CF Industries Holdings Inc (CF) — Q3 2019 Earnings Call Transcript

Thank you, Kevin, and good morning. Thanks for joining the CF Industries 9-Month and Third Quarter Earnings Conference Call. I'm Martin Jarosick, Vice President Investor Relations for CF. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its 9-month and third quarter 2019 results yesterday afternoon. On this call, we'll review the CF industry's 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 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 the first nine months of 2019, in which we generated adjusted EBITDA of $1.3 billion, after taking into account the items detailed in our earnings release. These results reflect higher year-over-year global nitrogen prices, lower natural gas costs and continued strong execution across all elements of our business. I especially want to highlight the great work of the CF team. Throughout this year, we have run our assets well, managed through logistical challenges and ensured our customers received product when and where they needed it. Most importantly, we did it all safely. Our 12-month rolling recordable incident rate was 0.61 incidents for 200,000 work hours, significantly better than industry averages. Our team's great work, combined with positive industry fundamentals, drove a 21% increase in adjusted EBITDA compared to this point last year, and we continue to efficiently convert the EBITDA we generate into available free cash flow. On a trailing 12-month basis, our free cash flow is $830 million, which today provides our investors with an industry-best free cash flow yield of 8%. As we've said before, we believe we will generate superior free cash flow through the cycle compared to most of our global competitors. That's because our cash generation capability is built on an enduring set of structural and operational advantages. Our structural advantages are clear: access to low-cost North American natural gas, operating in the import-dependent North American region, the largest and best production and distribution network in North America and the long-term demand growth for nitrogen. We also consistently focused on increasing our operational advantages to drive further margin growth. We do this by investing in our assets and people, and actively managing the company through the cycle. The cumulative effect of this disciplined choices that we make is clearly evident in our performance. We have the highest ammonia plant asset utilization in North America. We have reduced controllable cost per ton since 2016. We have among the lowest SG&A expense as a percent of sales in our industry, and we have driven significant reduction in our fixed charges, which Chris will discuss in more detail. Slide 9 demonstrates the impact of our superior cash generation. Over the last 2 years, we have dramatically reduced our outstanding debt, increased our shareholder participation of the business through share repurchases and accretive growth, while also returning significant cash to shareholders in the form of dividends. These actions have both strengthened our balance sheet and driven nearly 10% accretion for shareholders since 2017. Looking ahead, we expect to build on this track record in 2020 and beyond. We believe our operational performance will consistently deliver sales volumes between 19.5 million and 20 million product tons each year. We continue to project that global demand for nitrogen will outpace net capacity additions over the next 4 years, further tightening the global supply and demand balance. Additionally, the forward curve for North American natural gas remains very attractive compared to the rest of the world. We believe these factors, along with our operational excellence and strong balance sheet will continue to drive superior cash generation and shareholder returns in the years ahead. With that, let me turn it over to Bert, who will talk more about current market conditions and our outlook. Then Chris will cover our financial position before I offer some closing remarks.

Thanks, Tony. The CF team continued to perform at a high level during the third quarter, positioning us well for the remainder of the year and spring 2020. First and foremost, we met customer needs in July as the spring application season in North America was drawn out due to poor weather earlier in the year. Following the extended spring, we focused on building a good order book. This included a well-received UAN fill program, which launched about a month later than normal and was met with strong demand. Demand for other products was positive as well, and we essentially shipped what we produced in the third quarter. As a result, we ended the quarter at seasonally low inventory levels. This gives us flexibility in the months ahead as the fall and spring application seasons develop. Looking at spring, we continue to anticipate strong corn plantings in the United States. The current soybean-to-corn futures ratio supports higher U.S. corn plantings in 2020 and is comparable to last year's ratio at this time. We are ready for the fall application ammonia season to begin which has already started in some areas. We believe our customers are expecting a positive fall ammonia season, given expected strong corn acres and attractive nutrient pricing. As always, the weather will drive how positive the fall season will be. If a good application window opens, we believe farmers will take advantage of it. If a good window does not open, we have ample storage capacity to position product to meet customer needs in the spring. We expect that the remarkable stability we saw in the global nitrogen prices this year will continue into 2020. Global demand has been healthy overall and has required additional tons for marginal producers in China to be bid into the market. As you can see on Slide 13, our global cost curve projection for 2020 suggests that the average price per ton for urea delivered to the U.S. Gulf will be similar to 2019. Longer term, industry fundamentals remain positive. As Tony said, we continue to expect that global demand growth will be net above capacity additions over the next 4 years, given the limited number of projects currently under construction. We believe that low-cost North American natural gas will become an even bigger advantage for CF in the years ahead. Average annual NYMEX Henry Hub futures from 2020 to 2023 are all lower than 2019 NYMEX settlements through October of $2.65 per MMBtu. Not only will this keep the majority of our production firmly at the low end of the global cost curve, it should also support margins compared to 2019. As the global supply and demand balance continues to tighten in the years ahead, we believe that our margin advantage will grow even more. CF is well positioned for the rest of 2019 and into 2020. We look forward to working with our customers in the near term and positioning the company for the industry dynamics we see developing over the longer term. With that, let me turn the call over to Chris.

