CF Industries Holdings Inc (CF) — Q1 2023 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 2023 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 will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first quarter of 2023, in which we generated adjusted EBITDA of $866 million. Our cash generation remains strong. And on a trailing 12-month basis, our free cash flow was $2.3 billion. These results reflect continued outstanding execution by the CF Industries team. We ran our plants well, leveraged our logistics and distribution capabilities, and most importantly, worked safely. At the end of the quarter, our 12-month reportable incident rate was 0.33 incidents per 200,000 labor hours, significantly better than industry averages. While last year's unprecedented pricing environment has moderated, global industry dynamics remain favorable. Global nitrogen demand that was priced out of the market last year is returning, driven by the need to replenish grain stocks. At the same time, forward price curves suggest that energy spreads between North America and high-cost producers in Europe and Asia will continue to be significantly wider than historical averages. As a result, we expect to continue to generate substantial free cash flow. This will enable us to both invest in growth and return capital to shareholders. In line with this, we are pleased to have reached an agreement to purchase the Incitec Pivot ammonia facility in Waggaman, Louisiana. The Waggaman facility offers us a newer, highly efficient ammonia plant that we expect to enhance through improved uptime and asset utilization. This acquisition is the latest step in our drive to provide shareholders with greater participation in our business and access to superior cash flows as is shown on Slides 6, 7, and 8 in our materials. The facility will fit seamlessly into our network and increase our capacity to meet demand for decarbonized ammonia as a clean energy source once we have implemented carbon capture and sequestration at the site. We believe the demand for low-carbon ammonia will provide a robust growth platform for the company in the years ahead. We have made serious investments alongside partnerships and collaborations with global leaders in order to be at the forefront of producing decarbonized ammonia as a clean energy source. With that, let me turn it over to Bert, who will discuss the global nitrogen market conditions in more detail. Bert?

Thanks, Tony. Over the last year, the global nitrogen market has continued to change rapidly and in dramatic ways. At this time in 2022, global energy prices reflected the shock and uncertainty brought on by Russia's invasion of Ukraine. There are fears that Russian fertilizer exports would be locked out of the global market, and we entered a period of substantial production curtailments and shutdowns across Europe, while China restricted urea exports. Today, global energy costs have moderated, and global operating rates have risen. New capacity delayed by the pandemic ramped up production. Other than ammonia, Russian fertilizer exports have returned to near pre-war levels as willing buyers have continued to take the discounted product, especially in the United States and Brazil, and global fertilizer trade flows have largely adjusted. As a result, global nitrogen prices have fallen from 2022 highs. This helped lead to a first quarter of 2023 that was marked by lower than typical global buying activity. Agricultural purchases in North America took a wait-and-see approach as global nitrogen values fell and weather patterns did not support an early spring. Several large importing regions were essentially absent from the market during the quarter as well. Most notably, this included India, which only had one urea tender during the quarter, in large part due to higher domestic operating rates. Additionally, European purchasers slowed import activity in the first quarter after securing substantial imports in the second half of 2022. Lower global nitrogen prices have triggered a rebound in demand from less affluent regions of the world, as you can see on Slide 13, offsetting some of the impact of lower purchasing from large importers. CF Industries was well prepared for this environment, having entered the year with a strong order book. As demand in North America held off, we leveraged our distribution and logistics capabilities during the quarter. This included capturing superior netbacks available from exports as well as positioning product at our distribution terminals for the spring application season. As a result, we had a more open order book heading into the second quarter than usual. We have managed as well as the North American spring application season kicked off recently. Pricing in North America has risen as demand emerged, and all products started moving at a more normal rate. We expect this to be an active fertilizer application season in 2023, with corn acres in the U.S. expected to be up about 5% and wheat acres up around 9% compared to 2022. Income at the farm gate in the United States and Canada is historically high, underpinned by an extended period of low grain stock-to-use ratios supporting high crop prices. We continue to believe that this will take two growing seasons at trend yields to replenish global grain stocks. This should support agricultural-led demand as growers seek to optimize nitrogen applications and maximize returns. That said, over the next 7 to 8 weeks, the entire value chain will be walking a logistics tightrope due to the purchasing delays. And with that, let me turn the call over to Chris.

