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CF Industries Holdings, Inc. (NYSE:CF) Q3 2023 Earnings Call Transcript

CF Industries Holdings, Inc. (NYSE:CF) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good day, ladies and gentlemen, and welcome to CF Industries' First Nine Months and Third Quarter of 2023. All participants will be in a listen-only mode. [Operator Instructions]. We will facilitate a question-and-answer session towards the end of the presentation. [Operator Instructions]. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Sir, please proceed.

Martin Jarosick: 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, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first nine months and third 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'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Tony Will: Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first nine months of 2023, in which we generated adjusted EBITDA of approximately $2.2 billion. Our trailing 12 months net cash from operations was $2.9 billion and free cash flow was $2 billion. These results reflect continued strong 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. In the near term, we expect strong demand for the 2024 application season in North America due to low nitrogen inventories across the supply chain. We expect to close the acquisition of the Waggaman ammonia plant this year, adding that facility to our network and production volumes for 2024 and beyond.

In the medium term, industry fundamentals point to a tightening global nitrogen supply-demand balance. Over the next four 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. 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 in growth opportunities as well as returning capital to shareholders through dividends and share repurchases. With that, let me turn it over to Bert, who will discuss global nitrogen market conditions in more detail. Bert?

Bert Frost: Thanks, Tony. The third quarter 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, purchases aggressively entered the market early in the third quarter driven by attractive nitrogen values, positive farm economics, strong interest from Europe and low inventories in the North American nitrogen channel. CF Industries built a good order book early in the third quarter and by the end of September, our UAN and ammonia order books stretched well into the fourth quarter. 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 $285 per metric ton, to $575 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 an open order book for the first quarter of 2024 and beyond and wide global energy spreads that continue to favor our low-cost North American manufacturing base. 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 fourth quarter so far, securing 1.7 million tons of urea in their latest tender. We expect demand for urea in Brazil will be robust through February for continence and second crop corn planting.

Aerial view of a vibrant wheat field, a representation of the fertilizers and crop nutrients this company provides.
Aerial view of a vibrant wheat field, a representation of the fertilizers and crop nutrients this company provides.

Longer term, agricultural led demand for nitrogen should remain resilient with global green stocks expected to approach averages from the last five years by the end of the 2024 growing season. We also expect continued supply constraints in some key producing regions. Natural gas availability remains an ongoing challenge in Trinidad, which in recent years have seen the loss of nearly 1 million 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 4 million to 5 million tons lower in the region compared to the 2018 to 2020 averages. This includes the impact of the permanent closure of our U.K. ammonia plants, which accounted for nearly 1 million tons of ammonia capacity.

Europe has become the CF industry's top export destination over the last 18 months as purchasers bring in ammonia for upgrade as well as purchase UAN, ammonia 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 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.

Chris Bohn: Thanks, Bert. For the first nine months of 2023, the company reported net earnings attributable to common stockholders of approximately $1.25 billion or $6.42 per diluted share. EBITDA and adjusted EBITDA were approximately $2.2 billion. At the end of September, cash on the balance sheet was $3.25 billion. We have earmarked $1.25 billion of cash for the acquisition of the Waggaman and ammonia facility, which we expect to close on December 1st. As a result, our pro forma available cash at the end of September was approximately $2 billion. We expect company-wide gross ammonia production to be between 9 million and 9.5 million 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 Waggaman facility to our network.

We project that capital expenditures for 2023 will be in the range of $450 million to $500 million. 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 million tons of CO2 per year. This project, which offers a return profile well above our cost of capital and will accelerate progress towards our 2030 decarbonization goal is on track for startup 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.

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 million shares for approximately $355 million. We expect to continue to favor opportunistic purchases layered in at attractive levels. With that, Tony will provide some closing remarks before we open the call to Q&A.

Tony Will: Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all they did during the first nine months of 2023. Their teamwork continues to deliver outstanding results. In closing, I want to highlight two slides from our materials. Page 16 provides a recap of our consistent approach to creating long-term value. We thoughtfully and selectively add production capacity to our network, the Waggaman 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 4x, 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 essentially proud of our team's collective commitment to safety excellence and their focus on continuous innovation. Nowhere is this more evident than in our annual Wilson Safety Awards. Our winner this year was the Courtright 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 website. We believe CF Industries has a bright future. In the near and medium terms, we are well positioned for what we expect 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. 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.

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