CF Industries Holdings Inc (CF) — Q3 2021 Earnings Call Transcript

Good morning. And thanks for joining the CF Industries Earnings Conference Call. I'm Martin Jarosick, Vice-President Investor Relations. 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 results for the first 9 months and Third Quarter of 2021 yesterday afternoon. On this call, we will review the CF Industries results in detail, discuss our outlook, and then host the 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 will 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 the reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Thanks, Martin. And good morning, everyone. Yesterday afternoon, we posted our financial results for the first 9 months of 2021, in which we generated adjusted EBITDA of $1.5 billion. These results reflect the drastically improving industry fundamentals that we experienced over the course of the year. Nitrogen prices are at their highest levels in over a decade. A strong demand and lower worldwide production have tightened the global supply-demand balance considerably. At the same time, energy spreads between North America and high-cost regions have widened dramatically, supporting margin expansion for our cost advantage network. The CF team also continues to perform exceptionally well, navigating a couple of severe weather events in the U.S., our highest levels of turnaround and maintenance activity ever, and a challenging natural gas situation in the UK. Most importantly, they did so safely. Our recordable incident rate at the end of September was just 0.24 incidents for 200,000 labor hours, significantly better than industry averages. These factors have driven substantial cash generation over the last year. Our trailing 12-month net cash from operations was $1.7 billion, and free cash flow was $1 billion. As we look ahead, we're excited about the opportunities to build on this performance. We have good visibility into the fourth quarter of 2021. We have priced virtually all of our product shipments through the end of the year, while also hedging our natural gas requirements. While there is always some uncertainty about the volume of ammonia that will be applied in Q4 given the dependency on weather, we would expect full-year 2021 Adjusted EBITDA to land between $2.2 billion and $2.4 billion. Further out, we believe nitrogen industry conditions will remain positive for an extended period. As Bert will describe in a moment, we see a very strong demand, constrained global supply, and wide energy spreads between North America and Europe to persist for some time. These factors support our ability to continue to generate significant free cash and to deploy that capital to create shareholder value. Our priorities remain the same: invest in growth where opportunities offer returns above our cost of capital, and return excess capital to shareholders through dividends and share repurchases. We remain focused on disciplined investments, and are excited about the two new projects supporting our clean energy growth platform. Once completed, these projects will enable us to produce over a million tons of blue, or carbon-free ammonia. Chris will share more about our announcement yesterday in a moment. We're also pleased to have achieved investment-grade credit ratings, which recognizes and underscores all of the work we have done to remove fixed costs in the business, reduce debt, and highlights the positive industry fundamentals for a North American producer. On the Balance Sheet, we are quickly closing in on our target of $3 billion of gross debt, and expect to repay the remaining $500 million outstanding on our 2023 notes on or before their maturity. However, that still leaves a substantial amount of excess free cash flow we expect to generate. And as such, the Board has authorized a new $1.5 billion share repurchase program to facilitate the return of capital to shareholders. With that, let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail. Then Chris will follow to talk about our financial position and clean energy initiatives, before I return for some closing comments, Bert.

Thanks, Tony. In the last six to nine months, we have seen a dramatic tightening of the global nitrogen supply and demand balance. High crop prices and increased economic activity continue to drive demand. Meanwhile, lower global production and government actions have created a supply-constrained global market. The impact of this can be seen on slides 11 and 12, where both our spot cost curve and 2022 cost curve are much higher and steeper than in recent years. As you can see, the margin opportunities available to our network have expanded greatly due to a wide energy spread between North America and marginal production in Europe. We expect strong global fertilizer demand to last into at least 2023. As you can see on Slide 8, global stocks-to-use ratios for both grains and oilseeds are at their lowest levels in nearly a decade, supporting high crop prices. These prices will support farm profitability in North America, even with higher input prices incentivizing farmers to plant acres and maximize yield. Based on our order book, we expect the fall ammonia application season will be the largest since 2012, demonstrating farmer commitment to planting corn and applying fertilizer. We believe farmers around the world will make similar decisions, with import demand continuing to be led by India and Brazil. We believe global supply will remain constrained in the near term, with relief unlikely to appear anytime soon. We believe inventory in the channel is very low. Global production has been lower in 2021 due to severe weather in North America, higher maintenance worldwide, and ongoing European shutdowns and curtailments. Further, the Russian and Chinese governments are discouraging nitrogen fertilizer exports through the Spring. These factors suggest the potential for strong fertilizer demand to last beyond 2023, even if some regions are unable to secure enough product in this supply-constrained environment, resulting in lower yields. If this were to happen, demand will be deferred into future years as it would take more than two growing seasons to replenish global grain and oilseed stocks. As we prepare for the spring application season, we continue to receive substantial interest for any product we offer into the marketplace. We are building a solid order book for the first quarter of 2022, at the prices you see in the market today. Similar to what we did for the fourth quarter, we are adding natural gas hedges as we make first quarter product commitments in order to lock in margin and protect against significant energy price spikes. As a result, we believe we're in a strong position heading into 2022. In this dynamic market, we remain focused on leveraging our manufacturing, distribution, and logistics capabilities to serve our customers and look forward to the opportunities before us. With that, let me turn the call over to Chris.

