CF Industries Holdings Inc (CF) — Q2 2019 Earnings Call Transcript

Good morning, and thanks for joining the CF Industries first half and second quarter earnings conference call. I'm Martin Jarosick, Vice President of 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 first half and second quarter 2019 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'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 by 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, 2018, and 2019. Weather significantly impacts the timing of fertilizer applications, often forcing shipments out of one quarter and 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 and uncertainty and shifting of planted acres by crop type, our first half sales volume has been steady through the past three years ever since our capacity expansion project 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 in a year like this one. As it is planted, it requires nitrogen fertilizer, the only nondiscretionary nutrient. This year also demonstrates why quarterly comparisons year-over-year are less meaningful than the comparability of first half results as quarterly volume is impacted by weather, but the first half volume remains constant. Our terrific results were driven by two factors: higher year-over-year nitrogen prices and outstanding execution by the CF team. Nitrogen price 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 product supplied to some inland locations. Meanwhile, the CF team and network performed exceptionally well during the first half. We set an all-time record for ammonia production. We took advantage of our system's flexibility to favor higher-margin urea production over UAN, leading to all-time records in urea production and shipments, and we leveraged our distribution terminals and 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 200,000 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 we will generate superior free cash flow through the cycle compared to most of our global competitors. As shown on Slides 6 and 7 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 in the plants running. While we convert 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 of EBITDA, investors in CF Industries are 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 100,000 shares. As seen on Slides 9 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, and 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 Bert 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 farmer economics strongly incentivize corn plantings. Second, the forward curve for North American natural gas remains very attractive compared to the rest of the world. This will continue to provide CF Industries with a significant cost advantage, keeping us on the lower 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 that will continue to support our generation of substantial free cash flow. With that, let me turn it over to Bert, who will talk more about how we deliver these strong results in 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 CF's people. We showed 9.8 million tons in the first half, including a Company record of 5.7 million tons in the second quarter, achieved higher prices compared to year-ago, and ensured our customers received product when and where they needed it. We're very proud of this performance given an extremely challenging spring application season, historic flooding, and disruptions in planting, applications, 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 favor urea over UAN 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, we've positioned 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 utilized extra railcars to enable 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 this activity continued through July as nutrient applications went much later than normal across the United States. This is why we didn't launch our UAN fill program until earlier this week, the latest we have ever done. As you 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 planting 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 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 stocks. Forward prices 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 MMBtu 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 we built into the CF 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. In the first half of 2019, the Company reported net earnings attributable to common stockholders of $373 million or $1.67 per diluted share. EBITDA was $973 million, and adjusted EBITDA was $936 million. There are two items affecting our first-half results that 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 were $858 million. Since the end of 2018, we've added $176 million of cash to the balance sheet even as we have returned $311 million to shareholders through share repurchases and dividends. This demonstrates CF's 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 longstanding capital allocation philosophy that is to pursue growth within our strategic framework 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 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 Q&A.

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 generate strong financial results. Most importantly, they operated safely. I also want to recognize the team at our UK facility who won the Stephen R. Wilson Excellence in Safety Award for their innovation that protects people and equipment while 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 1 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. Appreciated.

As we announced, Chris Bohn will be appointed as Senior Vice President and Chief Financial Officer. Chris is 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 role and will provide continued strategic leadership as we capitalize on our future opportunities. Chris and Dennis have been working closely together over the past several months and we expect a seamless transition. CF’s future is bright. Our unique and powerful business model has enabled us to generate and return nearly $1 billion in free cash flow to shareholders 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 shareholder value creation in the years ahead. With that, operator, we will now open the call to your questions.

Yes. Thanks. Good morning, everyone.

Good morning, Adam.

So I guess Bert, Tony, Dennis just interested for us in the market dynamics as we come out of spring and what did this quarter in spring kind of show about the U.S. marketplace? Thinking about the premium that urea has kind of captured to UAN specifically, you obviously shifted the production pretty sharply towards urea, but still with UAN and some of the 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 it people who can flex to urea and the nitrate premium returning just seems unusual for that to trade at such a sharp discount on a nutrient ton basis for a prolonged period of time?

