CF Industries Holdings Inc (CF) — Q4 2021 Earnings Call Transcript

Good morning. And thanks for joining the CF Industries Earnings Conference Call. 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 full year and fourth quarter of 2021 yesterday afternoon. On this call, we will review the results, 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 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 results for 2021, in which we generated adjusted EBITDA of $2.7 billion, net cash from operations of $2.9 billion and the company record free cash flow of nearly $2.2 billion. These results were made possible by the exceptional performance of the CF Industries team. We managed through two severe weather events in North America, completed the highest level of maintenance activity in our company’s history, navigated runaway gas costs in the UK, and adeptly responded to a rapidly changing marketplace for our product. Consistent with our 'Do It Right' culture, we did all of this safely. Our year-end recordable incident rate was 0.32 incidents per 200,000 labor hours, outstanding by any measure, but truly remarkable given the challenges of the year. Several of the factors that drove these terrific results in 2021 are expected to persist into the foreseeable future, namely strong demand, high-energy spread differentials and outstanding execution by our team. Let's start with the robust demand component. Significantly improving grain prices drove strong agricultural demand while economic recovery led to high industrial use as well. With December corn trading at $5.90 this year and $5.56 for next year, we see strong ag demand for at least the next two years. On the economy-driven industrial demand side, the last two months have seen inflation at 7% year-over-year, and that doesn't appear to be slowing down. So the combination of strong agricultural and industrial demand suggests overall global demand for nitrogen will continue at a torrid pace. Energy spread differentials between North America and high-cost Europe and Asia production exceeded $20 per MMBtu for most of the fourth quarter, which provided the opportunity for us to achieve record margins for our products. As we look forward, the energy spreads continue in the $18 to $20 range for the balance of this year and remain well above $10 for 2023 and 2024. Those energy differentials provide an extremely attractive environment for North American producers and give us a lot of confidence about our continuing cash generation potential. On top of this backdrop of very strong demand and high energy spreads were a set of factors that negatively impacted global supply in 2021. Turnarounds and maintenance activity originally scheduled for 2020 were deferred into 2021 because of the COVID pandemic and a desire to keep employees safe by limiting contractors coming on-site. The catch-up in maintenance activities last year took an unusual amount of production out of the global supply. Two significant weather events in North America, Winter Storm Uri and Hurricane Ida, further reduced production. The natural gas price spike in Europe and Asia, exceeding $30 per MMBtu for weeks at a time, caused plans to curtail or shut down in those regions, further reducing supply. And adding to these pressures, several important producing countries in an effort to ensure nitrogen availability and affordability in their home markets enacted export limitations or outright bans, including China, Russia, Egypt, and Turkey. The result was significantly constrained supply at the exact time demand was surging, which led to the predictable outcome of rapidly increasing nitrogen prices. These dynamics came to a head in the second half of the year, and in particular, during the fourth quarter of 2021 when global nitrogen prices reached record highs. This provided the market opportunity for the company to deliver an all-time record quarter, both in terms of EBITDA and free cash flow. This enabled us to return $800 million in capital to shareholders through share repurchases and dividends. We paid $500 million of long-term debt and returned to investment-grade credit ratings, while adding roughly $1 billion of cash to the balance sheet. As I said earlier, we believe the market dynamics of last year have plenty of runway ahead. To this environment, we bring unique capabilities honed over the past decade. Our investments in people, safety, and growth have built the industry's highest-performing manufacturing network, as shown on Slide 6 of our materials. Slide 10 underscores how this advantage is amplified by the low-cost position that North American natural gas provides us. As a result, we are able to capture the significant margin opportunities in front of us. Now let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail. Bert?

