogen prices in 2019. As a result, we see substantial opportunities to build on our 2018 performance. Net global urea production capacity additions are projected to be modest for the year at approximately 3.5 million metric tons. Additionally, we believe global nitrogen demand will be solid in 2019. Most notably, we expect strong nitrogen demand in North America during the first half of the year. The new crop soybean to corn futures ratio favors a substantial increase in corn plantings in the United States, which are projected to rise by 4 million acres to 93 million acres in 2019. We also expect a 1 million-acre increase in wheat plantings. These acreage shifts should drive incremental nitrogen demand in North America. Additionally, the poor fall ammonia season supports further incremental demand; areas that did not apply ammonia in the fall will likely need to make up the resulting nitrogen deficit in the first half of the year with applications of ammonia or upgraded products in the spring. With the demand outlook in North America, we anticipate barge, rail, and truck logistics assets will be in high demand and priced at a premium through the second quarter. As we look ahead, we expect sales volumes to increase compared to 2018. In any given year, CF is around 19.5 million product tons, which can be higher or lower based on turnarounds, maintenance inventory levels during the year, and product mix. We also expect to continue to benefit from our access to low-cost North American natural gas. We weathered spikes in the fourth quarter well, and the forward curve looks favorable. We continue to benefit substantially from basis differentials, particularly in Oklahoma and Alberta, and are actively managing our natural gas requirements purchasing forward to lock in basis differentials to remove near-term price spike risk. Each of these factors make us optimistic about 2019. We're well positioned for this environment. We have demonstrated our ability to effectively leverage the flexibility of the CF system to navigate market conditions and we're confident in our ability to maximize our overall margin through the year and into the future. With that, I'll turn the call over to Dennis.

Thanks, Bert. The company reported net earnings of $49 million or $0.21 per diluted share and EBITDA of $349 million for the fourth quarter of 2018. After taking into account the items detailed in our press release, our adjusted EBITDA was $341 million. As the global nitrogen recovery has taken hold, our cash generation has increased in turn. This has allowed us to deploy excess cash in line with our longstanding capital allocation philosophy. As you can see on Slide 6, net cash provided by operating activities is approximately $1.5 billion in 2018. We used $422 million for capital expenditures on sustaining and improvement projects. We also invested in growth by purchasing all of the publicly traded common units of Terra Nitrogen in April. It also enabled us to return $780 million to shareholders in 2018, which included $280 million in dividend payments and $500 million in share repurchases. The repurchase program reduced our share count by approximately 11 million shares. As you can see on Slide 9, taken together, these have increased shareholder participation in the underlying assets of the business by approximately 5% or 2 tons of nitrogen for 1,000 shares compared to the end of 2017. As we look ahead, we believe we will be able to build on this track record. We ended 2018 with ample liquidity. Our cash and cash equivalents were about $682 million and our $750 million revolving credit facility was undrawn. We expect capital expenditures in 2019 to be $400 million to $450 million. And as Tony explained, we also expect substantial cash generation in the years ahead. As a result, the board approved a new $1 billion share repurchase authorization to the end of 2021. We also remain committed to repaying $500 million in debt on or before its maturity date in May of 2020. With that, Tony will provide some closing remarks.

Thanks, Dennis. Before we open the call to questions, I want to again thank all of CF’s employees for their outstanding work in 2018. Their commitment and dedication drives everything we achieve as a company. We're proud of what we accomplished in 2018 and we're looking forward to the opportunities we see ahead in 2019 and beyond. We're well-positioned to leverage our considerable strengths and take advantage of the favorable industry fundamentals we see for the foreseeable future. We expect to drive our substantial cash generation capability and we can enable us to continue to create long-term shareholder value. With that operator, we will now open the call to questions.

Yes, hi good morning. I just wanted to find out a little bit about your thoughts on the Magellan pipeline, potentially being shut down and what that means longer term for both your business as well as the future for ammonia?

Yes, thanks. Regarding the Magellan, we are disappointed, but not surprised by their decision to shut down the pipeline. They've had operational issues for the past several years which has challenged them to support or shift the tons of wheat we've wanted to move up in the upper Midwest. We ship about 4% to 5% of our ammonia on the Magellan. Kind of projecting what we thought would happen, we've been working with our system, with our team to create options and different avenues to move our tons up into that market. One is barge loading out of Verdigris, which we're able to do now, as well as increasing our storage capabilities in certain terminals and working with our truck providers. So we believe that we will be in an okay position moving forward to continue to move those tons into the market and we expect that the pipeline to shut down by the end of the year. Realistically, Michael, it was just the operational constraints, so with the predominant tons that we transported down to the Gulf as Bert said, we've got good barge options coming out of there. So I think Bert's team has done a really nice job of preparing for this eventuality.