Thanks, Bert. For the first quarter of 2023, the company reported net earnings attributable to common stockholders of $560 million or $2.85 per diluted share. EBITDA was $924 million, and adjusted EBITDA was $866 million. These results reflect the impact of realized and unrealized losses related to natural gas derivatives. We typically engage in hedging activity during the winter months to reduce our exposure to shocks in the natural gas market, similar to those during winter storm Uri in 2021. As our winter hedges rolled off, we bought natural gas at market prices during the second quarter. As we work through the higher cost inventory produced in the first quarter, we expect natural gas costs in our cost of goods sold to decline significantly. Looking ahead to the rest of 2023, we continue to expect approximately 9 million to 9.5 million tons of gross ammonia production and $500 million to $550 million in capital expenditures. With more than $2.8 billion of cash on the balance sheet, we are ready to fund the cash portion of the Waggaman facility purchase price. We have started the regulatory approval process with the U.S. government but cannot predict when it will be complete. We remain focused on disciplined investments in our Clean Energy growth platform to meet the demand indicated by our MOUs with JERA and LOTTE. Our blue and green ammonia projects at Donaldsonville are progressing towards their respective start-up dates, and the FEED study for our proposed joint venture with Mitsui is also advancing, with a final investment decision expected later this year. Even with this activity, our capital requirements for the year are modest compared to our cash on the balance sheet and our outlook for strong free cash generation. Consequently, we expect to continue returning substantial capital to shareholders. Over the last 12 months, we have returned more than $1.3 billion to shareholders through share repurchases and another $320 million through dividends. 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 thank everyone at CF for all that they did during the first quarter of 2023. Their commitment to safety and outstanding execution continued to drive our company's performance. This is an exciting time for CF Industries. Global nitrogen market conditions, coupled with our network and operational expertise, support our outlook for superior cash generation. We are excited about the value that integrating the Waggaman facility into our network will offer, and we have positioned the company at the forefront of global decarbonized ammonia supply, bringing together our expertise in ammonia production enhanced by partnerships and collaborations with leading companies such as JERA, LOTTE, Mitsui, ExxonMobil, and NextEra. Taken together, we are well positioned to increase our free cash flow generation and grow shareholder participation in that free cash flow, enabling us to continue to build on our track record of creating substantial long-term value for shareholders. With that, operator, we will now open the call to your questions.

Tony, Bert, this is more of a long-term question. As you consider your activities in blue and green ammonia, you've got several MOUs and projects at various stages of development, nearing FID. There's been a wave of announcements similar to yours in North America over the past year. I'm interested in your current perspective on demand growth, particularly outside of traditional fertilizer channels, as you look at the years 2025 through 2028. Do you believe that demand will align consistently with the potential capacity entering the market, or how should we view the balance of ammonia market surplus for the later part of the decade?

Yes. I think that's an excellent question, and there's certainly a lot of uncertainty out there. I would say the one thing that gives us great optimism and comfort right now, Adam, is the fact that a lot of the agreements that we have put in place and the discussions that we're advancing are with end-users who are actually going to be consuming the product for a clean energy source. So whether it's JERA, LOTTE, or a number of others, they are ultimately the end-users of that product, and they're pretty far advanced in terms of their thinking and some of the pilot projects they have run on co-combustion and so forth. So we feel pretty comfortable that the demand is going to be developing. Our sense is that it's probably going to start developing in larger increments as we get into the '27, '28 timeframe. But by the time we get to 2030, I think there will be a sizable volume of ammonia consumed in nontraditional applications as clean energy sources. Whether or not the pacing of some of these projects exceeds or lags that, I think, is to be determined. I think there's a lot of questions in terms of some of these announcements, how real are they, and are people going to be willing to put the money down. What we saw back in 2012 was something like 26 or 27 announced new projects in North America, of which only four of them got built, two of them by us, two other ones, and all of them were built by traditional industry participants. So a lot of the speculative plants that were talked about never materialized. And I would expect that same dynamic to happen here. But I think it's an excellent question, one of those things that we are evaluating and thinking about. And one of the things that I'm also excited about is the Waggaman acquisition gives us a lot of flexibility in terms of how we think about continuing to grow our own decarbonized ammonia platform base and different levers in terms of how to achieve that while having the same kind of supply-demand balance in the industry and not overwhelming the marketplace. So I think we're in a really good position. I think North America is clearly the place where these projects will get built and should get built both because of the huge natural resource base, low access to low-cost natural gas, but also the ability to do carbon capture and sequestration and the incentive structures in the 45Q. So more to come, but I think there's a lot of speculative announcements out there right now.