Thanks, Tony. We believe industry fundamentals point to a continued tight global nitrogen supply and demand balance and an extended period of positive operating conditions for low-cost producers like CF Industries. Global nitrogen demand remains robust, underpinned by the need to replenish global grain stocks. As you can see on Slide 9, global coarse grain stocks-to-use ratios remain low, supporting high crop prices and another strong year for farm incomes. High demand for coarse grains leads to high demand for our products, as farmers are incentivized to apply fertilizer to maximize yield. This helped drive our strongest fall ammonia application season since 2012, and our expectations for a high level of coarse grains planting this year, we project that 91 million to 93 million acres of corn will be planted in the United States, along with strong wheat, cotton, and canola plantings across North America. We believe it will take at least two more growing seasons at trend yields to fully replenish global stocks, supporting continued strong agricultural demand. At the same time, increased economic activity is driving industrial demand for ammonia, urea, and diesel exhaust fluid. We had record DES sales volumes in 2021 and expect continued growth for this important emissions control product. Against this demand outlook, we believe global nitrogen inventory today is low. This reflects the impact of both strong demand and lower global production in 2021. Looking ahead, we expect global supply to remain challenged by high natural gas prices in Europe and Asia, along with coal costs and tightening environmental regulations in China. This should continue to affect the profitability of producers in these areas and lead to lower operating rates. Additionally, natural gas forward curves suggest continued favorable energy spreads for North American producers compared to marginal producers in Europe, as you can see on Slide 10. We are well-positioned for the spring fertilizer application season ahead. We are pleased with our order book, which we began to build at peak prices in the fourth quarter. Our manufacturing network is operating at a high level, and we look forward to leveraging our logistics and distribution capabilities to meet demand as fertilizer applications and planting begins in North America in a few weeks. With that, let me turn the call over to Chris.

Thanks, Bert. For 2021, the company reported net earnings attributable to common stockholders of $917 million or $4.24 per diluted share. EBITDA was approximately $2.2 billion and adjusted EBITDA was just over $2.7 billion. Net earnings and EBITDA reflect pre-tax non-cash impairment charges of $521 million related to our UK operations. For the fourth quarter of 2021, net earnings attributable to common stockholders were $705 million and EBITDA was $1.2 billion, and adjusted EBITDA was $1.26 billion. Adjusted EBITDA and free cash flow in the quarter were both company records. These financial results allowed us to opportunistically accelerate capital return to shareholders at the end of 2021. In the fourth quarter, we repurchased 7.5 million shares for $490 million, effectively completing the $1 billion share repurchase program that expired at the end of 2021. Since 2019, we have repurchased nearly 19 million shares. We continue to view share repurchases as an important tool for return on and return of capital. As you can see on slides 13 and 14, over the last decade, we have invested in the business to grow free cash flow, while at the same time, lowering the outstanding share count. As a result, shareholders have accrued more of the asset base, doubling their free cash flow participation on a per-share basis compared to our prior free cash flow record back in 2011. We believe our new $1.5 billion share repurchase program provides us a strong platform to build on this performance. At the same time, we remain focused on disciplined investments in clean energy that offer returns above our cost of capital. We have begun construction on the green ammonia project at Donaldsonville with completion expected in 2023. This year, we'll begin work on the installation of dehydration and compression equipment at Donaldsonville to enable production of blue ammonia. We believe these projects are well-timed to accelerate the growth of a global market for blue and green ammonia. Our estimated CapEx spending for 2022 of $500 million to $550 million includes expenditures for the Donaldsonville blue and green ammonia projects. And through 2025, we have committed $385 million in capital to these projects and installation of dehydration and compression equipment at Yazoo City. We also remain committed to reducing the gross debt on the company from $3.5 billion to $3 billion by the middle of 2023. We start 2022 with a strong balance sheet, positive multi-year industry outlook, and stable maintenance CapEx plans for the next few years. We also expect gross ammonia production in the years ahead to return to typical levels of 9.5 million to 10 million tons, supporting higher sales volumes compared to 2021. As a result, we expect to have significant excess free cash flow to deploy in the years ahead. With that, Tony will provide some closing remarks before we open up the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for an outstanding 2021. Our performance would not be possible without their commitment and dedication. Our results last year highlight the success we have had investing in the business to grow capacity and cash generation, while at the same time, lowering our share count. We are currently at an all-time low for shares outstanding. In fact, almost 20% below our IPO level. With a record year for free cash flow, coupled with our lowest share count, our cash flow per share is truly spectacular. Despite that, our equity appears undervalued given our free cash flow yield. I'd encourage you to look through our materials on slides 13, 14, and 15 to see exactly what I'm talking about. But what is really exciting and has all of us very bullish is the party is just beginning. We have reduced our fixed charges and debt levels and are again investment-grade. We have only modest capital requirements over the next couple of years, which includes our investments in clean energy and decarbonization. Futures for grain prices and energy spreads suggest we have a long runway ahead with significant margin and cash generation opportunity, and we are sitting at our lowest share count ever. In short, things are pretty good, and we are just getting started. With that, operator, we will now open the call to your questions.