Thanks, Bert. For the first nine months of 2021, the Company reported net earnings attributable to common stockholders of $212 million, or $0.98 per diluted share. EBITDA was $984 million, and Adjusted EBITDA was approximately $1.5 billion. Net earnings and EBITDA reflect the recognition of non-cash impairment charges related to our U.K. operations. As discussed in the earnings release, our results for the first nine months and the third quarter are preliminary, pending the completion of the impairment analysis and finalization of the non-cash impairment charges. We continue to monitor market conditions for the U.K. assets, which accounted for 2% of our gross margin in 2020. The Billingham complex is operating due to recently improved carbon dioxide contracts and industrial contracts that pass through natural gas costs. Operations at Ince remain halted. Free cash flow generation remains strong. The trailing 12 months net cash provided by operating activities was approximately $1.7 billion, and free cash flow was $1 billion. We believe we have a good opportunity in 2022 to build on these results, based not only on our positive outlook but also on increased production from our network. In 2021, we completed a record level of maintenance activity that included turnarounds at seven of our 17 ammonia plants. We will return to a more normal level of turnaround activity in 2022. As a result, we expect to return to our typical high ammonia utilization rates with gross ammonia production between 9.5 million and 10 million tons. We expect to sell everything we produce and achieve sales volume between 19 million and 20 million tons in 2022. As we sell these product volumes into a favorable market environment, we expect to continue to generate substantial free cash flow and create shareholder value. As Tony said, our Board authorized a new $1.5 billion share repurchase program, which becomes effective January 1, 2022. We continue to operate under our existing program which has enabled us to acquire more than 11 million shares to be repurchased since 2019. This program expires at the end of the year. At the same time, we'll continue to evaluate clean energy initiatives to meet the demand for ammonia's clean energy capabilities that we expect to emerge in the second half of the decade. This includes positioning our network for the production of blue and green ammonia to support the development of a market for low-carbon ammonia. Constructing carbon dioxide dehydration and compression units at Donaldsonville and Yazoo City are necessary steps to enable blue ammonia production through carbon capture and sequestration. These projects leverage our existing asset base and represent an efficient use of capital with a return profile we expect to be above our cost of capital. Once sequestration is initiated, we'll be able to produce more than 1 million tonnes of blue ammonia annually while reducing our carbon emissions in a meaningful way. With our strong Balance Sheet, we also have the flexibility to evaluate additional opportunities in the years ahead. We continue to collaborate with global leaders where we can provide value, including jointly exploring with Mitsui the development of blue ammonia projects in the U.S.. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to recognize our team here at CF for their strong work so far in 2021. Their commitment and dedication continue to be the foundation of our success. We are excited about what lies ahead for CF Industries. In fact, I think the Company is better positioned today than we have ever been in our history. We are again an Investment Grade Credit issuer, we have the fewest shares outstanding ever. We expect the business to produce between $2.2 billion to $2.4 billion of Adjusted EBITDA this year. And as we look forward to next year, we should have significantly more tons to sell at overall average higher prices than this year. The business should generate all-time records for free cash flow per share. We see demand for low-carbon ammonia developing that should provide a long-term growth platform for the Company. And with our investments in both green and blue ammonia production, we will be at the forefront of this exciting opportunity. Taken together, we have never been in a better position to create value for shareholders. With that, Operator, we will now open the call to your questions.

Yes. Yes. Thank you. Good morning, everyone.

Morning, Adam.