And if I just have a quick follow-up, near-term with Waggaman getting funded out of cash on hand this year. How do we think about kind of buyback pace from cash flow in light of the first quarter? I imagine you might have been blacked out for part of it because of the Waggaman transaction. But how would we think about cash turn with Waggaman going out the door?

Yes, you're absolutely right. The first quarter was heavily influenced by the fact that we were in pretty advanced conversations for most of that quarter, and therefore, we were blacked out from being able to do buybacks. We were able to kind of jump in after the announcement went out the door and participate a little bit. I think we feel very comfortable about the amount of cash generation that we expect through the balance of this year, plus a sizable amount of cash on hand even after we consummate the Waggaman purchase. And so we have a large share repurchase authorization in front of us that the Board just put in place. But one of the things that we have seen is despite having what from a historical standpoint is a very strong Q1, including very strong cash generation, share price volatility seems to trade on all kinds of other factors, and we're committed to taking advantage of those dips opportunistically in a way that really rewards our longer-term shareholders in a very substantial way. And so what you'll probably see is us diving in deeper and harder on the dips and less so when we're trading relatively flat. But I think taking over a year or a two-year period that should really disproportionately reward those that stay with us.

Yes. I'd like to better understand your own outlook for demand for nitrogen in both fertilizer and industrial markets. When do you anticipate that collective demand will warrant pulling that production in Europe back on stream, even if it's $15, $20 per million BTU? Do you anticipate that that demand could develop? Or is the reduced demand for nitrogen and some of the chemical end markets basically eliminating that pull?

Steve, this is Bert. The outlook for nitrogen in 2023 and beyond looks positive. We have a favorable stocks-to-use ratio in the fertilizer sector and our position structurally within the grain market. The production losses in Argentina this year, along with the corn that is neither being consumed nor exported from Ukraine, represent a significant part of the global supply. Additionally, Chinese demand is steady with imports of 20 to 22 million metric tons of corn, supporting the international market. We believe it will take at least two years, potentially longer, to replenish the grain supply, which should lead to strong fertilizer demand. We are already seeing recovery in countries that paused purchases in 2022 due to high prices, such as Thailand, Turkey, and parts of South America. Moreover, we're anticipating an increase in corn and wheat acreage in the United States, adding to demand. Brazil's demand is also robust, with close to 8 million tons of imports expected through 2023, although they have only imported one ton to date. India will also contribute to this demand. I expect fertilizer demand to return to its historical growth rate of 1% to 2%, possibly even higher this year, which explains the observed price recoveries. As for industrial demand, our industrial segment remains strong and diverse, covering nitric acid, ammonia, ammonium nitrate, and DEF in North America. Europe may face a tougher situation due to cost structures and complications, but imported ammonia is likely to help balance supply. We anticipate a reduction of 5 to 7 million tons of ammonia production capacity being offline or curtailed, which will support the overall ammonia production globally as products are redirected. Overall, we maintain a positive outlook for demand in both industrial and fertilizer sectors.

And then Bert, maybe more near term, do you anticipate pricing in the corn belt, particularly in the Northern Plains that may be tied on supply with the river being closed, do you expect premium pricing to come through in the remaining of this quarter, how much have you sold forward? And can you comment on any allocation out of your Port Neal plant that we've heard about?

So when assessing the current situation, the product availability is very limited. Over the past few quarters, much of the inventory has stayed with producers or remained in their stock. Retail purchasing has paused for about 2 to 2.5 quarters. Now, as we face immediate demand for products, we need them urgently, but there's a shortage. This issue is worsened by the river problems on the Mississippi, which have caused lot closures and made it challenging to transport products from the Gulf to the Midwest where they are needed. Consequently, we implemented allocations at Port Neal. We are operating at maximum capacity every day, but there has been a surge in demand for maybe a 30-day contract, particularly for deliveries in the first week of the month, and we are distributing that demand fairly among our customers. Product availability is tight, and we do not foresee sufficient urea supply. We expect transitions to ammonia and UAN for second and third applications, and we are preparing by positioning our products throughout the system. Pricing has shifted from the typical spread of about $30 from NOLA to the Midwest; it now ranges between $50 and $100 and is likely to rise towards the high end as we approach peak application times. We are satisfied with our order book and our performance in Q1, and our pricing reflects that. We are also confident about our position for Q2.

