CF Industries Holdings Inc (CF) — Q1 2022 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 first quarter of 2022 yesterday afternoon. On this call, we'll review the results, 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'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Tony Will, our President and CEO.

Thanks Martin, and good morning everyone. Yesterday afternoon, we posted our financial results for the first quarter of 2022, in which we generated a quarterly record adjusted EBITDA of $1.65 billion. Our trailing 12-month net cash from operations was $3.7 billion, and free cash flow was $2.8 billion. These results reflect the continuing outstanding performance by the CF Industries team against the backdrop of a very tight global nitrogen supply/demand balance, and wide energy spreads between North America and marginal production in Europe. We ran our assets extremely well. Our North American manufacturing plants set first quarter production records for gross ammonia, UAN, and diesel exhaust fluid. We leveraged our extensive distribution network to serve customers in the corn belt and expanded our logistics capacity to serve customers on the East and West Coasts. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.25 incidents per 200,000 labor hours, significantly better than industry averages. This level of exceptional execution will continue to serve our customers and shareholders well as we expect the global nitrogen supply/demand balance to remain tight for the foreseeable future. Nitrogen demand will continue to be underpinned by the world's need to replenish global grain stocks. We believe it will take at least two years and possibly longer to accomplish this. At the same time, high energy costs in Europe and Asia are likely to lower global operating rates at certain times of the year. So, we expect nitrogen supply to remain tight with the marginal time being very high cost. Russia's invasion of Ukraine has exacerbated both demand and supply situations. First, by impairing Ukraine's grain production and exports; and second, by creating uncertainty about natural gas price and availability in Europe. Taken together, these factors make it likely that the global nitrogen supply/demand balance will stay tighter for longer. Given these market dynamics, coupled with our position on the low end of the cost curve, we expect to generate significant free cash flow in the coming years. This will enable us to invest in our clean energy growth initiatives while also returning substantial cash to shareholders. We are excited about the growth opportunities we see in the clean energy applications of ammonia. Earlier this week, we announced in conjunction with Mitsui, a potential new blue ammonia facility in North America. We also continue to advance both our green and blue ammonia projects at our Donaldsonville, Louisiana facility. We expect to begin making green hydrogen and green ammonia in 2023 and have up to 1.7 million tons of blue ammonia production beginning in 2024. These are important steps forward in the development of this exciting new market opportunity, one where we are clearly leading the way. In a moment, Chris will provide more details on our approach to capital allocation moving forward, including our capital expenditure outlook and our return of capital program. But first, let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail. Bert?

Thanks, Tony. Farm returns in North America for all crops are forecast to be historically high despite higher input costs, setting the stage for another strong year of farm incomes. This includes farmers who will be growing corn, wheat, cotton, and rice. As you can see on slide 9, global coarse grain stocks-to-use ratios have not improved over the last six months, driving nitrogen-consuming crop prices toward record highs. The timeline to replenish grain stock has been getting longer, not shorter. We believe it will take at least two more years and trend yields to fully replenish global stocks, supporting continued strong agricultural-led demand for nitrogen. We continue to expect healthy planted acres of nitrogen-consuming crops this year. Looking at new crop futures, returns for corn exceed those of soybeans, which supports our projection of 91 million to 93 million acres of corn planted in the United States in 2022 if weather cooperates. During the first quarter, our team leveraged the flexibility of our network to ensure that we were able to serve customers by helping prepare for this coming demand. Our rail utilization was at its highest level in years, and we increased UAN large capacity. We also chartered three times our typical volume of U.S. flagged Jones Act vessels to move UAN efficiently to the East and West Coasts. Rail service to some of our customers has become a serious issue in the second quarter, and we continue to work through those challenges. We believe that high crop prices and strong farm income will also drive demand for nitrogen in the world's largest urea export destinations. We expect the recent urea tender by India to be the first in a regular cadence of tender activity in the coming months. We also project urea consumption in Brazil to remain strong in 2022. We do not see many catalysts in the near term to significantly increase global nitrogen supply availability. We expect China to resume urea exports in the second half of the year. However, it is unclear how large the volumes will be given the Chinese government's focus on keeping food inflation under control and balancing the environmental impact of coal-based urea production. Marginal production in Europe that cannot export to the Southern Hemisphere will face difficult operating decisions during the Northern Hemisphere off-season if natural gas costs continue to be high. We expect Russian fertilizer producers to continue to export but at a reduced rate due to sanctions, limited internal logistics and port outlets, and difficulty arranging insurance and vessel shipping. CF Industries remained well positioned in this environment, even as natural gas costs in North America have increased. Natural gas forward curve suggests continued favorable energy spreads for North American producers compared to marginal production in Europe, as you can see on slide 12. We continue to work with customers on their requirements for the spring fertilizer application season, as weather has largely delayed planting so far. Farmers have proven that they are able to plant their acres in a short amount of time once that weather window opens. While most customers are prepared for first applications, we will leverage our expertise and extend the distribution network to meet the top-dressed and side-dressed demand that will emerge after planting. With that, let me turn the call over to Chris.