Yes, hi, good morning.

Good morning, P.J.

Quick question. Post winter, if European gas prices were to come down? And how do you see global nitrogen and urea prices would react? And what are you assuming for European gas prices as 2022 progresses?

I believe our best information comes from where the forward markets are trading. For instance, TTF for Europe, NBP for the UK, and JKM for Asia. As I mentioned earlier, the differentials between Henry Hub and those locations are $18 to $20 in spread value. This creates a significant margin opportunity for our low-cost North American production base. If energy spreads decrease, we would anticipate a compression in pricing. However, based on the current market trends regarding energy spreads, that outcome isn’t expected.

Yes, I'd say, looking at the forward curves of what Tony mentioned on gas and the efficiencies from most of the European producers, they're still going to be troubled at that $750 to $850 a metric ton cash or full-cost range. That's an incredible margin opportunity for a North American producer, when you have a substantial portion of the global ammonia capacity challenged. And so, therefore, that should then pass on to urea and UAN. And so, I think the projections that are out there for the correction in the second half of the year will be higher than what is at least thought of today in a very acceptable range for CF.

And the other thing, I think P.J. is, global economic recovery is continuing at a pretty strong pace in the aftermath of the pandemic. And against that backdrop, Europe is not generating new sources of energy supply. So, as long as economic activity remains high, and there's no supply, it's not clear what's going to drive a drop in energy prices or gas prices in Europe.

Great. Great. Thanks. That's really good color. And then secondly, as you build your green ammonia plant by next year, can you discuss your technological progress that you made in design and engineering of your electrolyzers? And any new update on cost of green ammonia, given your renewable electricity prices? Thank you.

We are not designing the electrolyzers ourselves; instead, we are licensing the intellectual property and design from our IP providers. We are using a conventional alkaline-water approach because it has been proven to be reliable. However, the cost of green ammonia is still high, especially in North America, where we can access low-cost gas and have options for capturing the CO2 emissions from the ammonia plant. Producing green ammonia costs four to five times more than conventional ammonia. In energy-challenged regions like Europe, I see a real future for green ammonia. In natural gas-rich, low-cost areas like North America, it has some potential, but I believe it will take longer to develop, as blue ammonia will likely lead the market in the near term.

Yes. Thank you. For your fourth quarter volumes, when would you say you really had the majority of that volume booked? How far did that happen? And going forward, how much of your first and second quarter volumes would you say are already booked?

In the fourth quarter, we introduced Fill for UAN at $285 for NOLA and secured a significant volume at that price. We then initiated a second round of UAN orders in the $420 to $430 range. Reflecting on the averages, the Q3 and Q4 blend was around $400. In Q1, we took orders in Q4 for our forward book at prices that are currently being published, which are very attractive. When considering this from a farmer or retail perspective, inventory is being built at these levels. Some conversations at the farm level center around costs, focusing solely on the peak cost of UAN rather than the blended cost available through retailers at appealing prices, such as $6.40 for bought corn or $6 forward corn. We started selling ammonia at approximately $600 and capped some incremental volume at around $1,200, showcasing the blended cost there. Our average price for urea during the quarter was $650, primarily procured in Q3 and early Q4, with most of it shipping in Q1 at favorable prices. This pricing structure has been established over time. For Q2, ammonia has been sold at levels between $1,200 and $1,400, which allows for further modeling of this structure.

Thank you, Bert. Chris, could you provide some insight on capital deployment? Should we expect you to maintain the $0.5 billion share repurchase each quarter? If that's not the case, what other options are you considering? I'm particularly interested in your thoughts on whether there are any underperforming assets that could be available for acquisition or if you're exploring any brownfield expansions.