I have a couple of questions. Just on your answer before Bert, maybe Tony will chime in too. So we know that retail as your home words took a buying holiday for 2 to 2.5 quarters. Can you talk about that some more? They did that and it seems like they went out for a while, maybe now they're not winning, but is that going to change your strategy going forward? Like what are the lessons learned from this year in many years at your career?

This year has been interesting and challenging for me, despite my limited experience. I appreciate the hard work of the teams, particularly the production team for maintaining safety and the distribution teams for effectively managing our terminals and logistics. They handled varying loads while transporting products, alongside our export program and the vessels we've contracted. It's evident that there has been a significant division of responsibilities and decision-making. In the retail sector, prices have been dropping, which poses a dilemma. For example, if retail purchased UAN at $500 and the market value is now $300, it raises questions about pricing for farmers, who are also consuming similar market information. This has led to a standstill in purchases, as farmers have halted buying. As usual, when there is a disbalance, prices decline, and we saw a notable impact in the first quarter. However, in discussions with many of our customers, we've emphasized the importance of planning, considering that railcars and barges take considerable time to be loaded and cycled back. Currently, we find ourselves in a tough retail environment concerning applications and pricing. Despite this, prices have rebounded, and we are now positioned as the highest-priced market globally, which we anticipate will persist into the second quarter. Inventory levels will decrease, setting us up well for the third quarter. Each year brings its own challenges. Last year saw over-purchasing driven by fear, while this year has seen reduced purchases due to expectations of surplus. It will be interesting to see how this year evolves, but as I mentioned earlier, we face significant logistical challenges.

And then my second question is actually a two parter. So, is there any reason why Q2 earnings should not be higher than Q1, right? A lot lower average gas costs, maybe pricing down, but volumes higher? And my second part of that is, is there any reason why this year should be dipping out the years where Q3 pricing is typically lower than Q2 pricing? Any reason why that may not be the case here?

When you're looking at Q2 versus Q1, we're still in the beginning of the game. If it's a 9-inning game, I'd say we're in inning 3. And product has been moving. A lot of demand has been coming in for prompt shipments. And so I think it's a little early to speculate on where and what. But we're active on all fronts. We are exporting. We are moving product and we are taking new orders. So I think Q2 will be positive. When you look at Q3, you're right. Traditionally, we do have a reset period. Why? You're asking customers to hold inventory in North America for up to 9 months, and that's something we work closely with our retail and wholesale customers to make sure we're properly priced against the import alternative, helping our customers move that product ratably because we want to keep our plants operating and be in a good position for fall demand, which is generally ammonia and then spring demand for the three major nitrogen products. So I think it's a little too early to go into Q3.

Yes. The other thing I would just add, Joel, is that there's still basically 8 weeks or so to go here in Q2. So there's a lot to play for you at, and it's probably too early to make a call one way or another in terms of how we do sequentially quarter-on-quarter. But if you look at our price realizations reported in Q1, Bert did a great job with this team of really getting some good numbers there despite the fact that you saw pricing kind of moderate throughout that quarter. And if you take a straight average, we did a great job of getting price compared to Q1. Current prevailing prices in the spot market today tend to be a bit below where our average prices were in Q1 as reported. And so again, more to play for. We do expect some tightness in the marketplace. We do expect the inland premium and product coming out of Port Neal and Medicine Hat and our other facilities to really trade at a pretty significant premium, given some of the logistical challenges that Bert talked about, and it's also clear based on Chris's comments that our gas cost should be a lot lower than it was in Q1. So all of those things are positive, but we're starting at a point where prevailing prices are a bit below where our average price realization was in Q1. So more to play for, but some of that together, we still expect a great first half of the year by historical standards and to generate a lot of cash over this period of time. Q3, as you pointed out, normally a reset period. But every year is different. So stay tuned, I guess.