Good morning. Thank you. When you think five-plus years out, can you give us an update on how you see the growth of the U.S. LNG market impacting U.S. nitrogen economics and specifically CF's position on the cost curve and do you have kind of strategies to manage that? Thanks.

Yes. Ben, I think both Dennis and I will take a look at this. But the good news is from our perspective that construction costs in North America are extremely high. And so anybody that’s building an LNG liquefaction capacity in North America is putting a fair bit of dollars into the ground and are expecting a return on it given that those are all for profit entities here. As a result of that along with an expected rate of return, we see gas costs in the rest of the world continuing to be in a position where North America is substantially advantaged relative to our competitors abroad. Looking at the resource base in North America, if you look at what's happened just in the last couple of years we've gone from high 60s low 70s Bcf production into the 80s or mid-80s now. The supply response is very quick in North America and gas prices below three bucks. So, we don't think there is an issue of the resource drying up quickly and North American gas spiking, and we don't see the new LNG capacity dramatically lowering the marginal cost of production elsewhere in the world. So for the next four to five years, we think it's business as usual for U.S. producers.

Yes. Ben, I think the key thing for you to look at on the resource side is what is sort of the resources to production ratio, I've seen that anywhere from 80 to 100. When you've got a ratio that high, typically when you've got money, you can tap into the resource with short cycle time, low cost, land rig projects. So the production response can be as Tony has talked about or outlined it. The small increments that we see in LNG capacity that have come or that will come are pretty small compared to what the resource base is capable of producing in a fairly short timeframe.

Thank you. Given we're approaching the challenge of capacity expansions over the last build cycle was half decade or so. How do you believe urea trade flows are going to evolve given the decreasing importance of Chinese exports? And if you could also touch on how you believe the UAN trade flows will evolve in the context of European anti-dumping duties, both of those would be appreciated? Thank you.

So you're right. Regarding expansions, we're, as I said, in my notes that about 3.5 million tons are coming on this year, a declining amount of tonnage, new tonnage coming on, and with the expected growth, we expect that the urea market will be good and positive going forward. However, the capacity of expansions that have come are from lower cost production areas, Nigeria, Northern Africa, Middle East. I'm not sure about the Indian additions that there are announced just because they'll be having to pay high cost LNG. We do believe that China over time is moderating down to this level of about 2 million tonnes of exports. So trade flows, I think you've seen the additions come on and operate well in the United States. We're going to move down into a lower level of imports and stay in that range of let's say 4 million tonnes, and we expect growth in Brazil as the Petrobras plants are shut down. So moving from 5 million tonnes to over 6 million tonnes, still expect India to be a net six to seven million tonne range for the next couple of years. And so it's a classic supply and demand high cost and marginal producers back to those economics and the cost curve will work and that these higher cost higher LNG markets will have to moderate down and absorb the lower cost tonnes and that's a direct reflection of these EU discussions. We're actively participating in and cooperating with this analysis. We expect an announcement to come out in the next month or month and a half and they can lead to duties, no duties or continuation of the same duties, which we paid today at 6.5%, while millions of tonnes come this way and pay no duty in the United States. Our position on that one is pretty clear; the low margins of the European producers is completely unrelated to the U.S. imports that we have shipped or exports we have shipped over to there, but it's caused by a combination of what we would experience as lower price UAN and urea global prices, and then higher European production costs driven by high gas costs, whether that be LNG or Russian imports. We expect, and I would if you were thinking economically and reviewing the economic analysis that we and others have provided, that that analysis should come out that we did something that was shipping tons at prices similar to what the United States were and was not anything close to dumping.

