CF Industries Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to CF Industries First 9 Months and Third Quarter of 2023. All participants will be in a listen only mode. Presentation. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations.

Operator

Sir, please proceed.

Speaker 1

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Wills, CEO Chris Bohn, CFO and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the 1st 9 months and Q3 of 2023 yesterday afternoon. On this call, we will 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 Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.

Speaker 1

More detailed information about factors that may affect our performance may be found 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

Speaker 2

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 1st 9 months of execution by the CF Industries team, a constructive global nitrogen supply demand balance and energy spreads favoring North American production. Looking forward, we remain very positive about the opportunities that lie ahead.

Speaker 2

In the near term, we expect strong demand for the 20 This year adding that facility to our network and production volumes for 2024 and beyond. In the medium term, industry fundamentals point to Tightening global nitrogen supply demand balance. Over the next 4 years, construction of new nitrogen production capacity does not keep pace with the expected Demand growth of approximately 1.5% per year in traditional applications. Additionally, Several important regions are projected to have reduced nitrogen production, given constraints around the cost and availability of natural gas in those regions. Finally, longer term, we expect our clean energy initiatives to provide strong returns and multiple growth opportunities for the company, while helping us to meet our decarbonization goals.

Speaker 2

Taken together, we are very optimistic about our ability to drive strong cash generation in the years ahead. This will enable us to continue to create value over the long term through disciplined investments and growth opportunities as well as returning capital to With that, let me turn it over to Bert, who

Speaker 3

will discuss global nitrogen market conditions in more detail. Bert? Thanks Tony. The Q3 is often a period of softer demand and softer prices in North America as applications for the current crop are completed And purchasers assess their needs for the next spring. This year, purchasers aggressively entered the market early in Q3, driven by attractive nitrogen values, Positive farm economics, strong interest from Europe and low inventories in the North American nitrogen channel.

Speaker 3

CF Industries built a good order book early in the Q3 and by the end of September, our UAN and pneumonia order books Stretched well into the Q4. Strong demand early in the quarter helped drive nitrogen prices higher during the quarter. Urea barge prices in New Orleans moved up from below $300 per ton to over $400 per ton in early September, While the Tampa Ammonia contract moved from $2.85 per metric ton to $5.75 per metric ton during the quarter. We believe nitrogen inventories in North America remain low and substantial future demand will still need to be met as we enter the New Year. We are well positioned for this environment, giving our low inventories today and open order book for the Q1 of 2024 and beyond And wide global energy spreads that continue to favor our low cost North American manufacturing base.

Speaker 3

Outside of North America, we project significant nitrogen demand from India and Brazil in the coming months. As expected, India has been active in the Q4 so far, securing 1,700,000 tons of urea in their latest tender. We expect demand for urea in Brazil will be robust through February for cotton and second crop corn planting. Longer term, agricultural led demand for nitrogen should remain resilient with global green stocks expected to approach averages from the last 5 years by the end of the 2024 growing season. We also expect continued supply constraints in some key producing regions.

Speaker 3

Natural gas availability remains an ongoing challenge in Trinidad, which in recent years has seen the loss of nearly 1,000,000 metric tons per year of production compared to the 2018 to 2020 average. High natural gas prices have made ammonia capacity in Europe the global marginal producer. Ammonia production levels are 4000000 to 5000000 tons lower in the region compared to the 2018 to 2020 averages. This includes the impact of the permanent closure of our U. K.

Speaker 3

Ammonia plants, which accounted for nearly 1,000,000 tons of ammonia capacity. Europe has become the CF Industries' top export destination over the last 18 months as purchasers bring in ammonia for upgrade as well as purchase UAN, Ammonium nitrate and urea. In addition to curtailments and closures, government actions continue to restrain Participation in the global market from other producing regions. The Chinese government reinstated urea export controls after Chinese producers contributed large volumes For the August India to urea tender, additionally, intermittent natural gas curtailments by the Egyptian government continue to affect nitrogen production in Egypt. And with that, let me turn the call over to Chris.

Speaker 4

Thanks, Bert. For the 1st 9 months of 2023, the company reported net earnings attributable to common stock Approximately $1,250,000,000 or $6.42 per diluted share. EBITDA and adjusted EBITDA were approximately $2,200,000,000 At the end of September, cash on the balance $3,250,000,000 We have earmarked $1,250,000,000 of cash for the acquisition of the Wegmans and Ammonia facility, which we expect to close on December 1. As a result, our pro form a available cash at the end of September was approximately $2,000,000,000 We expect company wide gross ammonia production to be between 9,000,000 and 9,500,000 tons in 2023. We expect gross ammonia production to be significantly higher in 2024 as we add roughly 900,000 tons of ammonia capacity from the Wegmans facility to our network.