Thanks, Bert. For the first quarter of 2022, the company reported net earnings attributable to common stockholders of $883 million, or $4.21 per diluted share. EBITDA was $1.68 billion, and adjusted EBITDA was $1.65 billion. The trailing 12-month net cash from operations was $3.7 billion, and free cash flow was $2.8 billion. Given the substantial free cash flow we are generating today and our confidence in the company's long-term free cash flow outlook; I want to walk you through our expectations for capital allocation moving forward. First, we reached our long-term gross debt target of $3 billion in April after we repaid the final $500 million of our 2023 notes. This level of debt and the work we've done over the years on lowering fixed charges provides us with financial flexibility now and through the cycle. We expect capital expenditures to remain in the range of $500 million to $550 million per year. This estimate includes planned maintenance activity, as well as our investments in clean energy initiatives that are in progress. We continue to advance the Green Ammonia project at the Donaldsonville Complex and have placed orders for all major equipment. The construction of the CO2 compression and dehydration facility at Donaldsonville is expected to be complete in 2024, enabling us to be first to market with the significant volume of blue ammonia once sequestration is initiated. While we leveraged our existing network to create decarbonized ammonia capacity, we're excited to pursue organic growth in blue ammonia capacity through a joint venture with Mitsui. We believe the investment related to this effort in the next two years will be measured, with a FEED study beginning shortly and FID in 2023. The nearly 50-50 joint venture will support our ongoing commitment to disciplined investments in the emerging clean energy market and provide supply of low-carbon ammonia to support the global transition of clean energy. Given these relatively modest calls on capital, we expect to have ample capital to return to shareholders through our quarterly dividend and share repurchases. The Board's decision to increase the dividend by 33% was driven by two main factors: the more positive outlook for cash generation across the cycle and the significant reduction in fixed charges we have achieved, through debt reduction, share repurchases, and other initiatives to eliminate frictional costs in the business. We also continue to view share repurchases as an important way to provide shareholders a return on and a return of capital. During the first quarter, we repurchased approximately 1.3 million shares for $100 million. This represented the ratable portion of our share repurchase program for the quarter. Based on our free cash flow generation outlook, we expect to increase the ratable portion of our share repurchase program to $175 million per quarter. Along with the higher quarterly dividend, this positions us to return greater than $1 billion to shareholders on an annualized basis. We are also prepared to opportunistically repurchase additional shares at attractive levels as we have in the past. 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 the entire team here at CF Industries for their outstanding work during the quarter. Our focus continues to be on operating safely and leveraging our manufacturing and distribution network to serve customers, a role that is even more critically important today than ever. The North American agriculture sector, including CF Industries, is poised for strong results over the next several years as we collectively work to replenish global grain stocks. The geopolitical issues in Europe, particularly Russia's invasion of Ukraine, only increases the importance of the role North American farmers play as well as the rest of the supply chain in providing food for the world. The last year has underscored the critically important role of ammonia to the world both for fertilizer and industrial applications. It has also confirmed our belief that new demand for ammonia in clean energy applications will grow significantly in the coming years. CF Industries will be a leader in supplying blue and green ammonia to meet this emerging demand, and we are excited about our progress in this area. We have tremendous opportunities before us and we intend to capitalize on them to create meaningful shareholder value in both the near and longer term. With that, operator, we will now open the call to your questions.

Thank you. Good morning, everyone. I would like to ask about the decision to pursue the blue ammonia project with Mitsui. Considering that you still need to complete the full FEED study and FID next year, could you share some rough estimates regarding capital costs that led to this announcement? Additionally, could you explain why the blue ammonia project with Mitsui in the US Gulf was prioritized over other potential opportunities in your portfolio? I'll leave it at that.