Yes, I mean, I think on that point as Bert said, we're cooperating actively with the Commission investigation. We are not dumping; it is a global price point for UAN and our delivered price into France and Belgium is above what our net back price would be using a Jones Act Vessel that hit the East Coast of the United States. So those are very rational, kind of moves for us to make. And at the end of the day, it is not the Western European producers that are filing this complaint. It is not Euro Cam, it's not OCI, it's not Yara, it is the Eastern European producers; Lithuania, Romania, Poland that are bringing this lawsuit and as Bert said, they're running very inefficient, very high-cost, and logistically challenged plants. The center of mass of U.N. consumption is in Europe, which is France and Belgium, and those plants are located in the East, they have as high of transportation costs to land that product as we do or even higher. If the European Commission goes forward with some sort of duties, what they're basically telling us is the French farmers you have to subsidize the high-cost eastern European producers. If you're sitting in Belgium, that's probably not a terribly attractive message to be sending out to the French farmers particularly given the yellow vest situation and so forth. So we'll see how it develops. But Bert, you want to talk about plans that we've made to deal with the situation if it goes that way, if the farmers are subsidizing high-cost producers?

Yes, either way, regarding your question on trade flows. We're constantly looking at our options and optionality in the system, whether that be moving it to this market or that market. We're ambivalent to where the tons go. We like to move them to the highest net back. Overall, CF’s UAN book, we think, will be able to continue at the same level or above that we're participating in the market today and see good opportunities going forward. We're looking at extra terminating opportunities in the United States and on the coasts, and we're working with our domestic customers for additional tonnage to remain in this market. The development of South America, Argentina, Brazil, Chile, Colombia, and Mexico all have grown substantially in the last five years, and we're at the forefront of that effort for very attractive margins.

Hi good morning guys. The last few months, we saw a lot of volatility around Indian tenders, which urea tenders, which you don't participate in. But maybe from your perspective, you can comment on what kind of volatility the market has created among participants in terms of different trade flows going in between China and India, senior China and Iran, but also there's a lot of discussion of maybe some of the bid volumes into that tenders were double counting different ways. So maybe talk about how the different play on the Indian tender has affected your market that you participate in? Thanks.

Yes. When you look at the India tenders, they do, depending on the size and the timing, can have a big impact. They're the only country in the world that purchases this volume, this amount of tonnes, six, minutes let's say five and a half to seven million tonnes depending on the year. In the past, that came principally from Iran and China. As we've talked about over the last couple of years, these trade flows are changing. We see a decreasing amount of tonnage coming out of China, and that has happened. With the sanction on Iran, that has been difficult if not impossible to participate in the recent Iranian tenders. That tonnage has moved to the Middle East principally supplied out of Qatar, Saudi Arabia, and some of those countries as well as Nigeria and some northern Africa. As traders and producers have participated, some producers are going direct, and some traders, you're right, some people took some shorts and then covered later. That does have a disrupting impact on the overall market when you get it in and buy a million-plus tonnes in a week, and then that ships over a six to eight-week period. We look at that for us and how we manage our position and what we expect to come into North America. For us, that's a good outcome that Indian buyers are buying, and the Middle East eastern producers are shipping; it's like a $7 freight to go to India rather than spending $20 to $30 to come to North America. This goes back to my earlier comment that this is just how economics works. Low cost providers are providing into a market that's attractive for them, and so trade flows will continue to evolve. We have some spot tonnage that comes into this market as well as Brazil. When that is too much, that overwhelms the market. That's what happened to Brazil and that's what happened to us in the last couple of months. We think that will moderate, and we see a positive market going forward.

Thanks. Just a quick follow-up on the pipeline issue. With cold weather affecting the barge season, there's already talk of high barge demand through the second quarter. Is that going to drive your freight costs higher?

For CF, we’ve contracted our barge logistics and we also have our own railcars; we have 5,000 and we have our own trucking group that’s managing an increasing amount of our truck logistics. You're correct. I think with the cold weather, the ice, and ice lot probably will be a little bit later, but the volume of water that's probably going to be going down the rivers will make barge traffic going up slow. The impact of the Magellan for us is ammonia, and we do barge ammonia for Verdigris as well as Donaldsonville, and we are already putting that into motion. We believe we will be fine. I think that barge freights probably will go up and we can see what other competitors and customers are doing, locking up low points like Saint Louis. High barge costs and freight costs in general just increase the in-market premium that we get. In the glass half-full side of the equation, we have pretty ready access to the vessels and our ability to maximize our margins.

Good morning. What factors do you think contributed to your UAN net realized price in the last quarter, which seems to be falling short of our expectations? Was it specific key end markets impacting this, or perhaps related to forward sales? Regarding your pricing outlook for UAN, which has been somewhat weak recently, what leads you to believe that the supply channels aren't already saturated? Your forecast for increased corn production and a light fall application season seems promising, but how can you be sure that your competitors haven’t already secured forward sales?