Speaker 4

We project that capital expenditures for 2023 will be in the range of $450,000,000 to $500,000,000 Our green ammonia project at the Donaldsonville complex is nearing mechanical completion. We also continue to advance the carbon dioxide dehydration and compression unit at Donaldsonville, which will enable us to permanently sequester 2,000,000 tons of CO2 per year. This project, which offers a return profile well above our cost of capital and will accelerate progress towards our 2,030 decarbonization goal, is on track for start up in early 2025. Along with decarbonizing our existing network, we continue to evaluate low Carbon ammonia capacity growth that is well timed with demand. We expect the FEED study for our proposed joint venture with Mitsui to be complete before the end of the year, which is one of the many outputs into a final investment decision.

Speaker 4

We also remain committed to returning excess capital to shareholders given our free cash generation outlook. Since the start of the year, we have repurchased more than 5,000,000 shares for approximately $355,000,000 We expect to continue to favor opportunistic purchases With that, Tony will provide some closing remarks before we open the call to Q and A.

Speaker 2

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all they did during the 1st 9 months of 2023. Their teamwork continues to deliver outstanding results. In closing, I want to highlight 2 slides from our materials. Page 16 provides a recap of our consistent approach to creating long term value.

Speaker 2

We thoughtfully and selectively add production capacity to our network, The Wagamin ammonia plant being the latest example, while we steadily reduce our outstanding share count. Since 2009, we have increased the participation in our business by approximately 4 times, a 10% CAGR over this time horizon. I also want to highlight Page 15 that demonstrates we are the best operators in the world of these types of assets. We have a long track record of unmatched asset utilization enabled by a safety culture without peer. I'm especially proud of our team's collective commitment to safety excellence and their focus on continuous innovation.

Speaker 2

Nowhere is this more evident than in our annual Wilson Safety Awards. Our winner this year was the Courtwright, Ontario complex, But all the finalists were outstanding and helped to drive continuous improvement across the organization. I encourage everyone to learn more about these innovations on the company's Web We believe CF Industries has a bright future. In the near and medium terms, we are well positioned for what we will be a tightening global nitrogen supply demand balance with strong margin opportunities. Longer term, our disciplined investments in low carbon ammonia Production provide a robust growth platform for the company.

Speaker 2

As a result, we expect to generate strong free cash flow in the years ahead, enabling us to create substantial value for long term shareholders. With that, operator, we will now open the call to your questions.

Operator

We will now begin the question and answer session.

Speaker 5

Hi, good morning. Good morning, Joel.

Speaker 6

So a big question is whether European production is the marginal Ostrana, it seems like in the last couple of years that we've gone through a lot of geopolitical issues and higher gas prices and lower gas prices, sometimes it is, sometimes it isn't. Do you think that The European tons are marginal production. Can you elaborate on that? Is it seasonal? Anything else you can provide would be great.

Speaker 6

Thanks.

Speaker 2

Yes. I mean, I think, as you point out, Joel, it shifts from sort of high third quartile to the high fourth quartile And back and forth kind of depends upon weather patterns and what's going on with storage and honestly costs in other places. But I think if you look at, as Bert mentioned earlier, probably somewhere in the neighborhood of 4000000 to 5000000 tons of ammonia production that has Come out relative to where they were operating just 5 years ago, it's pretty evident that it's a challenged environment to operate there. But to your point, there are times where Asia is equally challenged, or other parts of the world, whether it's because of Export controls or as Bert said, government enforced gas curtailments, I think Nigeria had some of that earlier And Egypt as well. So it is a situation that's dynamic and influx, but the one thing we can definitely say is The U.

Speaker 2

S. Is firmly at the low end of the supply curve and we have consistent access to gas. So we're really happy with our network And where our plans are.

Speaker 3

Yes, Joe, when you look at gas comparisons, whether it's MBP, TTF, JKM being Europe And Asia, but also feathering in the coal costs and then equating that back to an MMBtu value, You do have just a separation, but then thinking about the age of the plants and the efficiency of the plants, That's when you get into question some of the European or Eastern European or FSU locations That are a combination of high cost and inefficient and that's what how we're able to move some of those and call that And you're seeing that reflected in the level of imports and the inability to operate in even the current environment of $15, $16 gas Against ours and others in the world of 2 to 3. And I think you're going to see that dynamic and it is reflected in the forward gas curve of how these plants will operate and when they'll operate.