So Tony, Bert, Chris, I guess what I'm trying to reconcile and think about is the risk of demand destruction at current nitrogen and fertilizer prices broadly. I mean, you talked about record demand for ammonia in the fall, those prices were also booked several hundred dollars ago relative to where the stock market is. And so, as you think about the order patterns into the first quarter, do you see any risks on farmers and their application rates? And obviously, nitrogen is less discretionary, but do you think that could have any impact on agronomic yield given where affordability is today?

When you look across the world and where we are starting with just supply, it's just not there. This is more of a supply constrained market. The demand is definitely there. You're seeing we're desperately trying to pull in tons and we'll continue to do so through, I expect into their next fertilizer year, which begins in April. Brazil is ahead 10% year-on-year and probably will continue at that pace through importing urea, at least through February for their safrinha. And then we hit our spring in the Northern hemisphere. With what's going on in Europe with gas prices and the level of shutdown, there's over 11 million tons of ammonia that is currently not being upgraded into ammonium nitrate, urea, or CAN, and so tons need to flow, which were not planned in the supply and demand scenario to Europe. We were in a supply limited market, and that's what's going to keep prices elevated. The demand side of the equation is still very strong and you're correct. What we sold for fall and we're applying today was sold at levels much lower than the current market, which is probably over $1,000 for ammonia. That being said, we're selling $1,000 ammonia for fall application on the incremental tons that are available. Whereas I said on my prepared remarks, we're selling urea, and there is significant demand at that $730, $750 short ton NOLA, it's even higher in the interior at over $800, which we've transacted a poor deal. And you've seen in the publications, the UAN reaction and the demand pulling, and I just looked at the analysis of where we are to date with order books and demand. And again, at a very good place of $550 UAN, calculating all that forward with current trend yield at 177 bushels per acre on the trend yield. That's not considering the Ince dates where you will be 275 bushels. Even with rent as land, at today's economics, your cash positive. You're actually profitable at a pretty healthy level if you own your land even more so. There are ways to economize. And so if you have a firm, you can look at different options, but that's not going to come at the expense of nitrogen and probably even at fertilizer. It's going to come at some other issues. We're constructively, as I have said, positive. I would say very positive. And the customer advances continue to come in, and so we are working with our retail partners to make sure that that supply is available and our retail partners are buying that. And moving on, there's going to be a substantial amount of cash coming into our retail friends through year-end as farmers prepare for 2022. I would just add one thing, Adam, which is, as Bert said, demand is clearly there. If you look at our customer advances, our order book is strong and continue to sell forward, and it looks like farmer economics are positive. But given the supply shortfall, particularly now with both Russia and China withholding tons from the export marketplace, there is a real shortage of nitrogen and price has got to basically arbitrate who's going to get the scarce tons that are out there. And so it's not so much that you are going to destroy demand; there's going to be a lot of unmet demand that's going to be pent-up. And so, we do think yield is going to be on a global basis off next year. Again, not because of demand destruction, just because there's not enough tons available. And what that means is it's going to promote favorable supply-demand dynamics and core screens as we get out into 2023 and probably beyond. Our view is that this is a very, very healthy dynamic that leads to a much longer period of positive fundamentals for our business.

I appreciate all that. I will pass it on, thank you.

Good morning everyone.

Hey Joel.

Just thinking about your order book and Bert, I don't want to misquote you, but I think you've talked about before when prices go up, you tend to book more product more floor. It can no longer dated order book as prices go up. Prices have really gone up. So would that be the case that really you book more product into Q1 than you normally have at this time, normally have at the other time?

So we're pleased with our order book and like the position that we've placed ourselves in, with the opportunities that the market has given us and you're right we have seen an accelerated market we started the year at $350 per ton of urea, moved to $400 by April, moved to $500 by July, $600 in September, and $700 in October. We had index contracts at every week price and you can see in the publications we started our fill program in July at $285 NOL equivalent and then moved to $435 in September and then in October $535. And so as I said, we are booked for Q4 and the majority of the $285 UAN was shipped in Q3 a little bit in Q4. And then those other prices will blend in. As we look forward to Q1, we're starting to book those values today. And so you're looking at that's $530 to $550 for Q1, and $700 to $750 probably for urea. And we have yet to price Q2 ammonia. And once we book out Q1, then we'll look at Q2, but if there's substantial demand for Q2, we would rather sort Q1 first.