Thanks, Bert. In the first nine months of 2019, the company reported net earnings attributable to common stockholders of $438 million or $1.97 per diluted share. Our EBITDA and adjusted EBITDA were both approximately $1.3 billion. Our trailing 12-month net cash provided by operating activities was approximately $1.5 billion and free cash flow was $830 million. Cash and cash equivalents on the balance sheet at the end of the quarter were over $1 billion. Since the beginning of the year, cash on the balance sheet has increased by $337 million after investing $297 million in sustaining capital expenditures, repurchasing about 5.7 million shares for approximately $250 million, issuing $200 million in dividend payments and distributing $186 million to noncontrolling interest. Given our liquidity position, which as of yesterday was approximately $1.2 billion in cash and cash equivalents, our strong cash generation and positive outlook into 2020, we announced earlier this month that we will redeem the remaining $500 million in senior notes due in May 2020. Additionally, last night, we announced that we will redeem $250 million of our 2021 senior secured notes in December. Retiring this debt is the latest step in the balanced approach we have taken over the last 2 years to manage the company, prudently allocate capital and return to investment grade. These actions will reduce our gross debt by $1.85 billion. They also support our focus on reducing fixed charges in order to provide us the greatest long-term capital flexibility through the cycle. As you can see on Slide 10, our annualized fixed charges in 2020 will be $186 million lower than they would have been without the steps we have taken since 2017. This includes reducing annualized interest payments by about $121 million, which achieves our goal of annual interest payments below $200 million. It also includes a lower level of dividend payments due to share repurchases as well as the elimination of the cash distribution to Terra Nitrogen unitholders. Additionally, we have focused our capital expenditures on safety and reliability. Not only has this supported our industry-leading asset utilization rates, but has also kept our capital expenditures for the past few years at around $400 million per year. These actions, along with the industry recovery from the trough conditions of 2016 and 2017, have greatly improved our credit metrics. As a result, we believe we have built a strong case to earn investment-grade ratings. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to provide some summary comments to frame how we're thinking about the future. We had a great first 3 quarters of 2019, with adjusted EBITDA increasing 21% year-on-year. On a last 12-month basis, we generated $830 million of free cash flow, which is truly a fantastic year. We also have the highest conversion efficiency of EBITDA to free cash flow in the industry. With all the free cash that we generated in the last 12 months, we have returned approximately $750 million to shareholders through share repurchases and will have retired an additional $750 million of debt by the end of this year. That accomplishes our objective of bringing our balance sheet back into investment-grade metrics and drops our annual interest expense well below $200 million per year going forward. Looking ahead, we're excited about our outlook for 2020. While there are always moving pieces, we think that overall 2020 will be similar to 2019. As we've explained, we expect our sales volumes to be similar from year to year. Our 2020 global cost curve projects average nutrient prices to be in a similar range as 2019. And the NYMEX Henry Hub forward curve suggests natural gas costs in 2020 will be lower, which all means, we expect another fantastic year in 2020. And since we have already repaired our balance sheet, all of the free cash flow we generate will be available for us to deploy for value-creating growth or to return to shareholders. This company is a highly efficient cash-generating machine. We've driven over 10% accretion for our shareholders in the last 2 years by investing in accretive growth and share repurchases while fixing our balance sheet at the same time. With our balance sheet now investment-grade, we look forward to driving additional shareholder value by continuing to invest in accretive growth and further share repurchases. With that, operator, we will now open the call to your questions.