Speaker 6

I got a follow-up, I forgot. Go for it. Okay. I forgot. Okay.

Speaker 6

Just really quickly, I read some of the filings. It's probably a sensitive topic on The ammonium nitrate dispute you're having with Orica and Nelson Brothers, I'm sure some sense of topic there, but anything you can talk about as we're thinking about To plan your ammonia nitrogen volumes and your margins versus the past, how should we think about that going forward for next year, considering what's going on in that disagreement?

Speaker 2

Yes. Our expectation is that we continue to run our ammonium nitrate capacity at capacity. In the U. S, our RA on It is really centered around our Yazoo City, Mississippi facility. And in the U.

Speaker 2

K, although we don't do ammonia production Over there anymore, we're importing ammonia and then upgrading it to solid ammonium nitrate. So our expectation is our volumes are going to be The same going forward and we're largely constructive on Margins given the forward gas curve and our opportunity to bring ammonia into Billingham and get a good upgrade margin on So overall, our AN segment, we're real pleased with and I can't really comment on the Topic that you referenced earlier because it's a matter that's under dispute at the moment.

Operator

Thank you. And Our next question will come from Stephen Byrne with Bank of America. Please go ahead.

Speaker 7

Yes. Thank you. How do you think your Donaldsonville operations might Change post the connection with Wageningen given you can you could move Those ammonia tons up into the Corn Belt from Wagman and then maybe upgrade more at Donaldsonville, is that logical? And maybe to that topic, your 3rd quarter volumes were more ammonia than urea than we expected, even Pricing was so much better in urea. Was that just summer fill volumes were really robust in ammonia?

Speaker 7

Any comments on that?

Speaker 2

Yes. So Steve, let me start off with a question about Wagamin. The Wagamin facility has existing Supply agreements that are in place and those volumes are largely spoken for. We're very pleased with The recipient customers for that facility and so we're not looking to make any Changes in that regard and our belief is we can get consistently more out of that plant than what Historically, it's been able to produce. So we're excited about that plant added to the network.

Speaker 2

Relative to Deville upgrades, we tend to run the upgrades at basically full capacity at least the urea plants And then we swing back and forth between how much of that's granulated versus how much UAN we make based on Relative margin opportunities between the various products. So there's not really an opportunity to dramatically increase the amount of Ammonia, Donaldson build it to upgrade it just because we're running upgrade plants full on. Relative To the product mix in the Q3, we did have an offset at our Medicine Hat Alberta urea plant that took some production offline and we had a turnaround in another facility. And so the result of that was just through both planned and unplanned maintenance, Lower ability to make granular in the quarter and therefore we ended up with a net longer Ammonia position and Bert and his team were really focused on trying to manage kind of inventory levels and took appropriate steps to make sure we could keep So plants run-in full rates?

Speaker 3

That's exactly what happened. The only thing I would add is we did export additional volumes out of Deeville as we balanced The system in North America, as Tony said, we had the medicine hat issue, so we're moving some of that product down. And then we had some Turnaround work at one of our Oklahoma plants and then the balance then was moved to Donaldsonville and that ended up being exports At a lower value, but that's what the values were at

Speaker 2

the time. And the good news is, we're back up out of the maintenance activities and we're running full In terms of our urea production network again, so we're looking forward to the Q4 and the first half of next year.

Speaker 7

That's very helpful. And wanted to just pick your brain a little bit about the outlook for Blue Ammonia, Tony. You have these Partnership discussions with several players. It's not just Mitsui, it's Lotte, it's JERA, it's POSCO. And when you think about this down the road, are these likely to result in one greenfield Plants or could this be multiple plants?

Speaker 7

And do you have any kind of a conflict in that because some might prefer An auto thermal reformer whereas you were also considering steam reforming, does that play into this at all?

Speaker 2

Yes. Steve, without going down the rabbit hole of technology too much here, As Chris indicated in his comments, we're finishing up the FEED study on The conventional steam methane reforming plant, basically a carbon copy of Donaldson Bill 6, which I believe is The highest operating rate ammonia plant in the world. And the fact that they're so close together allow us to not only Basically make a carbon copy of it and train operators just down the road, but also share common spare parts. And we think that The opportunity to get fantastic asset utilization out of a plant like that right from the beginning is quite high. But as you mentioned, there is different appetites in different jurisdictions for a carbon intensity.