Thank you.

Yes, thank you. You laid out the significant levels of disruption in supply that are going on. And most recently, you have Russia jumping into that theme, and I wanted to get your view on how significant is that? I understand that essentially, all of the ammonium nitrate that Brazil imports comes from Russia. If that is the case, and where are they going to get it now? And are there regions of the world that you think are just flat out not going to be able to get nitrogen for the Spring?

Yes. In the context of the recent announcements, the situation with China is more impactful than that of Russia. China traditionally exports about 4 to 5 million tons of urea and phosphates, and this is significant because of the additional tonnage that is continually being bid for. With around 50 million tons of urea traded globally, removing up to 10% will definitely affect the market, especially given the demand from Europe that needs to be fulfilled. We can expect to see North African supplies moving into Europe, creating a gap in availability. As mentioned, some buyers will face challenges and may have to pay more to secure their needs. The news from Russia surprised us, as their nitrogen fertilizer demand has been stable at around 5.5 to 6.5 million tons annually, with exports making up the difference. Year-on-year, this suggests a potential shortfall of about 0.5 million tons. Brazil should still receive its ammonium nitrate from Russian suppliers like EuroChem and Macron, who will also allocate some of their product to Europe. However, we can expect decreasing availability each month from reliable sources, which will worsen the supply-demand imbalance that we've highlighted.

Maybe a question for Chris, the decision to focus on Yazoo City as another carbon capture project in addition to Donaldsonville, do you have any more clarity about where the demand was going to be coming from for the blue ammonia? Are you increasingly confident that you can move those tons and generate a sufficient premium to offset your capital investment and generate a return?

Yes. Thank you, Steve. Yazoo City has excess CO2, which is why it was selected for the dehydration and compression unit. Similar to Donaldsonville, we are in advanced discussions regarding various sequestration options, including enhanced oil recovery or entities currently applying for their Class VI permits in those areas. When evaluating the economics at Yazoo City, especially in light of the proposed 45Q tax incentive, it enables us to cover those capital expenditures and achieve a return above our cost of capital. This is largely possible because we are already capturing CO2 from our ammonia process, which means we have the necessary equipment in place and will have lower capital expenditures, thereby enhancing our return.

But I think we are confident we'll be able to move that product into position. Even if that demand is international, we can effectively showcase it at E-ville for minimal cost and export it as needed. It's not very far from Yazoo to D-ville, and we believe there’s a ready market for that time. Additionally, as Chris mentioned, Yazoo is attractive due to the excess CO2 available, its proximity to existing CO2 pipeline capacity, and numerous options in the area. The geology there is highly favorable, making Yazoo a clear addition to the D-ville project.

And I think when these projects do come online, because it will take 2 to 3 years, you'll also see domestic demand for blue specifically at the levels that we've been producing at Yazoo.

Thanks very much. When do you expect to produce 1.25 million tons of blue ammonia? And how do you think about the price of blue ammonia? Is it relative to the price of agricultural ammonia or is it independent or it's relative to fuel prices? And so with all those issues, how do you think about the returns on selling blue ammonia?

Relative to the value of blue ammonia, at a minimum, I would say the value is equivalent to a regular conventional ton plus whatever carbon jurisdiction you're talking about. In Europe, you're talking about EUR50 or above a ton. In the U.K. it's more like PS50. Other regions are going to have different cost structures from a regulatory environment. And so at a minimum, I would say you're able to get whatever prevailing value of carbon is on top of a regular traded ton and, as Chris highlighted, if you think about the total variable cost required to produce a ton of blue ammonia, we probably have somewhere in the neighborhood $5 to $10 a ton of electricity cost on plant site. And then we're in pretty advanced discussions with a number of potential parties on the transport and injection. And believe that that is a very manageable number from an overall cost standpoint and so the all-in the variable costs that we incur is less than the value of the 45Q credit. And so the differential will go towards paying back the capital even before you put any premium on blue ammonia. So just on the value of the 45Q, we feel comfortable that we'll get returns above our cost of capital. And then to the extent you're able to realize margins and additional premium on blue, that just further adds to the attractiveness of this investment for us.

Okay, and for my follow-up, some farmers say that they really can't secure nitrogen product for the second quarter. And in your commentary, you said you're really trying to put together your first-quarter order book. Is that a generally correct description that farmers can't really get commitments into the second quarter just yet?