So I would like to get your thoughts on the current market dynamics as we approach the fall. Recently, we've noticed that urea prices have dropped somewhat unexpectedly, and NOLA is trading at a significant discount compared to some offshore markets. Can you shed some light on the factors influencing this situation and what could bring prices back to equilibrium? I also have a follow-up question regarding the decision to repay the debt.

When examining the current market and the performance of CF and the industry over the past nine months, we have observed a relatively stable market, operating in the $240 to $260 short ton NOLA range, and approximately $240 to $270 FOB for metric tons. Recently, the shift in these numbers has been somewhat unexpected. However, it's important to recognize that this is a global market, and we've experienced a change in some tonnage due to tenders in India and other market adjustments. There has been an increase in volume purchased from India, along with rising export figures from China. We anticipated exports from China to be around 2 million to 2.5 million tons, but it now appears they will reach 4 million to 4.5 million tons, effectively doubling. This phenomena is influenced by production costs in China, especially with coal energy costs down about 8%. Furthermore, the devaluation of the RMB, now averaging around 7.10, contributes an additional 5%. This has enabled Chinese producers, even those with higher costs, to sell at around $250 per metric ton FOB. These tons have entered the market while Europe has also benefitted from low gas costs during the summer and Q3, leading to higher operating rates globally. This has resulted in an increase in the exportable tonnage, bringing the total traded annually to about 45 million metric tons, slightly enhancing the market mix. Recently, we have traded below international parity, which we believe is an aberration. Currently, our average stands at $210 to $215 per short ton, indicating a potential $20 to $30 shortfall compared to the international market. We foresee sustained demand from India, with another tender or two amounting to an additional 1.5 million tons required. Brazil is also behind on imports, needing at least another 1 million tons. We anticipate Europe stepping in as well, looking ahead to a promising 2020 with corn acreage possibly reaching 93 to 95 million. This incremental demand raises questions about the upcoming ammonia season and its possible effect on urea prices. While we don't believe this market condition will persist much longer, we are confident in our ability to navigate through this period. Our inventory space is sufficient, and we expect considerable purchasing activity, with developments to monitor in spring.

Given the scale of your cash flow generation, could you remind us of your four capital allocation priorities beyond share buybacks, including any opportunities for low-risk, high-return brownfield projects as well as mergers and acquisitions? Regarding the latter, there have been reports of some potential assets available in the U.S. and Europe. Can you share your willingness to pursue a larger deal and your general perspective on asset bases outside of the U.S.?

Yes, Chris. I mean, look, I think from a capital allocation perspective, we have said for a long time we want to get the balance sheet back into investment-grade metrics. And with the recent announcement, I think we're there. We've got managed our annual fixed charges down to a level that it's very comfortable, even in sort of trough conditions of '16, '17, we'd still be net pretty significantly cash-flow-positive during those kind of trough conditions. And we think that, that's representative of an investment-grade rating, and we're very comfortable with the sustainability of the balance sheet through kind of down cycles. So once that was behind us, then we look at, obviously, sustaining capital to maintain what is the highest operating rates in the industry on our ammonia plants, is this number one call for capital; number two would be, if we've got accretive growth where we can buy assets in a way that we believe creates value for our shareholders, and that would be number two. And in the absence of doing those things, then I think we look to return cash to shareholders in the form of share repurchases as our preferred mechanism, given that we already have a pretty robust dividend that's in place today. So that's kind of our priorities. We're relatively open to geographic expansion. I do think when you start clustering assets together, you're able to better realize synergies from larger network effects than if you've got them spread around. But I think at the end of the day, it all comes down to as long as there's a set of assets that we believe we can run well and really leverage our organizational capabilities against, then we'd be open to considering a number of places. But it all really depends upon price point. And they've got to be at a place where we feel it's creating value for shareholders because our alternative is to buy back more of what's already the best asset base in nitrogen of the world, which is our own share. So instead of overpaying for poor quality assets, we just buy more of our own.