Speaker 2

And ultimately, that's The notion of blue ammonia or green ammonia is this convenient shorthand ultimately where we're going to have to get to as a measure of carbon intensity. And the possibility for auto thermal reforming, does provide at least, at first blush, A lower carbon intensity than steam methane reforming does. So we are engaged in a feed study also on a Integrated standalone, auto thermal reforming technology plant, that Cost estimates from those probably won't be in for about another 12 months. We're also engaged in a Study on doing flue gas capture, so that theoretically the alternative to get to A very, very low carbon intensity number could be auto thermal. It could be a conventional steam methane reformer with flue gas capture technology Added to it.

Speaker 2

So we've got a number of different potential pathways going forward and we're excited about The developing appetite and new demand applications for clean ammonia, As I mentioned in my earlier comment, we're also very excited about the fact that even in traditional applications, we think the world is Going to be nutrient short going forward. So I think the demand is clearly out there. We are, As I said, the best operators of these kind of assets in the world and given North America's Access to plentiful low cost natural gas and a very favorable framework Around rule of law as well as carbon capture and sequestration, this is increasingly recognized as the place to be. So I think all of that sets up very well for us in terms of evaluating these different types of opportunities. And we are, as you said, engaged in conversations with numerous parties.

Speaker 2

They all look to us Because we are the global leader in this space and we think we can navigate any kind of conflicts And manage that situation through a variety of ways, including the fact that we're going to have multiple sources of Decarbonized ammonia from a production standpoint, not only potentially if we build a new plant at our Blue Point complex, but also at Donaldsonville, Wagamin once we add CCS there, our Yazoo City, Mississippi facility once we add CCS there. And so we'll have multiple points of production, multiple ways of navigating potential conflict Should they arise and honestly we're just really excited about the opportunities ahead of us.

Speaker 7

Thank you.

Operator

And our next question will come from Richard Gartnerino with Wells Fargo. Please go ahead.

Speaker 8

Great. Thank you. Just with the Wagovin acquisition closing December 1, I was wondering if you could Give us an update in terms of your thoughts on the ramp up once you take ownership. I believe the plant was running Probably sub 90 percent operating rates under IPL. So how long do you think it can take you to get those operations up to The rest of your plants and related to that, any synergies that you think you've sort of unveiled Given the recent work that you've done since you first announced the acquisition, would be great.

Speaker 2

Yes, I mean, I think the biggest synergy from our perspective is the fact that we think we can consistently run that plant Higher rates and get incremental tons that come out of it into the network. And so that's where Basically, all those incremental tons are purely at variable cost and therefore at very high margins. And that's 1st and foremost, the most important aspect of this. I think it also gives us some flexibility as we think about scheduling turnarounds and ship From ship to locations, it's a plant that is on the pipeline and so it's got access into the terminaling system in the Midwest. And it just gives Bert some additional flexibility in terms of how he thinks about minimizing aggregate, logistics and transportation costs.

Speaker 2

So That's really kind of how we're thinking about the plant. But first and foremost, the biggest value is we're Buying it, I think, at an attractive value for us. I think it's attractive for IPL as well. And we think we can get more tons of production out of it, That should generate some very nice incremental margin for us.

Speaker 8

Okay. And then just as a follow-up, your CapEx guide this year, Is there anything in there for prep work for Wagamin? And how should we think about 2024 CapEx levels given that as well as the progress on the Donaldsonville TCF. Thank you.

Speaker 2

Yes. So all of that is baked in there. The finishing up of Green ammonia plant this year, is part of this year's CapEx, continuing progress and basically getting, If not to mechanical completion, darn close to it on our dehydration compression project next year At Donaldsonville, plus what we're expecting to do at Wagamin in the way of turnaround and process improvement is all embedded in there, As well as some of the ongoing improvement things we've got on our end from an IT and the systems perspective. So including The integration of Wagman into our systems and our network. So all of that is rolled into the number that Chris gave you.

Speaker 2

We are Very consistently year in and year out in the range of $450,000,000 to $500,000,000 And I think this is one area that Ashraf has brought great discipline to from an operation standpoint of being able to get world class On stream factor and asset utilization without having to gold plate stuff, but we keep all the processes Incredibly safe and high running and our people safe as well. So I would say this is an area where we really excel.