Yes. I think the only thing I would add is that regarding natural gas prices, while we are purchasing at significantly lower prices today, we still have some inventory and hedges from our actual production in Q1. Some of that will roll off in Q2, and then we will start purchasing the gas at around $2 per MMBtu that we are seeing today.

You obviously alluded to this a few times in your PowerPoint in your prepared remarks. But the cost curve seems to be engaging at least a little bit more in a fluid manner than it has in the last 12 to 18 months, especially with European operating rates increasing. I would just love to hear your team's perspective on what your, let's say, second half/normalized view of import-export trends is going to be, just given the dynamics in Europe right now? I mean do you still expect more products coming out of MENA, specifically North Africa, to Europe in terms of also ammonia trade flows as you saw last year going into Europe to supplement some of the product that's offline. Just any quick thoughts on that as well as you would be incredibly helpful.

Yes, Chris, I'll start and then hand the mic over to Bert here in a second. But MENA is running at full rates. And so it's not like we're going to see incrementally more product coming out of MENA. It's local consumption, is relatively low in the region. And so it's a pretty constant stream of product coming out of MENA. That said, our belief is it's a pretty tough operating environment in Europe. The reason why is there's a very steep contango on the gas forward curve between Q3 and Q4. And even if you see prices, the spot market moderate a little bit on gas, it's kind of hard to want to campaign an ammonia plant for 3 months or 4 months of operation. It takes a terrible toll on the equipment to heat it up and then cool it back down again. And plants don't operate well when you're pulling them up and down like that, at least on the ammonia side. And so we do not expect Europe to return to kind of historical relatively higher operating rates. We think it's going to be spotty and campaign. And I think the upgrades will run, but that means it's a sync for ammonia as opposed to producing ammonia locally. We do think that Europe is going to go ahead and continue to evaluate and look at bringing in more urea and UAN as an alternative to locally produced nitrates, and I think that that bodes well for our production network in North America.

Yes. Just some of the numbers behind Tony's comments, when you're at 20 million tons more or less of production capacity in Europe, West and East, and you have 5 to 7 of that offline or curtailed, that's an impact of about 2 million tons of urea. So as those demands for that nitrogen are needed in Europe and they're pulling those imports in from wherever, that is structurally helpful to the global nitrogen complex and supporting prices. And as we go more towards winter, that only is further placing those plans with difficulty with an operating environment plus carbon costs. Today, I would say that cost for ammonia is probably $550 to $600 where you can import for substantially less, so it makes sense and that supports the global price of ammonia. So I think that these trends only continue and get worse as we hit winter.

As a quick follow-up, Tony, it seems a bit off to bring this up now, but we used to talk about normalized earnings many years ago, typically between 13% and 18% EBITDA. Now, I believe many analyses suggest it's nearly double that. When I step back and consider your M&A pipeline and the deals with JERA and Mitsui, do you have any additional thoughts on how you're enhancing and improving CF's normalized EBITDA profile not only for 2023 and 2024 but also for the rest of the decade? What insights can you share about your thinking on this?

Yes. I mean I think a lot of the new demand for ammonia as a clean energy source is much more likely to be kind of longer-term, contractually based with ratable offtake and a return profile that's attractive based on either the acquisition price of the asset or the build construction if it's new build. And so our expectation is that we believe that we're the best operators of these kinds of assets in the world. We operate in one of the lower-cost regions. There's incentive structures out there from a legislative perspective. And access to some great partners, like we have with ExxonMobil and others, to help us achieve blue ammonia. And so from that perspective, we think that we can earn a really attractive rate of return on incremental capital that we're putting in the ground on these kinds of projects. And it's likely to be much more kind of ratable and fixed rate of return than it is subject to some of the volatility in the fertilizer space. And so we think that adding some of those layers of attractive fixed margin returns will be pretty additive to the overall valuation of the enterprise going forward. We'll continue to generate some good cash flow for us that we can deploy either against share repurchase or appropriate growth projects when we find opportunities to continue to generate those rates of return. So we'll probably see us doing more of that kind of thing, particularly as this new demand source emerges.

Bert, I would like to ask you about China. If the export policy reverts to what it was in 2021, you mentioned we might return to the 3 million to 5 million range for urea. However, I'm interested in the situation with ammonia sulfate, which saw significant exports from China last year. If the restrictions on urea are lifted, do you anticipate an increase in urea exports? Additionally, will ammonia sulfate exports remain stable, or could they decrease as some ammonia is redirected to produce urea for export? How would that situation unfold?