Yes. It's interesting that you've pointed 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 the flexibility of the CF system. We've seen heavy springs and falls, where we find a lot of ammonia and 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, when we look to future dynamics, what has shifted these tons has been more weather-driven, not necessarily agronomic decision-making driven. And so we're seeing small shifts over time, urea to UAN, UAN to urea. But when they can apply the products, they choose the product that is 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, it's very good for us. Specifically focusing on UAN and why it is trading at a discount today, it is, I think the reflection of the EU antidumping duties that have forced additional Russian tons to come to the United States. And during the indecision time, probably additional Trinidadian tons to come to the United States. And 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 tank 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 Trinidadians have a lower penalty rate, we'll probably focus more of their tons on the EU and then we'll see what happens with the market overall. We'll still be active in South America and some of these other areas that we're developing. So I think right now, it’s natural that UAN would trade at a discount to urea. I think over time as it balances, we'll come back and we anticipate UAN to trade at 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 proved that in states where these expansions just went way out and we profited from that.

And Adam, I'd add to that, kind of what Bert was saying. I think one of the things that the EU antidumping duties did is that it led to some globally inefficient behavior. So you've got a set of EU producers that are basically running full on a purely economic basis that would have shut down or at least largely curtailed. So that the lower-cost Russian and Trinidadian tons and even our tons could back fill in that marketplace. But the sort of the real irony, I guess on all of this is – what you've seen is UAN prices to the European farmers, in particular, the French farmers have gone through the roof, and UAN 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 turned it around and given it to the inefficient European producers, some of which are ironically owned by Russian entities. So it's kind of a weird twist of how that worked. But as Bert said, we've got a lot of different levers to pull and we're navigating it as best as possible.

Hi, good morning, team. A question about ammonia, I think that the feeling was that milling inventories are higher in the country. And so I think the play was to be exploring a lot of ammonia in June into July and August, I guess exports lower netbacks, your million netbacks were incredible in 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 MN premiums, but also having to export at lower net back? Thanks.

So we look at ammonia, and 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 the team executed extremely well. Part of that is in the preparation of where we placed the tons and utilizing our terminals and our logistical capabilities. Part of that was Chris, and the plant's running extremely well. And so we were prepared; I'm not sure if our other market participants were as prepared as we were. And so we executed 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 4 million to 4.4 million tons of ammonia. From the fall, we knew 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's 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 export. We exported more on a year-to-date basis than last year. And like you said, that's to be expected, but I don't see that significantly higher and so premiums are good, the market is good, and we expect good things for this fall.

I mean, I think the other thing I'd add to that, Joel, as Bert said, because the ammonia system ran so well and we set an all-time production record in the first half. We're really pleased with the volumes that burden the team got down on the ground from an ag perspective because ammonia still represented a great value to farmers compared to UAN and Urea on a nutrient basis. 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 it is in every other year. And as Bert said, we've got the right plans in place to be able to manage. The inventory 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 of the industrial business that we've taken on as well as the planned maintenance. We feel very comfortable with managing the inventory situation.

Hi, good morning. This is Harris Fein on Chris. Just given the current energy price stack and construction costs? Can you update us on your views on Brownfield versus Greenfield economics for both U.S. and global players? Thank you.

Yes, I mean, I think what you'd see is in limited locations, it actually isn't – labor costs and your ability to lock in fixed costs labor is as important if not more so, in some cases than absolute gas costs is that you'd expect new capacities to be added where it is being added. So places like Nigeria, Iran, and Russia are places where you can actually get fixed labor costs and in a place like that, current economics, if you can get reasonable gas costs and manage the political risk situation. I'd expect there to be some level of building in those locations, and I think you've seen kind of that those announcements here and there including people like your came and others looking at incremental units. I think the challenge in North America is that the labor costs because it's on a reimbursable basis and not on an LSTK basis, no one's 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 at it. And if anyone's 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 just not that's an essentially astute to because we just don't see the current price deck being supportive of new builds here in North America. By the way, if you find someone that wants to build, we'll sell them the plan for the cost of new construction.

So my question is that we've seen Chinese exports pick up year-to-date and on one hand that's a good thing because obviously you needed higher prices in order to get the experts 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. I think what you're seeing is based on where coal prices are, we absolutely believe that Chinese coal-based capacity is the marginal production capacity, particularly given where gas prices in Europe today. 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 or somewhat below 100% rates for portions of the year. And so what - that's why their operating rates depending upon what publication you look at and what denominators they use is somewhere in the 60% to 70% range. So we do think that there is a fair bit of capacity that can turn on and economically will turn on when - what when it's profitable to export. And so I do know that there's 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 I'd say, yes, there probably is some truth that I don't see urea going back to $450 or $500 anytime soon. I just - I think that bids in way too many plants in the interim and people can find a way to make reasonable money as price comes up. But the price indication from India, from Brazil, from the world in total in terms of the demand side, on that production in China and the world really needed those tons. And I think, as 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 supply-demand 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 overarching view is I think China will be there to export when the world demands those tons, it'll be sort of the flywheel that gears up or down depending upon what global demand is. And it's really going to be cost curve driven because they're much more economically or acting in a much more economically rational way now. Bert?