Speaker 4

Yes. Richard, if I could do this is Chris, if I could just add on to that. So Q3 is generally our historically been our higher maintenance and turnaround period. And after that period, we actually reduced what the range was from 500 to 550 down to 450 to 500. We did that because once we get through this heavier turnaround period, we have better line of sight on what the spending was for those particular turnarounds, but also What we can accomplish project wise until the end of the year.

Speaker 4

I think as Tony was speaking about the Wegamin site, because we don't necessarily have that site yet and we will only have it for 12 months. It's pretty much looking at what will be built in into the 2024

Speaker 3

CapEx number as we go forward.

Speaker 6

Thank you.

Operator

And our next question will come from Josh Spector with UBS. Please go ahead.

Speaker 9

Yes. Hi. Thanks for First, I wanted to ask near term, Bert, we've seen some decline in urea prices over the last month despite kind of entering kind of Stronger North America season. I guess, 1, what do you attribute that to? And 2, like, what's your view when you look over the coming months here?

Speaker 3

Yes. So Yuri has been on an interesting ride. As I mentioned in the prepared remarks, we entered Q3 at 2.85, 2.95 And then accelerated through the quarter, based on some global issues being India's demand and China's restrictions To over $400 and then has since settled out, and then probably dropped back down into the for NOLA 355 to 370 range today. And when you look across where the demand will come from, We still see significant demand out of India and from Brazil, South America, and then we'll transition to the Northern Hemisphere in the New Year And a lot of demand to be fulfilled in North America and Europe. So demand is solid.

Speaker 3

We've seen on the supply side More restrictions, the gas issues that we mentioned in Trinidad and Europe affect urea and as well as the upgraded other upgraded products And there are continued restrictions out of China. So the market we believe is tight and that supply demand balance probably It moved more towards demand and we're in an okay range. We expect pricing to improve as we go into Q1 and Q2 as well as demand to Accelerate. We're looking at planted acres for the 2024 crop below 2023, But not significantly so, more in the 90,000,000, 91,000,000 acres and then solid wheat, but good performance out of South America for 2nd crop. So demand is good globally and pricing is like Yuri is, it's volatile.

Speaker 3

There's the volatility with gas, But, I think we're in a good spot.

Speaker 9

Thanks. I appreciate that. And just longer term, Tony, I wanted to ask just more about The timing here for the JV with Mitsui. So you have the FEED study completing shortly. So from our prior conversations talked about The milestone in Japan with Medi talking about some subsidy support or how that evolves, is that timing still early to mid next And does that mean you make a decision to invest later next year mid to late next year or is there any reason that timeline would be off from how you're thinking about it?

Speaker 2

Yes. I think the situation with Medi and JERA's decision making might be a little fluid. It feels a little bit like many governments 1 step forward, 2 steps back. So it's hard to know with precision exactly when they're going to come to Conclusion on their evaluation and putting in place the subsidy schemes that are ultimately going to drive that marketplace. But We remain strong believers in the fact that it's ultimately going to happen.

Speaker 2

It's going to be an important tool For ongoing decarbonization, both in Japan and in Korea. And if anything, our conversations with the Potential end users are becoming more firm and kind of more compelling as opposed to Softening based on what's going on with the government. So we're very optimistic about how that Demand profile develops, it's more a question of when the governments kind of finalize things and people are able to step forward. We are continuing to have, as Chris mentioned, the FEED study is one important input into the process in making investment decision. We're continuing to have ongoing very constructive dialogues with our potential partnerpartners in that project.

Speaker 2

And we're hopeful to be able to be a little more definitive about things. I'm going to stop short of saying making a final decision, but being more definitive about things on our Q4 full year call In February. So I would just say, Josh, stay tuned. That's probably a good time horizon for us to really update where we're at.

Speaker 9

Okay. Thank you.

Operator

And our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Speaker 10

Yes. Thank you. Good morning, everyone.

Speaker 5

Good morning, Adam.