Yes, one reason we are pursuing a greenfield site instead of brownfield is to maintain some geographic distance from the Donaldsonville facility. This decision stems from experiences like last year’s Hurricane Ida, which knocked our facility offline for three weeks. Having a separate location for blue ammonia production, along with the ongoing blue and green ammonia projects at Donaldsonville, ensures we can maintain a consistent supply even in adverse weather conditions, making long-term supply agreements for low and zero carbon ammonia possible. That's why we chose a different location than Donaldsonville. As for choosing blue ammonia over a full fertilizer plant, it reflects our and Mitsui's belief in the emerging and strong future demand for this product. We anticipate a growing need globally, especially since the U.S. currently lacks a structured regulatory cost of carbon, unlike much of the rest of the world. An export-focused facility that can tap into international markets while leveraging Mitsui's expertise is essential for our success. Regarding project economics, we are undertaking the FEED phase to accurately assess the project's costs. Based on our recent experiences at Donaldsonville and Port Neal, and adjusting for inflation, we estimate the greenfield facility will cost around $2 billion. This investment will be shared equally between us and Mitsui, paced over five years. Although it may seem substantial, it translates to about $200 million annually in capital over that period, which we view as manageable given our generation of $2.8 billion in free cash flow over the past year. I am confident that this plant will provide an excellent return for our shareholders.

Okay. That’s really helpful color. I’ll pass it on. Thank you.

Sorry about that. Good morning, Tony, Bert, and Chris. Another quick question on this blue ammonia facility with Mitsui. On top of your blue ammonia at D'ville and Yazoo City, is the demand for blue ammonia in your mind going up, or do you think the current 45Qs can cover these incremental costs, and you can make it financially attractive? Can you give some details on this incremental cost because others in the chemical industry don’t agree that you can really cover the incremental cost with 45Q credits? Thank you.

Yeah, P.J., I think the big difference between ammonia production and most of the rest of the industrial emitters is that as a byproduct of the ammonia production process, we capture and extract two-thirds of the CO2 from the process anyway. It's the process waste stream that comes from ammonia production using a steam methane reformer. And so we've already captured that. In some instances, we use that CO2 for urea production and in others, we end up venting the excess CO2 that we don't need. But the most capital intensive and costly aspect of CO2 sequestration is the capturing of CO2 to begin with. And because that's already baked into how an ammonia plant operates, the incremental cost that we're looking at is really just the dehydration and compression of the CO2 stream so that it's suitable for injection into geological sequestration wells. And so for us, as we announced at Donaldsonville, we're looking at roughly $200 million for dehydration and compression and it's probably going to be in the neighborhood of $5 to $10 per ton of CO2 of incremental utility costs down there. And then there's going to be some transport and some injection costs as well. But that still leaves plenty of money available within the current framework of the 45Q tax credit to earn a very favorable return on the incremental capital that we need to put in place, which is only $200 million. And for a greenfield facility or a brand-new facility, it's basically the same plant, whether you're doing conventional or blue we're just adding the additional dehydration compression. So again, call it another roughly $200 million. And again, on that kind of basis, the 45Q tax credit provides a very attractive return profile for us. So that's why ammonia production is pretty unique in the industrial landscape in terms of most likely able to take advantage of the 45Q credit. I think if you were doing blue gas capture or other things, you're talking about probably $120 to $150 a ton that you need the credit to get to in order to justify it based on today's technologies. Now I do think that there will likely be ongoing improvements and developments to reduce the capital and operating costs going forward on blue gas. But where we are today, you need a much higher 45Q tax credit. Fortunately, we're not encumbered by that given that we already capture so much CO2.

Great. Thank you for the detailed explanation, Tony. I will pass it along.

Yeah. Hi. Thanks for taking my question. I'm just curious about some of your assumptions around China urea exports in the second half. I mean, you seem convinced that there'll be at least some that hits the market. I don't know from your thinking, what are some of the gating factors that drive whether material comes out of China or not, given the moves that they've made over the past six months?

Yeah. This is Bert. Good morning. And I think some of those gating factors are real and pronounced today with what's going on with inflation and the government's desire to control that internally and not really looking externally for how that is impacted. There was an announcement today or information in the trade publications about a continued enforcement of those export bans possibly through or into 2023. So it's not clear how many tons will come out, when they'll come out. The previous position was in June that the export ban would be lifted. And so what we have seen is a very tight control of product, both N&P coming out of China. And China represents about 10% of the global trade, so a significant portion taken off the market. What we've seen internally to China is the price is controlled, almost half of what has been traded on the international market. So again, a reflection of controlling costs to the farmers and keeping that product in China. So we've been open that economically and from incentives as a marginal producer that they should be exporting on, again, on an economic basis. But on a governmental action basis, that probably will not happen. So let's just say we had probably expected 3 million to 4 million tons. It could be half or less than that, looking at it today.