Just quickly, Bert, I think you talked about increased China exports and falling coal prices, do you think that puts a lid on urea prices in the range of whatever you talked about $250 per metric ton. And then a question on your cost curve. Your cost curve is delivered prices to the U.S. Is that the right way to look at the urea market in your mind? Because most of the Chinese exports go to India. So maybe I can get your thoughts on that?

So regarding the increased exports from China, this is a discussion that is constantly changing and evolving. If we look back several years when their exports dominated 35% to 38% of global trade, it had a significant impact, driving NOLA prices down to $150 per short ton in the United States. The changes occurring in China seem to be positive overall. The recent currency devaluations related to trade conflicts raise questions about sustainability and desirability, but it's likely they would benefit from trading in a range closer to the 680s. Currently, capacity in China is estimated to have come down from previous peaks, possibly around 80 million tons, with some estimates as low as 70 million tons. The operational rates reported are around 70%, but we believe they might be operating in the 65% to low-60 range, making around 52 million to 53 million metric tons available today. Agricultural demands remain fairly stable, as do industrial demands, but the variable lies in export volumes. We do not anticipate significant tonnage movement. In our investor discussions, we often mention that idling these assets for too long makes it difficult and costly to bring them back into production, which is not an attractive option, especially considering the environmental impact. We believe China is stable at a range of 2 million to 4 million tons, and economically, exporting at current levels is unattractive. Regarding your question on the cost curve, we do consider it since our focus is primarily on North America, with over 90% of our production staying here. You are correct that Chinese exports mainly remain in Asia and are restricted from reaching North America; at their peak, only about 1.5 million tons came here, and that's not happening anymore. On the other hand, India has remained consistent with imports of 6 million to 8 million tons, potentially drawing an additional 1 million to 3 million tons from China if sanctions on Iran are lifted, along with some from Iran and the rest from North Africa. The global market is still looking at a 45 million metric ton export demand, which impacts the global cost curve.

Just wondering if you have any sort of latest thoughts on the potential for the Indian capacity to come back. There have been some moving parts on some of those facilities going forward, some of them not? And then there appears to be more lower cost gas available to them. So just your latest and greatest thoughts there would be helpful?

Yes, similar to the previous question, this is an ongoing issue in our industry related to Prime Minister Modi's focus on an India-centric and India-driven industrial policy. We've been monitoring the additions to plants and will continue to do so next year, as these are essentially new constructions. Currently, there are both new plans and some that are idled, like the Matix plant, which is still non-operational. There are pipelines and infrastructure that need to be established to support these plans. We anticipate these installations will impact imports, likely reducing them by a few million tons. However, in the long term, natural gas prices globally remain low, largely due to the efficiency of North American shale producers, which has positively affected Europe and parts of Asia, particularly China. I believe India will benefit from this situation in the short run, but this advantage may not last. It ultimately depends on the cost structure and whether the Indian government is willing to provide substantial subsidies for these plants, which we believe they will not. Therefore, we expect import demand to stabilize at around 5 to 8 million tons within the next 2 to 3 years. More developments are expected to unfold.

On one hand, you talk about new supply not keeping up with demand growth; and on the other hand, when we look at coal prices in China, they've gone from, I think $12.80, a couple of years ago to $11.80 at the start of the year, now they're at $10.80. Can you talk about how you see coal prices developing? Why have they come down? And does the government really manage this within a range, how low can they actually go?

If you examine coal costs, you'll see that it is another globally traded commodity influenced by several factors: the cost of production, the cost to transport the product, and the cost to receive it. The decline in Chinese costs, both domestically and for imports from Australia and elsewhere, is not likely to remain as low as it currently is. Therefore, we don't anticipate a significant further decrease beyond our current operational range. Additionally, rising costs are being driven by changes in bunker fuel prices, which we expect to increase positively for us. Over time, the focus will shift to finding the right energy source for a growing global economy. While coal remains a viable source with ongoing new plant developments, we believe that in the long run, its use will diminish. China is also looking to boost their gas production through shale, which we expect to become a midterm fuel source. We will see how this situation evolves.