I'll begin with capital deployment. As mentioned earlier, we focus on both returning capital to shareholders and generating returns on that capital. Over the past few quarters, we have discussed maintaining a consistent stream of share repurchases, along with opportunistic buying, especially given our expected free cash flow in the coming years. Recently, there has been some volatility in our stock, and we believe that throughout the year, there may be chances to make larger share repurchases. Consequently, we may maintain higher cash balances at various times compared to our historical levels, which could extend over the next couple of years due to our free cash flow. Currently, the demands on our cash are fairly minimal. Our capital expenditures are stable and close to historic levels, along with a $500 million balance remaining on the 2023 notes. Looking ahead, we anticipate having significant funds available for deployment. On the growth front, we consistently evaluate available assets and their market valuations against new developments. At present, existing assets tend to be trading at lower prices compared to building new ones. We are optimistic about a growth in ammonia demand, particularly in the latter half of this decade, which may present various opportunities for both inorganic and organic growth in the future. We have worked diligently to strengthen our balance sheet over the past few years so that we are ready to seize those opportunities when they arise.

Great. Thank you very much. You hit on the solar earlier and naturally, there's an end unit correlation between UAN and urea. But can you just quickly comment on the near to intermediate-term respective SSDs trade flow developments, just given things are different in 2022? And then just also how investors should be modeling the relationship going forward? It seems that things are a little bit tighter in UAN these days. So any color would be helpful. Thank you.

Let me just give you some high-level thoughts, and I'll turn it over to Bert for some more specifics, Chris. But UAN really should be trading at a pretty significant premium to urea on a per-nitrogen unit equivalent basis. There's a lot more capital intensity around producing UAN and there's farmer efficiency and agronomic efficacy that favors UAN, particularly for certain types of crops. And therefore, both the fact that it costs more to make and that it's more valuable and easier to use suggests it ought to trade at a premium. The fact that for a while there, it was not trading in a premium, I think, is directly related to some of the unfair trade practices and dumping activity that was going on by subsidized producers in certain countries like Trinidad and Russia. And we're starting to see things get back to where they ought to be on an economic basis. But I'd also say we have a fair bit of ability to move our production slate around in order to maximize margin opportunity depending upon where the different products are trading. So given where urea is trading today, versus where ammonia and UAN are trading today, we're going pretty much full on UAN and dramatically reducing our urea production. And in fact, it wouldn't surprise me if you see others in the world looking at that same math doing a similar kind of thing. So these things tend to even out over time, and it's not really the instantaneous spot price that matters. It's more the longer-term kind of relationship and benefits that they offer. But I'll turn it over to Bert for some more specifics.

Good morning, Chris. What Tony explained regarding the structural nature of UAN and its appropriate trading position is entirely accurate. CF has invested $5 billion from 2012 to 2017 in new assets, primarily producing UAN in Donaldsonville, with additional capacity from Port Neal that benefits North American farmers. This supply has been restricted due to the dumping and anti-competitive actions from Russian and Trinidadian suppliers. Now, that idle capacity is being utilized to meet those needs. As a result, our system has shifted, and we are much more active on the coasts. We have constructed tanks in California, allowing us to ship unit trains and nearly loop them weekly, which will capture a significant portion of the supply needed in California. The same applies to the East Coast, where we have built a vessel and contracted another to transport additional tonnage all the way up to Canada. The movement of trade flows reflects our improved positioning and a more level playing field, enabling us to utilize our capacity for the benefit of American farmers. We've reduced exports and are even maintaining a discount compared to global prices. Currently, Europeans are paying more for UAN due to high gas costs and ammonia imports. Economic factors should influence product flow in that direction. We have prepared adequately and have 5,000 railcars in service, as I mentioned regarding the vessels. You should see this reflected in Q1 and Q2, with more supply heading to the United States.

That’s always helpful information. As a follow-up, Tony addressed some of this in your prepared remarks, but considering the various factors affecting forward feedstock costs and thinking about cost curves for 2023 and 2024, along with the uncertainty in Chinese supply over the next couple of years depending on mid-year developments, could you share your updated thoughts on intermediate-term operating rates for the whole industry? We can focus on urea, particularly who you believe the marginal cost exporter will be for 2023 and 2024, as well as your expectations for new capacities coming online. Additionally, there have been some recent facility closures, so an updated picture on the overall situation would be greatly appreciated. Thank you.