Thank you. Very helpful.

Great. Can you – hopefully hear me?

Yeah, we can hear you.

All right. Just checking. All right. So Tony and Chris, you're posing to generate a lot of free cash flow over the next two, three years. I mean, we could all go back and forth about spreads. But I think the conclusion there is pretty clear. When you think about all the opportunities you have with both – some of these smaller, high-return, low-risk brownfields, what you're looking suite, obviously, share buybacks, which Chris hit on. How should we think about, let's say, over a rolling two to three-year period, the balance of capital allocation versus projects versus return to shareholders versus the last three to five, it seems like you're still juggling a lot of opportunities? So I'd really appreciate some intermediate to long-term color? Thank you.

Yeah, Chris, thanks. This is Chris speaking here. As Tony outlined and I did in our remarks, we have a number of projects that are laid out for the blue ammonia that will be happening over the next couple of years. That will take a couple of hundred million dollars. But as you point out, the amount of free cash flow that we have will be able to do everything from the share repurchases to the increased dividend that we just announced and also these projects. I think the one thing is there's – we're just talking about the projects that we've laid out here. We consistently look at other organic and inorganic projects. Over this past 12-month period, we've had almost $3 billion of free cash flow generation. And as Bert mentioned, some of the outlook that we see, that will be even greater. So I think it provides us with a lot of opportunities to do a lot of different things. One is to do the growth plans that we talked about here. And then two is to also move into some of the share repurchase and return of capital that we talked about, not only the ratable portion, which is going to be $700 million this year, but also the opportunistic piece. And given the volatility in our share price, I think we're looking at potential opportunities, not only this year but in the coming years where we can get in and get quite a bit of shares out at favorable return for shareholders.

And Chris, I would just add, and I agree with everything Chris Bohn said. But we are now at our desired level of long-term debt of $3 billion. We think we're well into the investment-grade ratings, even though we haven't been moved there yet. But if you just look at the strength of the business and how we're performing in the relatively small amount of debt that we're carrying, we feel very comfortable with that. And so as Chris said, even if we're ultimately decided to move forward on this new blue ammonia project, it adds roughly, as I said, kind of $200 million plus or minus per year to a range that's $500 to $550 million of capital per year. We don't really have additional debt reduction, so call it, $700 million to $750 million of capital going out the door that we've earmarked already. And as Chris pointed out, in the last 12 months, we did $2.8 billion of free cash flow. So, that still leaves a very healthy amount for return of capital to shareholders. And I think based on how the business is performing, we can do all of the above.

Got it. And just as a quick follow-up. There's obviously a lot of different dynamics going on with the UAN market. I mean some of the major producers, and obviously, Central and Eastern Europe are now completely cut offline. You've got, obviously, a lot of other trade considerations as well, which have evolved over the last year. And I think a lot of us couldn't help but see your mix this quarter. Tony and Bert, how are you thinking about not just the season but also the intermediate term outlook for UAN versus urea on end unit spreads and just how that's evolving? It seems like it's pretty favorable, but just any additional thoughts would be greatly appreciated. Thank you.

Yes, I'll share my brief thoughts and then hand it over to Bert. One observation is that we are seeing UAN returning to its proper valuation compared to urea. Producing UAN is more expensive than urea due to higher capital requirements. However, it provides farmers with an effective product from an agronomic perspective and allows for more efficient application of other chemicals, such as fungicides, herbicides, and insecticides. This means it benefits growers while costing producers more, which typically results in UAN trading at a premium to urea on a per unit of nitrogen basis. This premium is largely due to the duties imposed by the Commerce Department and the International Trade Commission on products that were being dumped illegally by certain foreign entities. We expect UAN to continue trading at this premium compared to urea. Now, I’ll pass it over to Bert.