Speaker 6

Good

Speaker 10

morning. So Tony, I mean, we talked a little bit about The kind of some of the supply disruptions in ammonia, in the near term, which is certainly helping kind of the overall nitrogen balance. There's also a lot of Blue ammonia and new kind of project activity happening in this market, maybe with a little bit less Diligence in terms of kind of the pre engineering or customer offtake agreements than you seem to be pursuing. But how do you look at that merchant ammonia market Over the next couple of years, do you see any concerns that there might be some blue ammonia that comes to market before Some of the end demand use, really is in place yet. Or do you still feel comfortable that there's a sufficient kind of tightness in the nutrient

Speaker 2

Yes. Adam, so one of the things I mentioned in my prepared remarks And certainly able to kind of provide more details of this offline as it makes sense Is that if you look globally at the number of projects that are under construction right now, And it basically takes 4 years before when you announce and actually break ground to have something that is in production. So you have a very good visibility in terms of how much capacity is coming online in the next 4 years. The amount of new net capacity coming online does not keep up with a 1% to 1.5% demand growth Additional fertilizer applications. And so we think that just based on the fundamentals in the marketplace, we are going to variance in S and D tightening and that's before you layer in some of the supply disruptions Bert talked about with Trinidad being down a 1,000,000 tons of production, Europe being down 4000000 to 5000000 tons of production, other disruptions elsewhere in the world.

Speaker 2

So We are very constructive on the S and B balance globally over the next 4 years. I think it remains to be seen how many new blue plants So that are actually announced get built. Capital cost continues to go up and it's easy to announce when it's a lot Harder to actually get financial close and build 1 and get it running. So I think as we look out, The next 4 years are very promising. We think based on the partnerships that we have lined up, We're in a really good position having secured end user demand, to go forward with these things if we can make the math work.

Speaker 2

And others, it's hard for me to speculate on where they are. We've seen a couple of projects that have been announced that people have walked away So, I would just say, again, more to come. Stay tuned. At the end of the day, I think, Some level of discipline and rationality is going to prevail here because it is a big expense To build one of these things and if you're an end user, do you want to line up with someone that's got single facility risk or do you want to line up with Someone that's got multiple sources of production for a decarbonized product and can guarantee supply even through turnaround periods and so forth. So We feel really good about our position in this marketplace.

Speaker 3

And just some additional comments. This is Bert, Adam. When you look at ammonia, we mentioned in the prepared remarks about Lack of gas in Trinidad and the difficulties in Europe, but if you feather in Brazil is not operating And the Togliotti pipeline coming out of Russia through Ukraine is not operating. You take an additional several 1000000 tons out. So if we calculate 4 to 5 out of Europe, 1 out of Trinidad and Brazil and Russia could be up to 3 or 4, you've got a Substantial amount of movable ammonia out of the market.

Speaker 3

And that's why I think you saw The reflection in the market when it hit the lows, it quickly bounced up back into the $5,000,000 and now $600 range for global pricing, Which is a very attractive range for us. Now regarding blue and let's just call it low carbon products, we'll be coming on in 2025 With our Donaldsonville low carbon ammonia and products and we're seeing substantial interest Whether that be for industrial applications or agricultural and that's globally. So I'm very excited about the progress and the Position we will be in, in the short, medium and long term with these products and the receptivity in the marketplace.

Speaker 10

There's a lot of helpful color there. I appreciate it. I'll pass it on.

Operator

And our next question will come from Andrew Wong with RBC Capital Markets. Please go ahead.

Speaker 6

Hey, good morning. So just looking at the balance sheet, there's a pretty large cash balance even after taking into account Wagamin and you're generating some pretty significant cash flow, which And I think can pay for most of these projects that you're considering over the next several years. Your shares are also trading at an attractive valuation. I think you would agree with that. So are there any plans to maybe just do a larger share buyback?

Speaker 2

So let me give just a little bit of color, Andrew, on this one, which is going back to the beginning of last year, We've purchased, I think, something close to 20,000,000 shares back, which is about 10% of our outstanding float. During that same period of time, we have invested in some new capabilities both in terms of green production And dehydration, compression, blue production and built cash on the balance sheet. So we have been able to do sort of all of the above. We do have an open $3,000,000,000 share repurchase authorization. And the approach that we have opted to go for is to be Sort of disproportionately opportunistic when we see, attractive valuations and As opposed to just a consistent and steady return of capital.

Speaker 2

So you will continue to see us Jump in deeper during those periods of time and then there may be weeks or months where we're Kind of sitting on the sidelines, but the whole idea is to make sure that we disproportionately reward our long term shareholders by Taking out as many shares at the lowest value as we can. And I think it actually is a good strategy. I'm not really that worried 1 quarter to the next, if we flex up or flex down a little bit. And as Chris mentioned, we expect to close the Wagman transaction here within a month. And so $1,250,000,000 is already spoken for in that regard.