Yes. Just some key points about that issue, is that 5 years ago where China was producing 71 million, 72 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, what I would say 48 million to 50 million tons. And so the disposable incremental ton that will be exported has been consistent in the numbers that we've been talking about the last couple of years of 2 million to 3 million tons, and this year that looks to be 3 million to 3.5 million tons. So in a global exportable ton of around 45 million metric tons, you're talking about an additional 1 million tons. And so I don't think a bear or bull case, it's no fun being a marginal producer and the United States used to be in that position in the early 2000s. And so I don't think they can gear up a system to be a major exporter 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 Panamax’ have been loaded in Iran and discharged, I mean that's a loose word, into China and then re-exported or moved or reflagged to other locations. And so I'm not sure all of that 3.5 million tons is really Chinese. And so if that is the case and let's say a 1 million tons of Iranian product has been moved in, then we're still back to that original thesis of 2 million to 2.5 million tons, and that's digestible by the international market.

Thank you. I just want to go back to the very high in-market premiums we saw this year. The call saying you sold some products out of the gate to Port Neal for 400 when NOLA was below 300. Does that become a headwind next year on pricing along with somewhat lower gas costs offshore? So could you quantify what that in-market premium benefit was to you in EBITDA this year?

So we did experience a very nice position in our in-market premium. And while we're seeing over time is, like I said earlier, the premium expands and contracts. And so it has maintained over the years with this new capacity because we're an import market and you're bidding in tons that have rates and have costs. And so as you have difficulties moving tons or as you have delays or advancement of the season, let's say we have an early season next year. 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 then 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 in-market premium to get something to execute.

I mean, I think Don in that regard, the U.S. remains an import-driven marketplace and we need to attract, still a fairly sizeable amount of tonnage coming here, particularly when Bert’s team is exporting out of diesel; it even requires more tonnage coming this direction. And it's always a question in terms of where those exporting regions go with their tons and they're looking for the best netback. And so the U.S. 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 fairly what I'd call normal operating conditions, is you get some spikiness in the market depending upon the particular year in question. And it has to do with the availability of product when and where people are applying and planting because there's a high urgency factor when they're doing the field work. And so that's one of the benefits that we have with the in-market plans and the distribution network that we've developed, which is we typically can capture some of that 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 kinds of opportunities on a more spot basis. This year, I'd say it was a little bit more widespread, but that is kind of the power of our system, which is we can capture that when opportunities present themselves.

Yes, Don. The other thing I'd add is, you asked about the cost curve. Think about lower gas prices internationally and let's just focus on LNG in 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 that are produced by coal people – coal-based manufacturing. So that really hasn't changed much. And I think if you look at our slide on – in the deck, you'll see that the cost per ton of ammonia, whether it's using anthracite coal in China, which is basically the marginal producer today or TTF gas on a forward basis, average for the year. 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 Great Britain, the marginal and MMBtu being seaborne LNG. At $4 plant gate, our plants, it's very clear that didn't have a value chain. There are people who are not getting paid, and so we don't view those prices as sustainable, and if you look at the forward curve, in fact, it rises quite significantly above that.

Thank you, Tony. A couple of quarters back, you commented about non-U.S. producers making some suboptimal decisions about where they were shipping in international parity. And clearly since that time, the opportunities into the U.S. haven't been that good. But as things normalize, do you think we're going to continue to see producers favor 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 there's enough inventory for exporters to send it out and where the demand regions actually need to consume it. So I think during those shoulder periods, NOLA will probably trade at a bit of a discount to international parity just because there's not that much demand in some of those regions. And then I think there are other times of the year where NOLA is going to trade at parity if not a bit of a premium. If there's high demand periods like we saw earlier this year. I also think the 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 and importers in the U.S. 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 scale back trading operations and some of that activity in response to that. And I think there's just more discipline because the people in the channel that are taking inventory positions, 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 they're bringing in, and the inland price back to the earlier comment from Don. It wouldn't surprise me to see a little bit of a gapping out between inland price and NOLA price, just if you end up with NOLA being kind of again the liquidity clearinghouse for the world during periods of time. I don't think you'll see that price necessarily reflected back inland because you don't have the bad behavior that existed before. So I think there's a lot more rationality taking place and that's a good thing.