Bert, go ahead.

When analyzing the current global operating rates, they are approximately 80%, but this figure is not evenly distributed. In the United States, we’re achieving about 110% capacity due to the excellent management of our facilities, while in China, the rate is closer to 60%. The global gas supply situation, particularly with gas prices in Europe ranging from $20 to $25, presents similar structural costs for Asian producers, including Chinese importers who are incurring these expenses. Currently, India relies on LNG imports for about 60% of its gas supply and is facing the same pricing challenges. As a result, India's tender prices are lower than expected, necessitating greater imports. For the first time, we are witnessing a mismatch of high demand and low supply, which is influencing global pricing. India previously paid the highest price in the world, around $600 a ton, for gas, driven by high production costs and low inventory levels. This scenario reflects the broader global trends. Looking ahead to the second half of the year, with continuing low inventories and declining production capacities, we anticipate favorable pricing conditions.

But I'd also say, back to Bert's point, in terms of LNG dependency, European and certain Asian producers are going to be very comparable in terms of high-cost production and competing in terms of what that marginal ton is. I think China is very serious about their environmental controls, and also trying to manage their coal and emissions and therefore, although we expect them to return to be a supplier on the export stage, I don't think there's – I'm not afraid of this boogeyman out there that's going to come and don't access product into the global marketplace. And so what is really telling for us is the forward energy curves. Look, even if they compress from today's huge differentials to $10 in 2023 and 2024, that's still on a basis like $350 of margin differential for a North American producer per ton of ammonia. And those are energy spreads that this industry has never really seen over a prolonged period of time. So the fact that we're talking about three or four years of these huge margin opportunities for North American production is really a unique time in this industry.

Thank you very much.

Yes. Thank you. Good morning. I was actually hoping to maybe follow up on some of the color you just provided, Tony, Bert, on kind of cost curve dynamics? And if you could just help frame what proportion of separately, ammonia, urea, UAN, seaborne product and global production actually is at the high end of the cost curve? Because I think there are some meaningful distinctions amongst the different products in terms of how much of the curve is actually buying that very expensive gas and just how we think about the differences in terms of the cost curve between the different products because certainly, the current ammonia, urea, UAN prices are not telling all the same thing as it relates to cost curves today?

Yeah. I mean, I would extract urea pricing at the Gulf out of this equation for a minute and look at UAN and ammonia pricing. And I think you do see a relatively more consistent story in that regard. I think, what you see with urea, particularly during a period of time where it's not going to ground in North America, is there's a tendency by certain rogue traders to want to try to manipulate the market and either build a position, or take shorts or do other things. And so there's not a lot of volume transacting at what looks like a pretty discounted price relative to the other products. And certainly, we're not anxious to go out and book forward on those kind of prices because we don't think that really reflects the underlying value that nitrogen provides as you get into the growing season. And so, I think the place to look at them really is more on global ammonia prices because remember, if you're making urea, you first got to make ammonia. And if you can make ammonia and sell it at a much higher margin structure as just ammonia, then you'll do that and pretty soon urea supply starts drying up pretty quick. So I mentioned this in response to a question earlier, which is I wouldn't fixate on the instantaneous price on these things, but really look at the broader kind of economics that underpin it. And Europe for a while had about 11 million tons of ammonia production off-line during the third and fourth quarter of last year because of very high energy prices. When you tighten up the market by that much, it's going to have a seismic impact across all products. So our view is, there is a very significant portion of the supply curve running at really high energy costs, and that's going to ultimately dominate where products should trade and the value of those products. And if there's some short-term discontinuities because of some sloppiness or some trading activity in urea that doesn't really tell the story. Ammonia is a much clearer picture.

Yes. And just some further commentary on the support of the end products to be able to pay for these prices. And when you look at the subsidized markets, subsidized on the outputs of Europe and India, it's an amazing opportunity because the farmers are still going to make money at these prices. When you look at a market like the United States, that has subsidies of crop insurance, the prices today relative to total inputs is going to be the second best year of profitability in the last 10 years. And then even in Brazil for the second crop corn is profitable even at lower levels of yield. And so when you look at the cost curve dynamics on the production side as well as the demand side for the output, we have a very solid structural basis for the future like we've articulated.