I think it's important to note that with LNG prices significantly decreasing on an MMBtu equivalency, coal prices need to lower to remain competitive. China remains largely reliant on coal for its energy needs. While there are several external factors pressuring coal, we see a growing demand for coal usage. Ultimately, we believe this will support coal prices, and we are not overly worried about significant changes at the upper end of the cost structure.

Just a question around demand in North America. So starting in the fourth quarter last year, we all talked about the bad fall application season, we talked about the short window in the spring. Given the crops we planted this year in North America, how much do you think we shorted the North American market on nitrogen? And then if we get the bump to, let's say, your $94 million midpoint acres of corn next year, how much more does that add? So kind of 2 buckets of incremental nitrogen growth over the next 12 months versus the last 12 months, if you could help break those 2 buckets out?

Looking at the demand in North America, nitrogen is essential and cannot be carried over from one season to the next. Last year, the fourth quarter was not favorable for ammonia, and we have experienced a few similar seasons, which we needed to compensate for in the spring. In the spring of 2019, conditions were wet and challenging; ammonia was applied in some capacity, but a significant portion shifted to upgrades like urea and UAN. I don’t have the exact application numbers available, but I don’t believe we fell short. We finished the second quarter with low inventory across both retail and producer levels, as well as imported supplies. Currently, in Chicago, the weather isn’t suitable for ammonia application, but typically we apply ammonia until early to mid-December. We’re hoping for a warming trend, as temperatures look favorable in Iowa, Nebraska, and Southern Illinois for completing the season. If we cannot complete that, I believe CF has the capacity to carry through to the spring, though that adds complexity to our operations. This situation highlights the value of our distribution and production assets, and our ability to quickly deliver products to market. The corn-to-bean ratio is advantageous for 94 million acres of corn, and trends in the protein market suggest continued attractiveness in that sector.

Good morning. This is Joan Tong on for Mark. Just a quick question on nitrogen application practice, in general. It seems like nitrogen application is a key area of focus in digital ag as well as some of the ag tech trend. Are you seeing any of those new technology or newer products affecting the way farmers are buying or applying nitrogen or affecting their interest in pre-buying?

When examining new technologies and biostimulants, everything is still in the testing phase and mostly theoretical, with some progress being made toward practical applications. Consequently, we have not observed changes in application practices. Over the years, with precision agriculture and education on proper application timing and methodology—often referred to as the 4Rs (right place, right time, right product, and right rate)—we're witnessing very positive farming practices. Our industry is undergoing significant education, which we are actively funding and supporting, focusing on watershed improvements and strong environmental practices. This knowledge is being shared among companies, groups, and particularly with custom applicators. For instance, fall applications of ammonia are now beginning as soil temperatures and moisture levels become ideal for nitrogen retention. We recognize these positive developments, and should the new technologies achieve their promoted outcomes, we anticipate a concurrent increase in nitrogen consumption, leading to higher yields, which benefits farmers and enhances the competitiveness of North American producers in the global market.

Back to the earlier question on capital allocation. New plants typically have some low-cost debottleneck opportunities. When you get to the first major downtimes coming up for your new plants, do you think we'll see some capacity expansions kind of on the order of magnitude of 10% or more?

John, I believe the current issue relates to the global operating rates of ammonia plants and the recent pricing of ammonia in Tampa. We view ammonia debottlenecks as not particularly attractive in terms of return on investment. However, there is a notable increase in margin per nutrient ton when converting ammonia into upgraded products like urea or UAN, and we are considering debottlenecking on the upgrade side. This, however, will not increase the nutrient ton capacity in the global supply and demand; it simply alters the form of nitrogen. Such debottlenecks are generally efficient from a cost standpoint and fit within our annual budget of $400 million to $415 million. These are definitely considerations for us, but they won’t significantly impact the cash flow dynamics of the business or our previous discussions.