Hi, this is actually a Luke Washer on for Steve. I wanted to touch on the farmer in North America. Did you see a shift in ammonia applications to side-dress this half and did 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 farmer behavior compared to last year would be appreciated as well. Thanks.

So regarding North America, yes, we did see a shift to side-dress and we had ammonia going out into July for side-dress. The change in behavior was driven by economics as well as weather and decision making. There comes a point in time where you have to plant and get your seed in the ground no matter what crop you're planting. And when I state as well as, I guess even Northern corn states, are trying to put seed in the ground in mid-to-late June. You better have the nitrogen there and ready to go. What happened was they came to the point where you couldn't do pre-plant application wait and then plan they had to get the seed. So we saw a lot of movement late in June and early July of ammonia, as I addressed 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 crop inspections and work with other people and just information on how much N was applied on average in some of the places that we watch. And you're seeing that holds the historical averages. The interesting thing for me is going to be the yield. The USDA is still projecting a high acre number as well as a much higher yield number that we think is possible. And I still think they are at 166 and I think you'll be lucky to be at 160, and it's going to significantly impact the stocks used ratio coming into this harvest season.

When also harvested acres were, I mean they're at 91.5 where do you think that's good?

Well, our internal numbers probably 84 million, 85 million and so that's what's really still to play. And again, getting back to the nitrogen, but what was applied and was taken up by the crop will be represented in yield? And so we'll see. But I don't think more was applied this year than any other year.

I mean the other point to highlight is the side-dressing 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 has moved out through June and then June, 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 we're thinking about from acreage, not in over-application of nitrogen in any way.

Good morning. Hi, can you hear me now? Thank you. I just a quick question on ammonium nitrate, I noticed your volumes were down year-over-year and everything else 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 CF, we produce in the UK as well as in 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 as we make agricultural grade ammonium nitrate, industrial grade ammonium nitrate, nitric acid, UAN ammonia, and DDS. So that's a very versatile plant for us. And so during this period, we saw some opportunities as some of the other products that we were able to segment and move tons to that direction. The other side is the UK assets. We have two plants there that make ammonium nitrate and NPKs. 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 those locations – or may 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 up not down, but overall it was – first half was up and again, we really think about this business in halves, not in quarters because I think that there was a pretty good shipment in Q1.

Well, okay. There ag season started really early.

Thank you, Dennis, first of all, congratulations on your retirement.

Thanks.

I have a comment and a question. My comment is, first of all, kudos to you guys for executing in this difficult environment. I mean, how did your urea volumes go up if you have 10 million plant acres and supposedly it was so wet that farmers couldn't get the tractors out? All the urea volumes you’ve sold, do you think all of 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 thoughts on the M&A possibilities?

So first of all, thanks for the comment. I think the whole team did an outstanding job this spring. And we do well and things are good, but really when it's challenged, when there are challenges out there is when the flexibility of the network really and the capability of the people really shine. Bert, you want to handle the urea. Did it go down or inventory question?

So looking at the whole system, obviously, we're up quarter-on-quarter, six months on six months 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&A 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'd already gone to maximum urea with an interesting side note that we didn't 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 for coming up with creative ways working with ARTCO, our barge fleet as well as power enough barges to get extra barging capacity. So we started working on this in April and with a flooded river or at least a 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 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 our urea went 1,200 miles to meet spot demand, and trucks are driving a long distance. We designed the Port Neal facility to load up to 10,000 tons a day by truck. And that happened. So when you take all of these individual movements in a 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 products that could deliver on time.

But I think PJ, your question about did it go to ground versus is it sitting in a shed at some place? Our experience with UAN, which is the vast majority of product that we shipped out in July was for prompt delivery and application, which is why we didn't launch the UAN infill program until just earlier this week because we were still seeing demand at spring pricing level, indicates that people weren't stuffing this product into bins and tanks because typically there's a price reset when you reach the application season and moving to the shareholder season. So all the stuff that we were selling through June and even into July was at spring pricing indicating to us that all of it was going to ground. There was no one that was going to put that stuff into a warehouse because that’s the long hold period for relatively firm pricing.

Our channel checks for urea and UAN, ours as well as our customers is low. And we believe that's represented like you just said, Tony on all this immediate demand, but you just talked about for UAN with the same issue for urea. We do think based on knowledge of barge and barge loadings that there is a high level of P&K in the market, but not of urea or UAN, and especially on the river.