Vincent, the significant development in 2022 is the volume of ammonium sulfate that has been exported from China. This product was consistently available for years, but recent compaction projects have enhanced its viability for markets such as Brazil, Turkey, and the United States. We utilize domestically produced ammonium sulfate, which is an effective fertilizer, being less expensive than urea while also providing sulfur. While there has been a notable amount moving out of China, I don't anticipate growth at our current levels. In terms of urea exports, a considerable amount of production capacity has been offline over the past five to six years, now estimated at about 81 to 82 million tons. Operating rates have fluctuated between mid-60s to low 70s, so with a 70% operating rate, output is around 56 to 58 million tons of urea. Domestic consumption is in the low 50s, leaving limited urea for export compared to a decade ago. Currently, speculation surrounds potential changes in export policy. There are a few plants initially built for export that might gain clearance for export sooner than others, but I don't foresee significant urea exports, only about 3 to 5 million tons for 2023.

So I think it gives us some flexibility in terms of how we evaluate the attractiveness of new construction in the near term. And it certainly gives us an opportunity to enhance our platform from the standpoint of adding dehydration and compression and making more blue ammonia in that location without having to do a full greenfield expansion. So it gives us, I would say, a lot of flexibility in terms of how we think of if and when it makes sense to do a new project. And we've added 900,000 tons of ammonia to the portfolio. That ammonia is already being consumed in the marketplace, so it doesn't disrupt the supply-demand balance. And we can generate a fair bit of blue ammonia with a fairly modest incremental investment. So I really like the project because of the optionality it brings us in addition to just the base economics of it.

I mean this one is for Bert. I mean, Bert, a temporary ammonia price is down to, what, $380 or so. I mean that's a level that's well below European production costs. Like what's causing that? And is the EU no longer the marginal cost producer? I mean it's just been very hard to understand what's going on there, maybe if you can help us.

Yes. So you're looking at the EU costs. It's a pretty easy calculation. Gas price is public, looking at TTF or NBP and op costs, adding what that would be for cash or for full, and then carbon costs, as I said earlier, gets you to between $550 and $600. And you're right, in the current spot market, you're in the low 400s. And so what I think is happening, and we're seeing this reflected in announcements as well as public and private companies, they're operating either curtailed or shut down. And supply-demand does work. And I think as you take some of that supply off in Europe and some of that is being backfilled with supply from around the world, then pricing tends to moderate and move up. We did I think is a reflection of some of the issues we talked about globally in Q1 with some economic downturn as well as purchasing holidays in different places. And delays in consumption probably went a little long on ammonia, which drove that price down to the level where it is today. And so we're positive on what's coming in terms of, we think, especially in winter with Europe and backfilling with product ammonia produced in different locations and shipping that. And we have done that ourselves taking down our Billingham plant and buying product or shipping product in from Donaldsonville.

And that's good. And another one on corn prices, they have come down not by a lot, but they have come down. I mean, if you look at the December futures price, it's at $5.25 or so. Like how do you think this will impact farmer psychology? Will they be willing to pay higher fertilizer prices when they see corn prices kind of moving down a little bit?

When you examine the prompt price and the forward price, especially looking at December, which is the harvest price for the 2023 North American crop, the global stocks-to-use ratios are tight. Argentina has faced a drought, resulting in a loss of approximately 8 to 10 million tons of production. Additionally, challenges in Ukraine have likely caused another loss of around 12 million tons, mainly affecting domestic consumption rather than exports, impacting corn processing and feed. In the United States, there was also a negative trend in yields during last year's harvest. While Brazil has made up some of this with a record corn crop, the price of $5.25 is relatively positive historically. Over the past few years, we've typically operated within the $4 to $5 range. Although we are coming down from highs of $6 to $6.50, $5.25 remains very profitable. We anticipate this being the third consecutive highly profitable year, following exceptional performances in the last two years. Farmers, whether they operate dryland or irrigated systems, should focus on maximizing seed population and nutrient applications for yields. The soil moisture levels in North America are favorable for this. Therefore, $5.25 is a fair price that supports both livestock and ethanol demand.

Great. First question, can you provide an update on the timing for closing Waggaman? Have you made any progress with regulatory approvals? When do you expect it to close?