Steve, let me answer the first piece of that and I’ll turn it over to Bert to handle the forward look. I’m going to take you back to our November transcript. I’m not sure how much clearer we could have been about saying, look our forward order book, we liked to the price when took it, we didn’t see the huge run-up coming in the fall and expected most of the fourth quarter to contain a heavy dose of fill from the summer. I understand that a lot of people sort of felt that missed out there on UAN price, but it's not clear to me what we could've done differently to have provided visibility in that what people should’ve been expecting. My only sense is, and I say this with the most respect for your work like you got to listen to what we say instead of what the publications are posting for spot price, because we gave you the script for what was to happen in terms of the fourth quarter results. But that said, I’ll turn it over to Bert and let him talk about our view into the first half of 2019.

Yes. So, looking at this general fall, we’ve spent considerable time over the last several years identifying tanks and size of tanks and the ability of the distribution system to absorb the tonnage that’s produced and imported. Today the UAN market we believe for North America will be above 14 million tons. Demand for specifically UAN will be robust given that the fall ammonia season was so light. When you look at the fall ammonia season comparison, 2018 was a particularly poor year compared to 2016, the difference being that in 2016 we didn’t get a lot in Canada and the Northern tier, but did in the Southern tier. The opposite happened this time, and we did get a lot of movement in product supplied in Canada to the Northern tier and did not in the Southern tier, which is a bigger consumption area. So, we believe our customers are preparing for that and realizing that they need to get those logistics in place, and those logistics can reserve with us and others. With good market conditions, we think we’re probably four to six weeks away from the spring starting, which plays right into our strengths with our storage network, end market production, and we think that UAN pricing will fare fairly well in Q1 and Q2.

Yes, I had a question on your thoughts on the moderation of Asian and EU energy prices on the global cost curve. Normally in your presentation you've got a cost curve and what the implications are for what you think U.S. pricing would be. For example, in Q3 you were implying that the cost curve would give you a 260 to 310 NOLA urea price range in 2019; can you update us on where we are now compared to what you were talking about the third quarter given lower energy prices? Thanks.

Yes. Don, this is Dennis. When we talked last time the range was, as you laid it out, a little bit $300. What we’re saying today is basically the floor that we talked about is roughly the same sort of that – say, 250, but the ceiling has come down to say sort of 285 to 290 to account for what’s happened to oil prices and related effects. We still face a pretty steep cost curve even with what’s happened in energy prices. If you look at those two numbers I just gave you, you can see it way at the left-hand side of the cost curve. There is still a tremendous margin opportunity still left in the business. We’ll have to see what happens to oil prices. What we’ll see now is that OPEC compliance has been reasonably good. OPEC plus is pricing up at $64 Brent today; I’m not sure exactly what the forward curve is going out, but it looks like it's perking up just a little bit.

And I would just add, Don, on that one, you’re absolutely right. When we published that curve, I think Brent was at mid-70s, and now it's low 60s. The one thing that moderated against that a little bit is internal to China, not what they're importing but internal China at least according to Woodmac, their coal prices have remained relatively flat if not increased a little bit. You may have a couple of those bars that have changed positions a little bit but it’s not like the low end of that has collapsed by any stretch of the imagination. The other thing that we’re pretty excited about honestly is that after we published the curve in October you got into November and December in U.S. gas price; it spiked for quite a while. It looked like the forward into the first quarter was up with a four handle on much of that, and when you look today it’s come down dramatically. We’re in the mid-2s now. I think it goes to what we spoke about earlier in terms of the supply response in the U.S. and just how much capacity there is to gas around here. If anything, our cost structure is favorable to when we produced this chart back in October, and we'll have to see what happens the rest of the year. We're very pleased to be largely open gas right now because I think there is upside for us out there.

Yes, Don, the other thing that I’ll point out is always important to remind people who look at the cost curve what they are facing. What average prices would be for sort of the year if the energy prices that we lay out in the detail we’re prevalent? It really is a price floor not a price ceiling. You can get into the periods during the year where the demand is a lot stronger than the immediate supply, which you can get average prices rise above the cost curve, as we have seen in prior years. One thing that I think that makes us confident in this perspective is that as you look forward going from 2019 through 2021, the rate of growth in capacity is outstripped by the rate of growth in demand, and despite demand balancings moving in the right direction for us.