I would say that's not necessarily the case. We don’t interact directly with farmers; instead, we operate within the retail and wholesale trading sector: first retail, then some wholesalers, and a bit of trading for exports. Our products are being sold and moved to the market, and the retail group has substantial quantities available. We are producing record amounts of UAN. Despite some disruptions from the hurricane and weather issues that caused us to lose some tons, we are still moving our tons into the market. We have a record number of UAN facilities in operation, and none of our railcars are in storage. Products are moving and available in the market. However, CF has not yet set prices for Q2. That’s a pricing stance, not directly about volume or commitments. I believe that if retailers or farmers are looking for quotes or offers, those should be accessible in the market, and there will be enough product to fulfill spring demand, not just from CF but from the wider industry as well. Imports are increasing, domestic production will improve, and spring will be here. I apologize, Jeff, I missed the initial part of your question regarding when blue ammonia will be available.

We have gone ahead and launched those projects now, we anticipate probably end of 2024 or early 2025. So by 2025, we expect basically a full year of operating on that basis.

Okay. Great. Thank you so much.

Thank you and good morning, everyone. Tony, I would love to get your thoughts on what the next few years, maybe 3 to 5 years, might look like. Currently, we have very tight grain stocks, a spike in gas and coal prices, and significant food inflation. Bert described a plausible scenario where we could see lower yields due to difficulties in obtaining nitrogen. What do you think the global response will be over time in terms of managing the food supply to avoid extreme situations like this in the future, while also balancing our climate goals and green energy aspirations? How do you see this unfolding?

That's a great question. As you noted, there are many competing priorities that have secondary and tertiary effects that aren't fully understood by everyone. The drive to lower the availability and affordability of fossil fuels due to climate change concerns and the shift toward renewable energy is directly linked to the current situation in Europe, where natural gas costs are exceptionally high. This has resulted in many plants being offline. Additionally, numerous governments globally are focusing on limiting nitrogen fertilizer usage because of worries about environmental nutrient loss and runoff, including concerns about potent greenhouse gases like nitrous oxide. In places such as Canada and elsewhere, there is significant pressure to reduce application rates, which will impact yields. There are various competing priorities that ultimately tend to benefit North American producers, given our access to low-cost gas and our position on the supply curve. As yields face challenges from limited nutrient availability or initiatives aimed at cutting nutrient application rates, grain prices are likely to remain high for an extended period. In the future, I believe governments will have to respond to public demand for affordable food, which may mean prioritizing certain measures that were previously viewed as essential over others in order to ensure global food security. We may see a shift, as evidenced by Germany decommissioning nuclear plants and relying more on coal-fired power, which is not necessarily aligned with green initiatives. Similar trends are appearing in China, the UK, and across Continental Europe as they cope with high gas prices. It seems there will need to be a reevaluation of what is necessary for the planet to sustain its food supply and energy needs.

Thanks very much. I appreciate all those thoughts.

Thank you. And back on the earlier question on the blue ammonia, do you expect to sell it as fuel or do you expect to sell it as fertilizer, and have some carbon credit broker get you the revenue for the sequestration values?

Yes, John. As Chris mentioned, and we've highlighted earlier, we do have this in place with Mitsui, we're having very productive conversations with them. I think there is a real emphasis, particularly in Japan, but in some other regions as well to go into coal combustion of ammonia with coal to reduce the CO2 emissions out of those plants. And we think that that is something that I will develop into a pretty sizable market. Estimates can be as much as 5 million tonnes by the time you get to 2030, or possibly even before. And that's a huge increase in terms of the total amount of ammonia being consumed, particularly with you've got curtailments and outages and across broad swaths of the production universe here in Europe and the UK. And so we're excited about the Clean Energy attributes that blue ammonia has. We think that that's probably where the majority of value sits, at least in the near term. Well, I think there is certainly the possibility to get some incremental value off of carbon sequestration in the soil from an agricultural application given that most of that is going into the voluntary marketplace today where values are traded at a pretty small discount to where structured carbon trades and the rest of the world. I think that's probably the last place just because of lower values that we would go now that the U.S. develops a more structured approach to the cost of carbon and you can get a scientific valuation placed on carbon capture to sequestration and the soil then that may change the math. But I think in the near term what we're really looking at is more of a clean energy source and we're working very closely with Mitsui to help develop that and bring that about. The other point though that I would say is we believe these projects are attractive just based on the 45Q credit that we ought to be able to generate a return on these projects without any embedded premium on Blue. Now, our expectation is there's going to be a sizable premium on Blue. But to be clear, we're able to make the math work pretty easily just with the 45Q credit.