Speaker 4

Yes. This is Chris. I would just add to that. As Tony mentioned, really just being opportunistic but patient. So there will be periods where we have higher cash balance I think if you look at the overall macro uncertainty, whether that be geopolitical in Ukraine For the Middle East or even here at home from whether there'll be funding approved by Congress in the next couple of weeks.

Speaker 4

And then even the higher interest rates market and having companies deal with that through that time, we're probably going to see periods where that macro Certainly goes counter to the fundamentals of the company that Bert and Tony have talked about today. And as a result of that, that's As Tony said, we'll go in deeper and more shares during that particular time, really rewarding the long term shareholders

Speaker 2

for their patients. I would also say that we were blocked out for Q1 because we were in kind of the final throes of negotiation With Instac on the Wagman acquisition, and so we couldn't be in the market buying our shares back. So that kind of thing May happen here or there, but we are focused on continuing to drive The underlying fundamentals of what underpins that Page 16 that I Our materials, which is selectively adding capacity where it makes sense and otherwise returning capital and buying our share count down.

Speaker 6

That's great. Makes a lot of sense. And maybe just a third question over to Bert. Just going back to the question on Europe as a marginal cost producer, Globally, we tend to look at urea a lot, but Europe is more of an ammonia and nitrates kind of market. So should we be Maybe more product specific when we talk about marginal costs, like if you look at it today, ammonia prices aren't that far off from European marginal costs.

Speaker 6

And maybe just looking at urea more specific isn't the right way to look at it? Like how do you think about that? Thanks.

Speaker 3

Yes and no. I think regarding your question, Urea is a placeholder globally that is the most traded product at 190,000,000 tons of consumption, 56,000,000 tons move globally on a ship and so it becomes the placeholder that is basically used on every continent. So it's a good Measure of nitrogen values. You're correct that Europe is more of a nitrogen or ammonium nitrate, calcium ammonium nitrate consumer or UAN, But there's still a large importer of urea, I think 4000000 to 5000000 tons per year. So, they do participate by a lot of North African and Nigerian Tons and some Middle Eastern tons make it up there.

Speaker 3

And so that's what I talked about when the Northern Hemisphere moves into its High demand period here starting in January, they become a pretty good importer as well. So yes, you need to look at it that way, But ammonium nitrate is not really consumed that much on for agriculture outside of Europe and maybe Russia and Ukraine as well, Maybe 1,000,000 tons in Brazil and so that's falling in North America. So we don't really talk about it outside of the explosive Sector in North America. So we do look at all those factors, but again, urea is more of the easy placeholder for everyone to understand.

Speaker 2

But I think the other important thing, Andrew, that I want to just highlight here is and you mentioned it. If you think about From a natural gas cost differential, the difference between the cost of production in the U. S. Versus the cost of production In Europe right now and even on the forward curve is about $400 to $500 spread. So whether we're talking about Ammonia or whether we're talking about urea or whether we're talking about UAN, North American production network has a Huge economic advantage, and that's one of the reasons we're so happy where our plants are located.

Speaker 6

That's great. Thank you very much.

Operator

And our next question will come from Ben Theurer with Barclays. Please go ahead.

Speaker 5

Yes. Good morning and thank you very much for taking my question. I wanted to go back to some of the demand expectations you've talked about and particularly The gap of imports or what you expect at least for Brazil and India, we've seen a lot of like Peers in the industry talking about just the softness in Brazil and the more, spontaneous buying as you go as you need Kind of purchases. What's your level of confidence as it relates to this demand for the imports and what you flagged And then obviously similar to India, because Also a very sizable number, so just about the level of confidence you're having for this demand.

Speaker 3

Yes. So when you look at Brazil, The substantial growth in Brazilian agriculture is amazing over the last 20 years, going from An exporter of soybeans and corn to a major number one position for soybeans and corn in a Subsequent or parallel increase in fertilizer demand going from 2,000 let's say 23 years ago 16,000,000 tons So today 44,000,000 tons. Well, what does it take to bring that in when you're only producing a little bit of phosphate? That means all the potash, Most of the nitrogen and almost all the phosphate as well needs to be imported. And what does that look like when you have Just a few ports, Pernodagua and Santos and some of the others that are congested.