Yes, Chris, looking at what is going on in the UAN market, we're at the precipice of planting in applications, which are late in North America. But product continues to flow and move to the interior. And as Tony said, it is trading in a premium to urea. And we have benefited or moved to a higher production and remain that way through first quarter of favoring UAN over urea. And as long as that spread maintains, we will continue to do that. The outlook is favorable. The demand is there with 91 million to 93 million acres of corn and what is taking place with restrictions of feed grains coming out of Russia and Ukraine, the world where we rely on Argentina, Brazil, and the United States and to a lesser degree, India and Australia to supply the wheat and some of the corn out of South America, especially. And that will take a lot of nitrogen. And we're seeing growth in UAN in those markets and continued demand in North America. Europe is constrained. With the gas spreads taking place today at $30 TTF against $7 to $8 in North America, it is difficult to produce and participate in the global market from Europe, as they have in the past. So we expect trade flows to change, especially as a result of Russia and then UAN from the United States to possibly go where it's most urgently needed in a food-constrained world.

It’s great detail. Thank you so much.

Catch a little bit on kind of what's happening from a logistical standpoint with the delayed spring and some of the issues on the rail lines. I mean, do you guys have sufficient urea, ammonia with your in-market storage up in the Midwest? And I guess, how is the delayed planting season, potentially playing a role into some of your outlook for the spring? Thanks.

Hey, good morning, Michael. Bert. And you're right, logistical issues have been front and center when we went public a week or so ago with some of the delays from the Union Pacific and some other rail carriers. We have been working with our rail providers to have good solutions in place, whether that be service and railcars, and that is a work in progress today. And so we've been communicating with our customers on any potential delays or movements. But because of that, we've geared up with additional UAN large capacity as well as I mentioned in my prepared remarks, vessels to go to the East and West Coast to just expand our capability to fully supply North America with the needed UAN, and we've ramped up production, as we talked about in previous quarters. What I think is taking place then it gets to the delays because of weather. And we've had cool wet weather, which has delayed access to the fields, and that impacts ammonia. And so the conversations with customers today are very real of do you have enough in place? And if you're asking us to move it, don't rely necessarily on the railroads today, but what we can do with our distribution network. And I do think ammonia will be challenged. We still have a good portion of our ammonia to be applied to the ground. But I think you're going to quickly go to putting the seed in the ground, especially as we get closer to the middle of May and potential yield impacts of late planting. So yes, we have sufficient storage. Yes, we have sufficient product. We are running our plants at 100% capacity and working very long hours to make sure that we supply our customers with the nitrogen nutrients that they need.

Yes. I just wanted to ask a little bit about this project with Mitsui. Do you think that they will be able to secure long-term contracts with the Japanese utilities, either at a fixed price or maybe a fixed tolling fee with gas pass-through so that this project could ultimately give you a fixed return? And on the capital, is this a POX or autothermal unit so that you can capture all the CO2?

Hi, Steve. Yes, we are still in the final stages of review and negotiations with various technology providers, so we haven't announced the vendor or our specific approach yet. We are considering all factors as we make our final decisions. I am very pleased with our partnership with Mitsui; their capabilities, regional knowledge, and contacts make them an exceptional partner. We are in a strong position, and we are excited about that. We are exploring several alternatives, and the one you mentioned regarding a gas plus arrangement that provides a fair return on invested capital is certainly viable. There are multiple factors we are considering, and we will have more updates soon, so stay tuned.

And then maybe a question about your use of free cash flow, the outlook relative to what you have as a commitment for share repo leaves a pretty big opportunity and gap. Would you say that you're just keeping your options open and thus could engage in a much more aggressive share repo, or do you want to keep your powder dry in case you want to go more aggressive on capacity expansions? And/or do you see any M&A opportunities down the road?

Yes. The good news here, Steve, is I think we're generating so much cash, it's all of the above. But we're focused right now on the first $1.5 billion of repurchase authorization that the Board's put there given that our debt is now where we want it to be and we're generating so much cash, our expectation is we'll get through that in pretty short order here. And then don't be surprised if we put another one in on the heels of it.

Yes. I'm with Tony on that one, Steve that I think there's enough to do a lot of different things, both organically and inorganically. But from a share repurchase standpoint, as I mentioned earlier, just the volatility that we see in our shares that really aren't backed by the fundamentals. We've seen that all the way back to December, where we stepped in pretty heavy and bought $500 million worth of shares within like a 20-day trading period. So I wouldn't be surprised to see that type of activity when we see disconnects along the way. But even doing that, as Tony mentioned, these next few years with what we see from a free cash flow generation and really with where CapEx is in a pretty manageable band, we should have plenty of opportunity to do some share repurchases and return of capital.