And then how are you thinking about the pace of buyback under the new authorization? Is it going to be opportunistic, or are you thinking something that's just going to be more structured over the two years?

Yes. I think based on what we're looking at in terms of not only current year performance but our expectations for next year, there's going to be a lot of cash that needs to find a home. And so while we'll certainly buy more on dips or at lower prices, I think it needs to be the volume that we're talking about is sizable enough that it probably needs to be a bit of a structured leg in there as well. So ultimately, probably a combination of approaches.

Thank you.

Great, thank you. Just over the last five years, there's been a plethora of variables that's still driving a bit of volatility in the end unit UAN pricing versus urea. Just given the current supply and demand dynamics, trade flow adjustments over the last few years, and the recent DOC case, can you just comment on your outlook for UAN pricing for '22, '23 as it pertains to UAN versus urea? Thank you so much.

You're correct, in terms of a lot of variables, a lot of volatility. In the last year-and-a-half, we've traded as low as $115 a short ton for UAN, and as high as $550 in NOLA. What drove that volatility? We believe we were pushed down low because of excessive imports of subsidized products and consigned products. And therefore, we took the case forward to the Department of Commerce and the ITC, and were successful. We're pleased with that result, and we believe that that information will come out with what the ruling will be and how that will be applied. Step 1. And so the discount to urea took place for several years, and that was an inappropriate response to a more valued product and expensive invested product and an asset base that we've invested several billion dollars to maintain and construct. So we're entering probably a normalized market now where UAN again, is trading at a premium to urea for the reasons I just articulated, and it should. So through spring, most definitely it will trade at a premium, will reset in July as we always do. We believe at a higher level for the reasons we have articulated. We're in a differentiated global market driven by a lack of supply with high levels of demand that is not going to correct itself probably for a couple of more years. And so in that context, we see UAN trading at an advantaged position to urea, as well blue ammonia and ammonium nitrate. And that market, we don't see demand destruction; we see differences of supply availability.

That's great information. As a quick follow-up, considering the situation in China, what is your intermediate to long-term outlook on export trends and the expected price per ton on an MMBtu basis? Thank you.

While examining export trends, it's essential to view the Chinese economy as a whole. Considering their energy initiatives and the impending winter season, there is a significant risk that some major cities may lack sufficient heating. The question is whether to prioritize urea production or the population's demand for heating and the generation of value-added products instead of commodity products. I would lean towards the latter. The current situation in China is shaped by various factors, including pollution, economic choices, and the shutdown of higher-polluting production. Additionally, there are restrictions affecting product availability. China's production capacity has decreased from a peak of 90 million tons to about 75 million tons today, with operating rates fluctuating between 55% and 75%. This means that only around 53 to 55 million tons of urea are available for use annually, while domestic consumption has increased to over 50 million tons. Therefore, there isn't a substantial surplus for export. The question arises: why export a product that destroys value? This indicates that the future of production in China will necessitate sourcing from other locations, such as Nigeria and Russia, which are both projected to ramp up production. However, this will take time, and the market won't adjust quickly to the influx of new production, despite it being needed. But I would also add, Chris, that according to the current forward curves, Europe, especially Eastern Europe, has become a more critical production area compared to China. However, the factors Bert mentioned indicate that China will not significantly flood the global market with excessive exports. This situation will help keep what we believe will be a relatively tight supply dynamic. Considering the energy spread differentials looking ahead, we are facing a much steeper supply curve than in the recent past, which presents us with a significant opportunity to generate cash in the U.S. Therefore, we are very optimistic about all of these trends.

Hi. Good morning.

Good morning, P.J.

There's all these resource nationalism going on about nitrogen that you talked about, but yours is still a net importer of urea. So how did this play out? Would growers switch from corn to soybeans at the margin, or maybe the industrial demand has to back down to make room for agricultural demand. In your mind, how does this play out in the medium-term?