In the Democratic primary, there's been a bit of a switch of the frontrunners. And one of the frontrunners that could win here has expressed the concern about fracking. We could see a change in fracking in the states in the next little while if couple of things work out that way. Have you started to think about what your risk appetite maybe for gas hedging? Or how you have to change your strategy if it's a change in that kind of political stance? And would you want to get ahead of some of that things?

Yes, I think there's a real question about whether the authority claimed by that individual actually exists within that office or if it requires something more. At some level, this is more of a Supreme Court-related issue, involving states' rights versus federal government power. Therefore, it's not clear to us that this power truly exists within that office, but others will have to make that determination. This is a significant macroeconomic decision for the U.S. If such a decision is made, it would impact not only our business but the economy as a whole. I expect this to remain mostly rhetoric and do not anticipate it materializing.

Tony, you mentioned nutrient tons shifting earlier. I'd like to know more about your gross margins by product, particularly in ammonia, where they seem quite narrow. Can you shift more out of ammonia, or are you required to move some of it right now because it's a product you can sell? Additionally, regarding ammonia, what is the impact of the Magellan pipeline closure? Does it affect your competitors' distribution costs more than yours? Could this situation lead to higher ammonia prices in the corn belt in the long term?

Yes, Steve. I think there are a couple of factors at play. I would focus more on the nine-month figures for ammonia rather than the third quarter since the third quarter has very little agricultural ammonia. The ammonia that did move during that quarter largely came from industrial contracts, which generally align with Tampa-based pricing. The Tampa prices have been quite low, which is why we aren't particularly enthusiastic about further ammonia debottlenecking, as they don’t generate sufficient returns. We operate our upgrade plans at full capacity. To shift more ammonia and enhance our operations, we will need to pursue some of the debottlenecking mentioned earlier. Our end market distribution network for ammonia is robust, as evidenced in the second quarter when we achieved significant volume movement and favorable price realization. With the Magellan pipeline down, coke and Enid have announced a major urea debottleneck expansion, which is reducing their excess ammonia supply. Other companies are shifting from anhydrous to upgraded products. We have the advantage at Verdigris of being able to barge ammonia from that plant, whether for internal use or exports. Therefore, we still have considerable flexibility compared to other players trying to minimize their reliance on ammonia distribution costs. Our terminal in the end market provides a strong boost during the application season, although spring is generally the heaviest application period. As Bert noted earlier, looking out the window here in Chicago, it's snowing, so it seems unlikely that there will be much of a fall application season this year. However, the shortfall in ammonia during the fall increases the value of upgraded tons as we approach spring.

And the only thing I would add, Steve, this is Chris, is that as you look at the ammonia segment, as Tony mentioned, looking at the 9 months is for probably more indicative, but if you look at the adjusted gross margin, you'll see that really a large part of that was depreciation, and it's pretty much in line with the prior year quarter. Additionally, the tons are up a little bit. As Tony mentioned, that Q3 is a higher maintenance period. So we had slightly higher ammonia output than we would have in a typical quarter.

From what I can tell at current ammonia prices, your Trinidad plant is running at negative margins, and that looks like it's going through into your equity line as well. Is there room for renegotiating the raw material pricing? Or how you're thinking about that in the current environment?

Yes. I think, for the most part, Jonas, the Trinidad plant that you're seeing at the negative margin is related to a tax amnesty program that we, along with our joint venture down there in that partnership, agreed which was related to withholding taxes from the year 2011 through current, and that was about a $16.5 million settlement that related to our portion of that. I think when you look at the Trinidad asset, it's still producing at a cash margin, given that the cash cost of natural gas down there is related to ammonia as well.

We announced about a year ago that our 5-year extension with NGC, the National Gas Company of Trinidad, had been finalized. The price we're purchasing gas at aligns with historical Carib-based gas agreements. Most other producers on the island have renegotiated their contracts annually. We believe we are in a favorable cost position compared to these producers. As Chris mentioned, the results you're seeing are due to a one-time tax issue, not a reflection of ongoing operational performance.