Speaker 3

And so you have lineups that and it's expensive to have demurrage. So when you calculate the movements of products, why we have confidence is the acres will be planted, they will be fertilized, The profitability for especially a farmer, Mato Grosso, for 2nd crop corn, even factoring in 100 bushels per acre It's positive and that's basically a cover crop for them. So that is at minimum an application of urea. So when you look at our expectation of 7,500,000 tons more or less for an annualized basis of Iria for Brazil And where they are today, that import will last through February. So we've got November, December, January, February 4 months at around 700,000 tons More or less per month and the demand is there.

Speaker 3

So we expect to see that and it's pretty consistent over the last several years, again, consistent with their growth and production In India, we've seen a different dynamic with the construction of the plants That have taken place with the Modi government, Build and Buy India program that that production It's gone up to close to 30,000,000 tons of the 36,000,000, 37,000,000 tons of demand. So our Expectation is more or less 7,000,000 tons. That's off of the 9,000,000 to 10,000,000 tons of imports of the previous few years, but still Sizable. That puts India well, now it put Brazil as the number one importing country, India number 2 and United States or North America region number 3. And again, those numbers are trending exactly that way.

Speaker 4

Okay, perfect.

Speaker 5

And then just coming back quickly On the capital allocation side, just as we think about it, you talked about the buybacks to be opportunistic obviously And accelerating here when prices are lower and dividends to be sustained. Now if we think about The projects that you have pending and you have obviously the bag of money cost next year and then roughly $450,000,000 to $500,000,000 in CapEx, but it still leaves A very substantial amount for excess cash. So if it's not buybacks because you don't think price is low enough to aggregate the value, How do you think about other inorganic growth opportunities similar to Vagamond? Are there any things you're looking at? Do you feel there is need Of doing something or with the projects you have on decarbonization and clean energy, plenty of CapEx to be spent on anyway?

Speaker 2

Well, we don't really think about it in terms of trying to look for a home and how to spend capital. We have an open $3,000,000,000 share repurchase authorization that runs through the end of 2025, and our expectation is that we are going to Complete that program and historically we tend to complete those ahead of Schedule in terms of when they expire. So I'm not worried about the pacing or the timing of getting out there and repurchasing Just in that volume of shares, we're just trying to get the most bang for our buck when we go do it. We do have an awful lot of Interesting potential growth opportunities that we're evaluating, but we evaluate them very rigorously and in a disciplined approach. And we do keep our eye on inorganic growth as a possibility, and we are very pleased with the Wagman acquisition.

Speaker 2

We I think that will create a lot of value for us and we're excited about it. But those things tend to be fairly sporadic as opposed to consistently available. They also tend to be fairly large bites when they do Come out just because replacement cost is so high for existing assets. So We're evaluating all of those things, but I'm not worried about our ability to buy the $3,000,000,000 of share repo back.

Speaker 6

Okay. Thank

Operator

you. Our next question will come from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 6

Thanks. Hopefully, I didn't get to this. I had to hop off mode. But Bert, could you talk a little bit about where you think U. S.

Speaker 6

Dealer inventories are going to end this fall season? Are Customers behaving a little bit more normal now or are they still looking to have empty bins or where is sentiment?

Speaker 3

I think sentiment is positive. We've seen this actually on a global basis. I can take it back to North America, but the increases in pull from places like Turkey and Importing countries has been remarkable compared to 2022 and North America is similar. You're right. The buying behavior from 2022 was basically a risk off, prices were falling and inventory built with the producer Until prices came to an attractive level in the spring of 2023, we're seeing the opposite effect For this fertilizer year, which began in July of healthy demand, healthy pull for our fill programs and fall application of ammonia program, We actually think inventories trending into 2024 fertilizer year were low based on acreage consumption and then just actual demand And our channel checks and we think they still remain lower than normal and we think a lot of buying is still to take place Even with the lower import levels, the November lineup for urea is still fairly weak as is December.

Speaker 3

So I think that will have to be made up in Q1 and Q2. And so we're that's That's why I think you can view from our comments we're constructively positive of what will take place in North America relative to demand and pricing. So I think behavior is back to

Speaker 6

normal. I'll leave it there. Thanks guys.

Operator

Ladies and gentlemen, this will conclude our question and answer session. I'd like to turn the call back over to Martin Jaroszlik for any closing remarks.

Speaker 1

Thanks everyone for joining us today. We look forward to seeing you at upcoming conferences.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
CF Industries Q3 2023
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