Okay. That's all really helpful. And maybe just separately, thinking about the carbon capture and sequestration that you're evaluating down in Louisiana. Can you just help us think about what still has to happen before that can actually move forward? And how 45Q would play into that or what it would take to ensure that you're getting that 45Q credit?

We have Board authorization to move forward with the dehydration and compression that are engaged in. We've done some preliminary engineering and are engaged in the detailed engineering and beginning to place orders for the larger pieces of equipment. So, we expect that to be online probably in the next two and a half to three years. And even under the existing 45Q credit, it still is very attractive returns, and it's the right thing to do because we want to be able to decarbonize our network and we also believe that there's going to be a premium on blue ammonia that we'll be able to produce. So for a lot of reasons, we're excited about that. But if some of the proposals that have been talked about that increased the price of carbon actually get turned into policy, then those investments are going to look even more attractive. But we're full steam ahead. It's not like we're waiting on some other approval or anything else that needs to be done. We're moving forward and commencing construction.

Yes. And we feel confident about the transport and sequestration side, whether it be EOR initially and then the Class VI, there's a lot more activity going on with Class VI. So we should expect some of those and in the locations of some of our plants, specifically the Donaldsonville and Yazoo City. We're in quite a few discussions with different groups on that. So we don't view that as a risk either. And as Tony said, these projects even at their existing, going to provide very good returns to the investment.

All right. Great. That's really helpful color. I’ll pass it on. Thank you.

Hi. Good morning. I wanted to follow up a bit on Adam's question, some of the answer that Bert and Tony gave. Is such a big discrepancy between cost curve support for urea, looking at European gas costs and what we're seeing in NOLA, why don't you just ship urea to Europe and take advantage of the arbitrage or is it not that simple?

This is Bert, and that is possible. But we've made a commitment to the American farmer, and we believe that the supply and demand balance here is such that we need to supply and utilize our distribution system and gain the end market premium as well. But there is an opportunity. We have exported. We're looking at that all the time and looking at arbitrage opportunities and timing against our commitments. And you've seen us act against or for those opportunities in the past, and we continue to evaluate them today.

But Joel, I'd say even on top of that, because vessel freights are pretty high for some of those things. As we look at it, we've got terrific opportunities just to maximize UAN production and keep that here as well as sell ammonia, because both of those products are far superior on a margin per unit event basis than urea is right now. So, we're really dialing back our urea production. And we tend to be net back driven focused. So if that means export, then we'll do that. But to Bert's point, there's really good opportunities for us. When you think about the cost of vessel freight and demurrage and supply chain costs continue to go up for us to keep a lot of that production domestic and focus on the products that are not as manipulated as urea is.

And my second question is different. Tony, Chris, you know that CF doesn't provide guidance. However, over the last few quarters, you have started to offer some insights. For instance, you shared some expectations for the current quarter. So my question is, why have you chosen not to provide any insights into what Q1 might look like? Additionally, do you believe that Q1 earnings will be similar to, higher than, or lower than Q4?

So let me start off with. Historically, we had not given guidance. There was so much kind of rapidly evolving movement of price and everything that was going on last year. And we had felt like we had a pretty solid order book on both forward product as well as gas prices that when we did our Q3 earnings call, which was in November, we thought we were in pretty safe ground to give full-year guidance. Well, four weeks later, here we are announcing a press release that we completely missed it, and we were off by like 25%. So that's why we don't give guidance because the pricing environment is so volatile that within the span of four weeks, we got it really wrong. Suffice it to say that 2021 was a fantastic year for us. And if you look at where we're entering 2022 versus where we entered 2021, we're miles ahead of where we were last year. So we're pretty excited about where we sit today.

Thank you.

Thank you very much. There are suggested tariffs that would be applied to Russian companies, and these proposed tariffs vary among the different Russian companies. Akron has one level while EuroChem has another. Regarding the imports of UAN into the United States from Russia, could you break down what percentage would face higher tariffs, what percentage would face lower tariffs, or explain how the tariff calculation would work on average?