I wanted to discuss the UAN situation a bit more. I understand you had a successful build program, but it appears that increasing prices has been somewhat challenging moving forward. How are you approaching UAN sales going ahead, particularly regarding the timing and what we might anticipate in the fourth quarter compared to next year?

We are pleased with the fill program. Due to late and wet spring planting, we were able to carry applications into late July when our inventory was low at the program's launch. This allowed us to create a solid order book, enabling full plant operations and efficient use of our distribution assets such as railcars, trucks, barges, and vessels as we continue to engage in the international market. As we look toward the first quarter, we feel well positioned. Our inventory remains low, gas costs are favorable, and UAN prices in NOLA have stayed within a reasonable range, slightly higher than some reports suggest. As we approach spring, we see a larger margin spread in the interior, which gives us a constructive outlook on UAN and demand. However, if ammonia prices do not decrease, it will be challenging to apply enough product. We plan to remain active in that market. There have been challenges with UAN due to EU sanctions, significantly reducing our exports, especially to Belgium and France. We've redirected much of that volume to other markets while expanding our distribution in the U.S. We're preparing for a future that may focus heavily on North America, and we believe we can succeed in that environment while still engaging somewhat in the international market.

Just a question on your price outlook for next year. You talked, Bert, about how you thought prices might be flat, but was that a NOLA comment because there's some very strong pricing in the corn belt this year due to all the river issues? Are you expecting a repeat of that in 2020? And then just quickly, are you taking advantage of some of these higher offshore netbacks in urea by increasing your exports out of diesel currently?

Looking at the price outlook, we anticipate 2020 will be quite similar to 2019. This is based on our analysis of the cost curve and expectations regarding tonnage movements and business dynamics. It is relevant to note that river closings have occurred, which means barges cannot reach the northern territories and will remain stuck until spring, incurring storage fees. Currently, we believe inventories are low, with a significant amount of P&K in storage, which complicates urea's entry into dry spaces. This situation should yield a favorable outcome for us, as we have ample shipping capacity at our facilities in Pine Bend, Medicine Hat, and Port Neal. Regarding exports, we see a decline of nearly 50% when comparing them from 2018 to 2019, primarily due to less favorable values in North America. If the current pricing trends continue, we would be more inclined to engage in the export market. Our priority is maximizing margins, so if we can achieve higher prices overseas, we will increase our shipments from Donaldsonville.

And Don, the question about the end market premium, which did kind of blow out during the spring, given logistical challenges and how we're viewing that kind of next year. I think, given the end market distribution and production that we have, we always expect to at least capture kind of the transportation spread but what we find typically during high demand periods or short replenishment windows is that that's when the power of that network really shines. And the last couple of years have seen more volatility as opposed to more smoothness in terms of the operations and what's required and demanded and what the market is willing to pay for. And I think that there's a little bit of more of the same kind of the assist embedded in terms of how the spring runs, particularly when right now you've got NOLA trading at such a discount to the international space. What that really means is the very few imports are coming this direction because if you're an exporter out in the Middle East or someplace else, you can get better values by going to other parts of the world. So North America is not paying enough to attract imported tons at this point, which means that, that's going to further sort of stress the system relative to be able to resupply in the market, and again, that's when our network shines. So from our perspective, the fact that during the low demand volume quarter, Q3 prices lag a little bit relative to the international markets. Net-net, that's sort of not a bad thing.

I just wanted to talk about maybe what you think is the range or the price point rather in North America that you'd have to hit or maybe sustain that would bid in greenfield capacity? And maybe that's thinking more in a 3- to 5-year horizon?

I don't see it happening. If anyone is interested in building one, they can reach out to us, and we'll sell them a plant at replacement cost. I'm willing to do that. You would need urea prices to stay above $350 on average for a full year to even consider it. Even then, it would be more advantageous to build in Nigeria or Russia rather than here due to the uncontrollable labor costs.

And I think, just to build on Tony's comment, that's a sustainable price above $350 in order to get something that's in low teens type of return for what they would be spending on labor and equipment.

Thanks everyone for joining us, and we look forward to seeing you at the upcoming conferences.