Hi, good morning. So has there been any change in some of the conversations you have with potential customers around the low carbon ammonia market or maybe potential for long-term agreements and that's what kind of gave you more confidence to kind of move forward with a pretty large project here?

Yes. I mean what we're having conversations on a daily basis with all kinds of potential customers and others that are working through technology, innovations, and applications. And I would say the first two that we see developing in pretty large quantities are ammonia being co-fired with coal for electricity generation. And I think both Japan and Korea are going to be the epicenters for where that begins, but it's likely to spread. And then as marine fuel because it's got zero-carbon emissions. And so I think those are the places where we see demand developing. And the marine application is so large, that it could with pretty, I would say, realistic assumptions double the amount of ammonia that is used in the world today. And so we're really focused on those two applications. Again, I think we've got the right partner with Mitsui to go after them. And our intent is to lead from the front on this.

Okay. That's great. And then, maybe just more around some of the more near-term operations kind of question, given that we're seeing higher prices internationally are you considering more export sales this year? And then, just also with the wet weather and the start to the planting season maybe be a little bit slower. Do you have any view on the inventory levels, as we exit the spring season?

Yeah, this is Bert. When we look at the market, we are at the brink of planting. There will be stages of applications for crops like corn, wheat, cotton, rice, and canola. We are already seeing applications taking place in Texas, Oklahoma, and Kansas as we move from south to north. Next week, we will ramp up operations in Iowa and then proceed to the Dakotas and Canada. Our focus for moving products is on where they are most urgently needed and highly valued. We are actively exploring opportunities and leveraging our relationships with customers globally. We have solid connections with our clients and are ensuring they are well supplied, which is why we have inventory ready for shipment throughout the United States and Canada. Our logistical assets are secured and are in operation daily. The outlook for CF is very positive, and we expect it to remain so for the next couple of years.

Thank you. Tony, maybe I could just ask a few more questions on the Mitsui situation. Could you maybe tell us a little bit about the site? And I guess what I mean by that is, you threw that a $2 billion potential total number. Could you talk a little bit about how much volume you are anticipating for the $2 billion and despite that you are looking at maybe you don't want too much about it, but how much expansion capabilities are there? Is this sort of the opportunity to have multiple phases over an extended period of time? And so maybe we could just start there.

Yeah, you bet, Vincent. So we are actually in some pretty advanced conversations with governments, both at the state and local regional levels, in a couple of different areas that will dictate where we ultimately end up. We've got sites in different states that have been identified, and this should be a competitive process like anything else is. And so we're heading down that path to get the best terms that we can because this is a significant economic boom to wherever it is that we end up putting the plant. The sites that have been identified are capable of supporting multiple units, I would say, four to five units based on the original land acquisition with possible extensions beyond that if and when appropriate and fantastic logistics in terms of deepwater dock access to make it export-oriented. And so that's really our focus in that way around the export marketplace. And I don't want to go too much more specific on location because we're coming into the, again, a short straws here or strokes in terms of negotiating the package deal that looks attractive.

Okay. No, understood. But just on the amount of volume you think you're going to get for $2 billion, any insight there?

Yes. I mean I think, if you think about the equivalent volume the new Port Neal ammonia 2 plant would be the low end of it and the Donaldsonville Ammonia 6 new plant would be, sort of, the higher level of it, that's really the state-of-the-art in terms of volume today. But again, we haven't really finalized the technology provider and the different firms have slightly different approaches and rates and so forth. But in that range, $1 million to $1.4 million tons a year is kind of what we're targeting.

Thanks very much. There's so much constraint in fertilizer production and trade in all the three major nutrients. Do you think that these constraints will have any effect on global yield of the major crops over the coming year?

Good morning, Jeff. This is Bert. You're raising a question that we have all been trying to answer, and we've been working extensively to quantitatively assess the situation in order to guide our product movements and expectations for future supply. The current restrictions from the Black Sea on grains, oilseeds, and processed products mean that global production needs to ramp up, particularly in the Northern Hemisphere this spring. However, Europe may face constraints due to limited nutrient availability. In North America, we are fully supplied, and favorable weather would contribute to a successful crop. Attention then shifts to South America, which conducts planting between September and January for its second crop, with harvest following. We view this as a 2023 concern regarding potential shortages, which could arise from nutrient deficiencies. Given the restrictions and sanctions related to Belarus and Russia, along with the complete limitations caused by the war in Ukraine and shipment issues from the Black Sea, we've effectively removed 25% of the urea supply. This situation necessitates adjustments, possibly increasing the use of ammonium sulfate for various applications, which will likely influence pricing. Additionally, some developing countries that are planting exportable products not denominated in dollars are likely to see yield impacts that may require them to import food. These are developments we are closely monitoring while maintaining communication with our industry partners, including grain companies, processing firms, and distributors, to ensure we can supply the necessary nutrients promptly and at reasonable costs.