We initiated the case in June of last year, which was reviewed by the International Trade Commission, and we unanimously won on all counts. The next step involves the Commerce Department, and we are currently awaiting the final results, which we expect by the end of Q2 or the beginning of Q3, although I don’t have a specific date. The findings indicated that there was dumping and anticompetitive behavior, and we emerged victorious, which is positive. Generally, there are different levels of tariffs for various companies. To provide some context, there are approximately 1 million tons of Russian imports and 1 million tons of Trinidadian imports entering the United States. North America's UAN demand, factoring in Canadian production of about 16 million tons, leads us to the conclusion that the U.S. can replace those imports. We anticipate that as a result of this case, some of those imports will be redirected to other markets, such as South America or Europe, while the United States will be adequately supplied by North American production.

Yes. The main point is that North American producers can meet all the demand in North America. From a logistics perspective, this is the most efficient way to achieve that. Therefore, we don't foresee any significant long-term imports from Russian and Trinidadian producers, as domestic producers can adequately serve the local market.

Okay. Great. Thank you very much.

Yes. I wanted to discuss the pace of urea imports into the US. It appears that the total amount of imports has increased year-to-date, even though prices in NOLA have been lower than those internationally. Regarding the recent tender from India, they accepted around 1.4 million tons, but there were offers for approximately 3 million tons. How do you view these trade flows, and is the rise in imports related to domestic producers shifting production toward UAN? Any insights would be appreciated.

You are correct that the imports for the current fertilizer year, which runs from July to June, have increased compared to both last year and a three-year average. This rise is attributed to higher prices, with shipments from regions like North Africa and the Middle East arriving at elevated levels following departures in September and October. However, it's important to note that production in North America was affected by hurricanes and maintenance shutdowns. We expect that inventories at the start of the fertilizer year from June to July 2021 were also at historical lows. Current estimates suggest we are about 1 million tons above last year's figures, but when adjusting for inventory changes and production, the actual increase is likely under 0.5 million tons. The North American UAN or urea market is approximately 15.5 to 16 million tons, with about 5.5 million tons imported. This means there is still a significant amount of imports needed. The recent tenders from India have absorbed much of the available shipping capacity that could have headed to North America, while Brazil and Europe are lagging and need to secure vessels to replace their production. Overall, we see a favorable outlook for the future, not just for North America but globally as well, given these circumstances.

Thanks. And then just as a follow-up. I just wanted to clarify in terms of your volume commentary and getting back to 9.5 million to 10 million tons of gross ammonia production. And then I think later in the remarks, you mentioned that you guys could potentially produce up to 110% of nameplate capacity. I guess, I'm assuming you probably came into the year with low inventories, but if you shift more production from urea into UAN this year, like what should we be thinking about in terms of the total number of product tons or a range in 2022 for that? Thanks.

Well, yes, as you shift urea into UAN, you certainly make more UAN tons, but you also end up with less ammonia tons. But net-net, product tons go up a little bit. We really think about it in terms of nutrient tons even though we report sort of product segments lines. And the nutrient tons goes back to the ammonia production to begin with. So as you said, Michael, we're looking at 9.5 million to 10 million ammonia tons. The 10 million is probably a little bit on the outside range just because our Ince plant in the UK continues to be down right now, and so 10 million is probably a stretch. But somewhere in that range is very likely. And then Bert is going to manage the product upgrade slate in order to maximize netbacks for us. And that typically has gone anywhere from 19.5 million to 20 million tons and maybe a few more here and there. As you said, low inventories coming into the year. I would think we're still probably in the 19% to 20% range depending upon what the product mix ends up looking like overall. So it's pretty much of a normal year for us.

Yeah. The only thing I would add is with the UK plants being a little bit lower from an ammonia production. If you recall, we've mentioned before that really, the profitability that comes from the UK is pretty de minimis from that level. So really, the margin benefit that Tony mentioned of, even with being below the 10 million is still going to be comparable to what we saw historically.

Thank you.

Thank you. Can you provide some guidance on how much stock you might repurchase? If your stock maintains over a 10% free cash flow yield, could the pace of share reduction resemble the earlier years depicted by the light green line in figures 13 and 14?