Yes. We have submitted our filing to the FTC and they are currently reviewing it. At this moment, we do not have a specific timeline. We are providing them with the necessary information and we are optimistic that we will be able to finalize that project sometime this year.

Once the deal is finalized, can you discuss the flexibility you mentioned? One option could be converting it to CCS to potentially receive IRA credits. How might that work in terms of timing, and have you discussed this with your partners like JERA, Mitsui, or LOTTE?

Yes. So timing on putting in the dehydration compression and getting access to the pipeline and being able to have that injected is probably two years out. That's about the time frame it took us to announce the project at Donaldsonville and have the equipment order delivered and installed. So it's probably about that kind of time frame. And again, we are in ongoing discussions with the partners that we have already signed and announced MOUs with, and there's a series of other conversations that are happening in the marketplace as well that are not quite as advanced at the moment. But this just is another source of supply. So it both provides some diversity of supply locations in case there's an outage or a storm or an issue that would affect one location. It also just increases the aggregate volume of material that we'll have that's low carbon. So it's certainly of interest to all of those folks that you mentioned. And we are in ongoing discussions about appropriate ways to try to structure agreements that provide them attractive and certainly secure access, but also provide our shareholders an attractive rate of return on our investments.

And just last question. In terms of funding these projects, is the idea basically to look for project financing? Or are you going to fund it with your JVs from free cash? How are you thinking about that?

Yes. So we ended the quarter with over $2.8 billion of cash on the balance sheet. We're continuing to generate a substantial amount of free cash flow kind of every quarter as we move forward. It's going to be funded from cash on hand. And by the way, it's a relatively modest draw on cash on hand, particularly at the rate at which we're building it. So it provides us flexibility to continue to do our share repurchases as well as our growth and improvement projects all at the same time.

Yes. Just to follow up on that. I mean these projects are staged over multiple years. So it's not as if similar to the Waggaman where there's a big lump sum at one time. So even the Mitsui project, the LOTTE project, these are 4, 5-year cash outflows with a partner involved. So we expect exactly to what Tony said that there's going to be still significant cash for other capital allocation return policy.

Just wanted to follow up on some of the logistic challenges you've talked about. And maybe help us understand how that impacted you this quarter or maybe benefited you this quarter? And how you think about logistics and supply chain issues just would like those different water levels, etc. go forward and how you can prepare yourself to maybe take advantage of it as it relates to your trade and export business?

Yes, it's a fascinating situation that developed towards the end of last year. We experienced historic low water levels on the Mississippi, and now, moving into spring, we are encountering significantly high water levels that are affecting barge traffic again. Additionally, there is a notable national shortage of drivers, particularly for over-the-road transportation. This has resulted in increased logistics costs and delays across the board. However, this situation creates a significant opportunity for us, allowing us to achieve a premium in markets like Port Neal and Medicine Hat, where we are already established. Generally, the market value of products is determined by their cost on the coast plus logistics expenses, and there may also be a time premium if products are needed immediately. All these factors are beneficial for us as we enter the core application season in the second quarter. In the first quarter, we did see a negative impact from rising logistics costs, but I believe the situation will improve and work in our favor moving forward. The export aspect is less affected because vessel freight rates have not changed as dramatically as inland rates.

When you're looking at the logistics options we have, we're on the Class VI railroads, and we're on the Arkansas, the Mississippi, the Illinois, Ohio. So we are able to barge as far north as Minneapolis, and when we look at each year, we work with our retail wholesale trader customers who work with the farmer, and we're in constant communication. And this is a great year for an earlier question of what did we do when our customers weren't purchasing. Well, we focused on how are we going to deliver the spring needs in a way that makes sense. And so we set out a strategy and a game plan early late Q4, early Q1 to make that happen, and that's leveraging all these assets that are at our disposal, and we have done that. So we feel very positive about what we have positioned in the interior through our terminals and ammonia tanks, our UAN terminals, and urea storage places for dry. But in those conversations, when customers were not willing to buy, we did pivot aggressively to the export market. And we're able to do that. We're able to move several of our plants to the export market and optimize our loading structure. We have 5 docks in Donaldsonville. So we are a unique company that has many options available to us. And each year, we're going to evaluate those and do what's best for our customers and our company.