Okay. You mentioned at the start of the call that the TTF price in Europe was $30 an MMBtu. If you look at the curve, I think next year, it's in the 20s. Do you have a hedging strategy in Europe for gas, or do you have a philosophical view about gas? And in terms of the state of urea and ammonia shipments out of Russia today, could you describe them, what's coming out of the Black Sea, and what's coming out of the Baltic? So I guess there are two questions stuck in there.

Our perspective is that Europe lacks self-sufficiency in gas production, especially if we exclude Russian supply. This situation will likely put Europe in a low-cost position during certain times of the year. Consequently, we anticipate that energy assets in the region will operate intermittently, leading to reduced operating rates. This will create a globally tight supply-demand dynamic, even with high-cost marginal production coming from Europe. Even if the price difference between North America and Europe narrows to $10 per ton of ammonia, this translates to $3.4 billion in value for us, not accounting for upgrades or the logistics network’s contribution. At a $20 spread, the value doubles.

Yeah.

So the kind of energy curves that we're looking at going forward give us a lot of confidence about the cash generation of this business. And our UK assets are pretty de minimis in terms of the contribution they make to the overall profitability of the enterprise as well as the ammonia production volume. It's really North America that carries the freight in terms of what drives this company. So, we are okay running our European business, our UK business, and assets when it's profitable to do so. And we're also okay taking those plants offline when it's not profitable to do so. And so our view is we want to be, generally speaking, more daily buyers of gas in Europe, given where they sit on the cost curve and not try to take a long position on gas hedging there because we think those plants ought to cycle on and cycle off given where they sit in the global cost curve.

To address your question about gas and hedging, this is Bert. We carefully observe the global market, similar to our approach with fertilizers, which are a key part of our costs. It's important for us to monitor these factors closely and position ourselves accordingly. Currently, as Tony mentioned, the price difference between North America and Europe exceeds $20, and even on the $23 to $24 forward curve, it remains at $20. This price disparity means European production will likely remain limited, particularly with the reduced availability of Russian gas as we head into the upcoming fall and winter, which will present significant challenges. Regarding Russian shipments, yes, we are monitoring what is being loaded and the loading locations. There are several constraints to consider. The logistical capabilities and flexibility of Russian producers have been greatly impacted due to the invasion, affecting regions such as Siberia and others. Many ports that were previously used, like those in the Black Sea, are now unavailable for loading. Similarly, other northern ports are no longer accessible or owned by Russia. With port capacity potentially reduced to about 30% of what it was, this leads to logistical backups, storage issues, and challenges in consistently transporting nitrogen, phosphate, and potash as before. These issues will become increasingly significant over time. Additionally, we must consider rising insurance costs and the difficulty in securing vessels or the reluctance to load at these ports, which drives up prices. For instance, the cost from St. Pete to Brazil is now nearly $200 per ton, compared to less than $50 just a few months ago. These factors will continue to limit Russian production alongside ongoing sanctions as we move forward, particularly into 2022 and beyond.

Thanks so much.

Hi, good morning. Bert, when we look at application rates for nitrogen this spring. Can you talk about any trends you're seeing in anybody, any farmers maybe dialing back then? I mean, are you seeing any difference between maybe higher-yielding acres versus lower-yielding acres or anything you've seen, please let us know?

Sure. That's actually a question that applies both globally and domestically in North America. Currently, we are not observing any decrease in applications. At $8 corn, and considering beef prices of 740 in 2022 and 640 in 2023, those prices are very attractive. With ethanol operating at nearly 90% and the strong demand for protein, particularly beef and pork, there is significant domestic demand and increased exports due to the challenges in Russia and Ukraine affecting corn and wheat movement. However, it is late in the season, and as I mentioned earlier, soil temperatures and the application of nitrogen, as well as PNK, are delayed. This creates a very tight logistical window. This is where CF excels, as we have capabilities and resources that others lack. We have numerous customers contacting us, eager to move products quickly. I can assure you we are busy working long hours to ensure that this happens.