Well, what I would say is, John, I don't think we're going to give an actual number as to what we're going to be repurchasing on the opportunistic side. But obviously, you've pointed out a very true point that where the free cash flow yield is now on per share shows that our share price and what our outlook is not only for the remainder of 2022, but into 2023 and 2024 shows that they're very undervalued. I think I'd point back to really the volatility in our shares and opportunities throughout the year. So while we don't have a lot of calls on capital this year when it comes to CapEx and other things, we will be deploying that to share repurchase. The timing of that is going to be different throughout the year just based on not only the free cash flow yield, where we see that, but also on the volatility of the shares.

I would like to emphasize that, as Chris mentioned earlier, there is a predictable component to this, as well as an opportunistic aspect. We want to be prepared to take advantage of any negative movement in our share price for the benefit of our long-term shareholders. We will act aggressively when the timing is right, while also recognizing that there is a consistent portion that will continue to operate steadily day after day.

And then how long do you think it's going to take before we start having more ammonia capacity announcements by the global majors like you and Nutrien and Yara, or is this a little bit like the oil and gas industry where there doesn't seem to be a supply response to the high oil prices?

Yeah. I mean, I think the important thing here is, by the time you decide to announce a project, it's probably four to five years until you're actually on stream. So what's less important about that decision is where today's prices are trading. What's more important is the longer-term supply and demand balance and what you believe is going to happen. As Chris mentioned earlier, we firmly believe that ammonia and hydrogen are going to play a critical role in decarbonizing economies and that demand is going to well exceed supply. The question is kind of when do you begin that build process? And right now, as Chris also said, the existing capacity trades at a discount to new construction. So as we think about it, you preserve the supply and demand balance, you get immediate cash flow, you're buying it at a relative discount, if you can find existing assets that you like as opposed to building new. But the world is going to need more ammonia by the time you get to the back end of this decade. And I think those announcements are coming. But I think they're going to come in a different form from how they've happened in the past. In the past, there's been fertilizer plants that have been built. And I think what you're going to see is more clean energy ammonia plants being built, ones that are either purpose-built around carbon capture and sequestration for blue ammonia production or possibly green production that you'll – announcements like have happened in Australia and the Middle East and in Europe. And so, and those tend not to be "fertilizer plants" those tend to be more energy-oriented plants. And I think that's what we'll see more of. The cost point on those is substantially less than building in fully-integrated fertilizer complex. And so I think, John, it's probably not too far in the future before you'll start seeing some real interest there. And you've already seen a raft of announcements around green projects. But I also think, there's only a few places in the world where you really want to go build a blue plant and North America is one of them. We've got access to very plentiful low-cost natural gas. We have the right regulatory and legal framework, and we've got the regulations in place in order to facilitate carbon sequestration. And so I think this really is the ideal place for blue production to really develop and become a significant part of the clean energy source for the world.

Thank you.

Thanks for taking my question. I'll leave it at one given the lateness of the hour. Given everything we've discussed. Is there any consideration for maybe refinancing the 2023 maturity rather than paying it down? And how are you thinking about the balance sheet now given sort of the parameters that you outlined for the earnings power over the next few years?

Yeah. I think – I don't think there's any change to that, Vincent. Our goal is the $3 billion, and it's really looking at it over a longer wavelength and allowing us, as we said, to have a balance sheet that's strong enough where we do see opportunities so we can take advantage of those. I think historically, sometimes taking on a little too much debt when those opportunities came we may not have been able to go in both feet. So right now, there's nothing that's changed from our balance sheet commitment to be at $3 billion in the take out those 2023s rather than refinancing those.

The good news is that what we're observing in the marketplace moving forward isn't preventing us from accomplishing our other goals. We can easily manage the $500 million in maturities due next year while still pursuing all our objectives. Looking back to last year, we returned $800 million in capital to shareholders, reduced our debt by $500 million, and increased our balance sheet by $1 billion. We feel confident that we have the capacity to achieve everything we aim to do based on the current operational environment.

Okay. Great. Thanks very much.

Thanks, everyone, for joining us, and we look forward to continuing conversations at the conferences we have coming up in the next few weeks.