Yes. Good morning. Two questions on the impact of the fall application season in North America. First, if we get the big expected spring like you think, does that change the mix of nitrogen products between urea, UAN and ammonia or will the mix be normal? And then two, what does that do to your inventories, both dollar amount that you carried through the year? And then how much kind of product you have replaced to meet a big demand season?

So, impact to the fall; we plan for a normal season and we got decades of shows what normal is. Some of that is presold and some of that is sold fast. As we roll through the fall it was evident early; I’m talking about by the 10th of November, we would not have a fall ammonia season. We quickly pivoted and redirected the tons to different markets and positioned the plants differently. Our intention is always to run our plants full and to then prepare for the spring starting kind of now in the Texas and Oklahoma market, and as the market moves north those markets come into play. We’re playing for a big spring with 93 million acres. We’re constructively positive about what can happen in the corn sector because of the low stock-use ratio on corn. The $4 position today corn has some upside, beans probably has downside, but an increase in carryout in soybeans makes it difficult. The attractiveness of corn could push it to 95 million acres, which means moving the additional demand might make it difficult to get all those tons out on a timely basis during the ammonia season, as logistics become paramount. I do believe the mix will change; about 700,000 to a million tons of ammonia did not go down in the fall. If you divide that into three different positions, you'll see a substantial amount of UAN being needed in the upper Midwest. Inventory-wise we plan to go in full and prepared; the challenge will be resupply.

Thanks very much. In your fourth quarter results, can you talk about how much your volume was limited by short season? And how much it was limited by your own turnarounds? And can you also say something about the level of imports of nitrogen fertilizer you’re expecting to the United States in the first half of 2019?

Jeff, let me handle kind of the first pieces of that or at least the piece of the first piece of that and then I’ll throw it over to Bert. The turnaround activity while it’s high for us really had we had extra ammonia in the fourth quarter that either would’ve gone out as exports which the ammonia exports are fine. They make some money, but they're certainly not as valuable as the end market ag sales are. The volume shortfall on ammonia was really a seasonal issue as opposed to a turnaround issue. I would largely point that to the volume of ag ammonia that didn't go out versus what a normal season is. Bert, I’ll let you comment on the rest.

Yes. Looking at imports, I would say we’re ahead expecting 4 million to 4.1 million tons of urea and probably needing 1.5 million tons of UAN, and we’re currently trending towards above that level. You’ve seen the weakness in NOLA. New Orleans is one of the few markets in the world that has liquidity at all times, and we've seen traders; the traders bring product in, and if the market gets lower, they take losses. We expect imports coming in Q2 would probably be lower just because of total demand in position. We think the market will balance that out.

Yes. Hi. Good morning. So, with the lower fall application that goes into spring, farmers can decide to apply a little bit of ammonia, but maybe more likely urea and UAN. How do you think that will play out in terms of volumes of each, because your margins are different for each product? How do you maximize your profit while helping your growers? Also, how much urea did you export during the off-season here and what was the net back on the export?

Looking at that question, we don’t sell directly to farmers. We work with our retail and channel partners to do the optimal decision-making for the farmer. That is directly connected to the 4Rs for planting; the right product at the right rate, at the right place, at the right time. We make these products, and we can move our products in different places whether that would be export, domestic, up to the river, on rail, with trucks, or through a pipeline, with the idea of having that product in place for our customers to pull. So, when looking at a corn farmer planting for yield and their trend yield target, it's important for them to apply nutrients at optimal stages. What we're seeing is a combination of that application for ammonia and then either urea or UAN or a combination there of both application. Yes, margins are different for upgraded products as we go, but we're driven to serve the needs of the farming sector. On this past week, we took a vessel to Chile from our urea production which was a positive net back compared to domestic market prices. Last year we exported a little over 400,000 tons of urea and UAN cost to 1.5 million tons focused on Europe and South America, but we shipped to Australia and Ukraine as well.

In particular on Urea, I would say much of the year last year, the U.S. was a little bit of the port of last resort for a number of international producers. This is the reason NOLA trading at a bit of a discount international parity. Virtually every one of those exports that we conducted last year had a net back that was substantially above what NOLA was offering, making Urea exports a great option for us.

Thank you. Was the buyback activity in the fourth quarter about the maximum rate that you can do in an open market program? Or could you have bought back a lot more stock? Just I think about the pace of buyback that we might expect?