Well, let me just add a couple of comments, Joel, and Bert may want to jump in. But I think the overall dynamics of the situation with high corn and soy prices and fertilizer values is making farms assess their own economics around applying fertilizer to maximize yield. So, I do think we've seen a little bit of variability based on the area. So there's a few farmers here and there making the decision to cut back some in certain areas, but it's not widespread. And again, the thing that gives me great confidence is just in the demand side is we see the corn planted come in at 91 million to 93 million acres, and we've had the crop prices to justify it. So I think they're being prudent with their applications based on economics, but I don't see a broad cutback overall.

Tony, Chris, could I ask about capital allocation in a different way? You discussed a ratable rate of $175 million per quarter or $700 million for the year, and you mentioned a possible $1 billion investment for your portion of the new joint venture over the next five years. With the significant free cash flow expected in the coming years, as noted in this call, this could be an optimal time. You mentioned your other project had considerable cash on hand that will be utilized. Why not take a more aggressive approach to share buybacks this year, given that it seems like there will be billions available?

Well, let's not be too hasty to call this the top of the cycle. I mean I think there's a lot of runway left and a lot of uncertainty out there. And the longer you see these kinds of energy spreads and the longer you've got, which obviously is a tragic, terrible situation with conflict. But the longer that persists, the more it pressures both the demand side because of grain availability, as well as the supply side in terms of gas cost and availability. And so I would hesitate to call the – this is a one-year situation. I think it puts us in a very enviable position. And as Chris said, we are focused on a ratable basis now between the dividend and the ratable portion of the share repurchase program, returning over $1 billion a year to shareholders. And that still gives us a lot of capacity to go in strong when we see drops in the share price and discontinuities like that. When a couple of weeks ago, there was a rumor of a ceasefire, we dropped $15 in one day, and then we ended up catching some of that back through the course of the day. But we have a highly volatile stock, and we want to be able to absolutely capitalize when there are drops in the share price that are not connected to the fundamentals of the financial performance of the business. And our belief is that, that is actually going to be in the best interest of our shareholders. And if that means we carry a little bit of extra cash on the balance sheet from time to time, so be it. I think when they see us like we did in the fourth quarter, taking out as many shares as we did at the average price of $60-some, that's a pretty attractive move. And so, the fact that we can continue to do that and return a big chunk of cash on a ratable basis just again proves, I think, the value of this organization and company and the asset base that we've got here.

Thank you.

Yes. Hi, good morning. Thank you for taking my question. So my question is on your dividend, which you increased substantially, 33%, to $1.60 per year. I mean that's a big signal from a cyclical company. Because looking back, you would not have earned this dividend in 2017, 2018, and 2020 in the last five years. So I mean, to make that move, are you signaling that the nitrogen markets have stepped up permanently? That's sort of my question on capital allocation. Thank you.

Yeah, P.J., this is Chris. I would say, there's two reasons. One, we do think that the nitrogen market has stepped up here where, given some of the supply constraints that we are seeing even prior to some of the geopolitical events was tightening. And those are things that Bert and Tony have been talking about for over the past year. So we've seen a fundamental shift in what our outlook is on that and seeing that for a longer bit of time than maybe even what we saw a year ago. But then additionally, I think it's all the work we've done on our fixed charges over time. The mantra we've had over the last three years is really to reduce our fixed charges, both through not only debt reduction, but even the share repurchase where we had lower amounts of aggregate dollars going out for dividends. And then, additionally, the work that Ashraf and his team have done through manufacturing to get our controllable costs down. So when you work all those things together, I think it's allowed us to increase the dividend without really changing our fixed charge outlook all that greatly. And then that, coupled with where we see the nitrogen market fundamentally shifting to made us feel very comfortable in and I think the Board is well with their approval of it.

I would like to highlight one additional factor, P.J. The way our shares are currently trading, and where we believe they should be, indicates that the previous dividend may not have been as significant from a yield perspective. We aim for the dividend to be relevant and competitive with other S&P companies, and frankly, a yield under 2% is on the lower end of the spectrum. While I'm not predicting another increase, I wouldn't be surprised if, in the long run, influenced by the factors Chris mentioned—such as reduced fixed charges and improved industry fundamentals—along with a high share price leading to a low dividend yield, we see it increase again at some point. We have a very optimistic outlook moving forward. All the actions we are taking demonstrate our confidence in this business and the market we operate in.

Thanks, everyone, for joining us this morning, and we look forward to seeing you, hopefully, in person at upcoming conferences.