I think that the U.S. based on crop prices, inefficiency of growers and requirements on the industrial side is able to bid away tons from other parts of the world that are less able to do so. Particularly those economies that require government subsidies in which to bring tons in. And so our expectation is that there's going to be availability of products here in North America. And honestly, I don't see a scenario where industrial demand starts backing off based on ag demand. I see a situation where you end up with inflation in terms of the industrial goods as opposed to some reduction in economic output. But I think ultimately, as Bert talked about, you see some new projects on the drawing board, but not very many, and particularly not enough with respect to some of the closures and shutdowns or even curtailments that you see out there right now. Ultimately, I think what's going to have to happen is, you end up seeing more capacity at it because the world just needs more than what's available. That's before you even get to clean energy applications for ammonia going forward. So I think the net of all of that suggests that there are new plants that the world is going to need to construct in order to be able to feed itself and utilize ammonia in these kinds of new alternative applications versus what we've seen in the past.

I believe the idea that those two are competing is inaccurate. In North America, we are situated in a resource-rich area for natural gas and energy products. We have the infrastructure in place to transport resources efficiently, whether by rail, barge, truck, or pipeline. As other economies shift towards lower carbon output or consumption through natural gas or renewables, I anticipate that natural gas spreads will either continue to expand or remain at elevated levels. While it may not stay at the current $20 per MMBtu, I expect it could stabilize around $10 instead of $6. This positioning will help maintain North America as a low-cost, high-margin region globally. Over time, we may observe some industrial production being compromised, particularly in Europe and possibly in China as we transition to a new market.

On the competition between corn and soybeans, the current situation favors corn, which has been beneficial for us. This period is crucial as it influences farmers' decisions regarding spring planting and resource allocation, leading to increased fertilizer bookings, which is favorable for us. We are witnessing strong industrial demand in our portfolio, and we are managing both aspects well, which is a positive outcome for us and the industry as a whole.

Great. That's good color. And just one quick one. Tony, when you talked about, and thank you for giving the details on blue versus green ammonia. It seems like blue ammonia will be more costly to make by $20 or $30 or something like that per ton. And so why would growers buy more expensive ammonia unless they're incented to buy? What's the mechanism for them to spend more?

So remember, $20 to $30, that might be in the range or it might be a little high relative to our expectations, but that's not a crazy number. Remember, the 45Q tax credit, the way that it was originally constructed was going to be 45-ish to $50. In the current RAGs, it's substantially above that. Although it's a little bit more expensive for us to make, if you net against it the 45Q tax credit, it's actually a discount relative to conventional ammonia from a producer side. But the reason why a grower would pay for it is if they want to be able to make carbon labeling claims that go into consumer products companies because they're going to care about that; or if you're trying to produce low carbon ethanol that might qualify for California's clean fuel standards, that might be a reason for it; or even in the voluntary market, if you can get $5 to $10 a ton for sequestering carbon in the soil being a grower. There are a couple of high-profile transactions that happened along those a couple of months ago. I think there's a lot of value there potentially for growers to try to differentiate what they're doing versus just a commodity bushel of corn. And so based on where some of those pockets of value are, we would expect there to be some margin opportunity for us or at least some incremental demand for that product. And again, to the extent that the U.S. actually adopts some more regulated and structured cost of carbon. Then there are real economics available to the farmer if they can demonstrate the sequestration and sell those credits into a structured marketplace.

I was just going to add to that. I think one of the benefits of this is the incremental demand that Tony is speaking of, is the agriculture is already using ammonia, but as you start to see more of the industrial move in, that's where you'll start to see the bidding on ammonia go up and more constraint. So it's really about the demand addition that we think is going to occur here.

Plus you have to remember, if it's $50 more a ton, let's take it there, then conventional, to a farmer that's $10 an acre. That's two bushels. So the cost is insignificant to the farmer based on the benefits that Tony articulated. And we already have people wanting to buy blue ammonia. So we think there's going to be a demand challenge, which is very good for our business in the future years.

And that's also honestly why Donaldsonville and Yazoo City are not the last dehydration collection projects that we're likely to build. We want to continue to evaluate other places with ready access to sequestration and continue to build out our network, because our belief is it's a project that pays for itself and also gives upside opportunity on access in the clean-energy market in a way that is differential for us versus other market participants.

Thanks everyone for joining us, and we look forward to speaking with you throughout the quarter.