Hey, good morning. So I guess just following onto that, sounds like from your commentary, you expect pretty strong nitrogen demand in North America over the next several years, not just next year and it's pretty clear next year it's 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 out? 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, 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. Well, and so we had this year at least initial and intentions being sort of 92 million, 93 million acres and I would expect if next year is 95 million, you're probably back in the 92 million, 93 million the year after because I just think the price signals are there. I also think we expect, ongoing and continued weakness in beans. And whether that's because of African swine fever, culling of the hog population, or ongoing kind of trade concerns or just other related issues and also bumper yields in 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 we're – that really is the backdrop against our bullish view of corn and also nitrogen demand in North America. Bert, you got?

Nope, I agree. I think your numbers are spot on, where you see a positive market.

Thank you, and congrats to Dennis as well and also Christopher. And I wanted to go back to your earlier comment that prices are not high enough for expansions. Was that directed just toward Greenfield since nutrients announced some small expansions recently? And I would guess your new clients have some pretty low costs. Incremental de-bottleneck opportunities?

Yes. I mean, I was talking about John with respect to expansions, or putting in a whole new ammonia urea complex, not incremental bottlenecks. I think generally speaking, once you've got the infrastructure in place, a de-bottleneck is going to have much favorable economics to building a whole new plant. And it was really, whether it's a Greenfield or a Brownfield, building a new ammonia plant and then upgrade facility. But we're certainly evaluating similarly de-bottleneck opportunities and additional flexibility. I think this year in particular highlights the value of product flexibility, and the more levers Bert can pull in order to manage what the product slight 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 add flexibility to the network, but are still fairly low cost in terms of the scale of a new plant is a great return. 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 million that includes some growth capital in there. And I think that's a pretty good number for us going forward and gives us some upside in terms of both product mix flexibility margin and absolute tonnage.

Good morning, guys. We early on talked about the economics of new plants and then completely agree that the economics starting to urea plant doesn't really make sense today. But we are also seen as LNG prices have fallen so much and you realize now the most profitable use of natural gas. And so two-part question, are you seeing any indication from places like Trinidad that they're going to allocate more natural gas towards urea over LNG, so reversing the trend for the last several years? And second, what do you think the risk and outlook is for places like your Iran works Trinidad to sanction urea just to find the least bad version to get rid of the word - to export their method?

Yes, I mean I think Trinidad in particular has had some challenges with respect to gas availability at the low costs that they had promised long-term contracts on. And so when most of those Caribbean-based contracts have come up for renegotiation, they've been reestablished that a fundamentally different kind of profit-sharing as well as a floor price 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're willing to offer that would instant capacity going into Trinidad. Again, I think that much more likely to see that in places like Nigeria and Russia and so forth. Relative to if there is some sort of 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 urea are far superior to methanol today. And if there was going to be some sort of embargo or whatnot, I think you'd see some rationalization of methanol operating rates in favor of urea. But there aren't a lot of urea plants in those regions that are sitting idle today. Everything is running in full on. So it's really more of a four-year fix because you'd have to build a new ammonia urea complex and 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 I know that's not one of those things that we look at and are terribly worried about.

Yes, hi, I just wanted to touch base a little bit on Iran and your expectations for 2019 uranium exports every day, sending a lot of product into Brazil we'd heard. So just your thoughts there and how you see the potential for exports trending mattresses here, but over the next couple of years?

Good morning, Michael. I think, look our view has always been there's too much money at stake for those plants to run or not run. That they're going to run and find some way to get those tons out. And whether it's sending them to China and re-export them, send them direct to India or Brazil, and barter or do something in the way of an exchange. Our view is those plans 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 they go down for maintenance or turnaround issues and are not able to get either the technical support or the catalyst or the critical vessels to bring them back online. And so I think that's really where you might see a pressure point, but that's a little bit longer wavelength. That's not this quarter or next quarter. I wouldn't anticipate. So I think those plants have been running and they continue to run. Bert to you.

Yes, just there has been a variety of behavior, you've seen these tons, as Tony mentioned for a price people will do certain things and those prices have been low. So they're not a very attractive business for the Iranians, but they have been creative in bartering, re-flagging, re-exporting from China. And I do think their tonnage will be lower as a result of these sanctions continues, but they've been creative so far.

Thanks everyone for joining us. And we look forward to seeing you at conferences over the next few months.