And then my second question is just to understand a little bit the magnitude of the inventory. You said the higher cost inventory, you still have to run through into 2Q. Can you give us a little bit of a sense of timing? Is that impacting like the majority of the second quarter, just maybe half of it, only a few weeks? How should we think about what was in place as to the nat gas hedges and how this runs through on the cost of inventory that needs to run through into usually good second quarter?

Yes, good question. I think generally, what we have is we have production and inventory that sits a little bit more than a month. So I think at a minimum, what you'll see is probably a month's worth of higher gas costs, probably maybe 6 weeks' worth that roll through here in the second quarter before we get into sort of the $2 per MMBtu gas that we're seeing today and purchasing today.

Just a couple of quick follow-ups on Waggaman. First, can you disclose what the remaining life is on the contracts for the other two buyers outside of Dino? And just regarding carbon capture and who gets the credit, is there anything in the agreement with Dino that has you share some of the portion of what you're selling them in terms of ammonia credits for carbon capture on those tons? Or is that still open-ended?

Yes. So we're really happy with the way that the contracts are structured and that we've got offtake for all of that production. It gives us some flexibility in terms of how we think about the future and increasing production there and what we do with the incremental tons as we increase production. and as we move forward. But it's nice to already have a home for all of those tons at kind of market-based pricing. So we're really pleased with those. In terms of the blue ammonia and the CCS there, we have a number of companies that are very interested and have registered interest with us on securing access to decarbonized or blue ammonia. Dino is among them. And we will work with Dino and also work with others, whether it's production out of Donaldsonville or Waggaman, in order to try to satisfy the needs that we see really developing in the marketplace but also realizing value for that product.

Yes. And I think as you look at the production and actually the dehydration and compression piece of that, we purchased the plant with that being an upside to CF that we would own that asset and also the benefits that would come from that as well.

And just to clarify, I mean, just without disclosing, I guess, the remaining life of the contract, do we need to be thinking about, is there any risk of renegotiation in the next one to two years creating different economics versus what you expect today?

I think we feel comfortable with where those industrial contracts are and we can't really disclose more than that. But we don't see the kind of risk that you're talking about associated with the go-forward in that facility.

So just going back to clean ammonia with a lot of these clean ammonia, clean hydrogen projects coming up in the U.S., along the gulf. Are you seeing any potential for bottlenecks, cost inflation around labor and construction services? And maybe taking the supply and demand question from the other side, like could there any tightness in the clean ammonia market, if we see any delays on build-outs and could demand come in quicker than expected?

Yes. Andrew, so I think it's fair to say that you're seeing inflationary impacts in every aspect of the announced projects that are there. And I think that affects both the time that it takes to bring them online as well as the cost that it takes to bring them online for those that ultimately get built. The raw materials, the metals, the fabrication, the transportation, the labor to construct, you're seeing inflation in every single aspect across the board. And remember that none of these projects that have been announced really are underway at this point from a construction standpoint. So minimum of 2027, maybe 2028 before any of these things that are announced would potentially start up, and there is a high likelihood of cost inflation over that period of time. It's one of those reasons that make us so happy about the Waggaman acquisition because our belief is by the time some of these projects that are being discussed, if they're announced, that the cost per ton of capacity is going to look really attractive from an acquisition economics on Waggaman. More to come in terms of whether what results our FEED study for the potential project with Mitsui yields, but I would certainly expect for all said and done for the Waggaman acquisition to look really attractive. Yes, one of the things that helps us address is some of our Scope 3 emissions. In this case, it's upstream Scope 3. The downstream Scope 3 are very hard to manage. But from an upstream perspective, if we're sourcing gas that is more responsibly produced and transported, it reduces the methane slip on the upstream that reduces our upstream Scope 3 emissions. And that's substantial because methane is a very potent greenhouse gas. It certainly goes into our overall carbon footprint. And so customers that are interested in the overall footprint will care about that to some extent. Most of the conversations we've been having around decarbonized ammonia are very project-specific to Donaldsonville and/or Waggaman and once we get the carbon capture sequestration equipment installed and operating. And so I think in the near term, that's a little less important. In the longer term, it's certainly more important, but it helps us manage our overall footprint and certainly something we're evaluating, continuing to expand from a program standpoint.

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