So, John, we had an authorization that was capped at $500 million, and in mid-October we were, the share price was trading in the mid-50s. As you wound toward the end of the year, it dropped into the low 40s. What you saw was increased activity reflective of where the share price was at that time. Taking shares out in the low 40s also provided about a 3% after-tax yield for us given the dividend on the share. We expect going forward to have a pace reflective of market conditions and cash generation, as well as where the share price is, with a lower share price expecting us to buy more in. That’s kind of how we think about the world.

On slide 16 in the back on the expected closures in China, about half of the expected closures are assumed rather than actually announced. Could you talk about the assumptions behind that estimate? The assumptions that weigh into that is looking at where the coal prices are as well as electricity price and the internal pricing versus being able to get kind of import parity; considering the number of plants that are below breakeven from a cash flow perspective. We see that the aggregate loss from a cash perspective leads us to think about the number of those plants down the line. We can’t tell you which ones do you turn off first, but we see that as likely coming. We think there are going to be about 5 million tons of closures as we make our way through this year. A lot of those plants may not be producing today. They could be on curtailment or shut down. But we certainly wouldn't be surprised if that doesn't change the net balance from a Chinese production demand standpoint; it's just that they are going to be moved to permanent closure as opposed to temporary curtail.

Hi. This is Vincent. Thanks for taking my question. I have a question regarding the modeling for 2019. Are there any factors to consider regarding the tax rate or any other aspects that would be helpful for modeling? Thank you.

Yes. From a tax perspective what we’re looking at is probably a federal tax rate of around 25%, with sort of mid-20s, so there will be a 21% statutory rate plus some state and foreign taxes. Remember that our largest foreign jurisdiction in Canada has a higher tax rate than we have here today. That, however, is for provision purposes from a cash perspective. We have a substantial amount of net operating loss carry forwards. In addition to that, we have the ability to take bonus depreciation, which allows us to deduct 60% of the cost of capital in the year. We've got a capital budget next year for 400 to 450. I wouldn't expect in 2019 we will be paying a significant amount of federal cash taxes despite what we have in the provision.

Hi. Good morning, guys. You mentioned in your press release you’ve been monitoring the Iranian sanctions and the Chinese re-exporting. I was wondering, is there a role for you to take more active stands than just monitoring? You do have pretty active market intelligence as far as I know. How do you see this playing out? Can Chinese traders keep exporting with no interference from the U.S. government?

I think there’s certainly a chance for some of that to continue. More recently, there's been some discussions about doing direct business with India and trying to do some currency payments and movements that don’t touch the international wire system. That would allow some of that activity to happen. Our view all along has been that the gas is virtually free; the plants are built. They’re going to run those plants, and those tons are going to find a way into the international market through some vehicle. It does create a bit of an overhang and some disruption, but our view is that that was just part of the global supply picture we were counting on not happening. The U.S. government is aware that those tons are coming out; some of the stuff is just outside the areas that we can provide or that the government can provide appropriate pressure against. I do think, longer term, that as long as the sanctions stay in place whether it's access to technical expertise or new parts particularly some of the more exotic materials that need to be fabbed in Europe or other places that are directly affected, you may see either a reduction in operating rate or slowness for like the Lordegan plant.

Hey good morning. This is regarding the $500 million of debt that's due next year. Do you plan to repay that? Or do you plan to roll it over? And maybe just a more general question on capital allocation; aside from debt repayments and share repurchases, is there anything else that you look at investing into maybe expansions or M&A things?

As you go back to our capital allocation philosophy, we would like to invest in growth for our business where we can do that and have it be accretive on our cash flow per share basis above our cost of capital. There are, however, not a million of those things for us to do, and we’re pretty picky about the projects and M&A prospects that we look at. Absent anything of significance in that area, we want to return the cash to shareholders, but we want to do that within a framework that reflects our commitment to long-term investment grade metrics. What we've committed to the market is we’re going to repay on or before its maturity date, which is in May of 2020, the last of the $500 million of the 2010 bonds. Those carry a coupon rate of about 7 and 8. When we finally get that done, we'll be sitting at an interest cost per year cash and just cost of below $200 million per year, a significant reduction in fixed charges. We also do share repurchases as a means of returning cash to shareholders while reducing fixed charges as well. We believe that both taking the debt out and reducing fixed charges is credit positive.

Thanks everyone for joining us. We look forward to following these conversations at various conferences we’ll be over the next few months.