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Edited Transcript of CF earnings conference call or presentation 14-Feb-19 2:00pm GMT

Q4 2018 CF Industries Holdings Inc Earnings Call

DEERFIELD Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, February 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bert A. Frost

CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain

* Dennis P. Kelleher

CF Industries Holdings, Inc. - Senior VP & CFO

* Martin A. Jarosick

CF Industries Holdings, Inc. - VP of IR

* W. Anthony Will

CF Industries Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Benjamin Isaacson

Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Jeremy Noah Rosenberg

Morgan Stanley, Research Division - Research Associate

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Michael Leith Piken

Cleveland Research Company - Equity Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 CF Industries Holdings Earnings Conference Call. My name is Tiffany, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, please proceed.

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Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [2]

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Good morning, and thanks for joining the CF Industries 2018 Full Year and Fourth Quarter Earnings Conference Call. I'm Martin Jarosick, Vice President, Investor Relations for CF. With me today are Tony Will, CEO; Dennis Kelleher, CFO; Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain; and Chris Bohn, Senior Vice President of Manufacturing and Distribution. CF Industries reported its full year and fourth quarter 2018 results yesterday afternoon. On this call, we'll review the CF Industries results in detail, 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 the 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.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [3]

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Thanks, Martin, and good morning, everyone. Last night, we posted our financial results for 2018 in which we generated adjusted EBITDA of $1.4 billion, a 45% increase over 2017 adjusted EBITDA of $969 million. These results reflect the backdrop of tighter global nitrogen supply-demand and generally lower North American natural gas prices. But it was the hard work and outstanding execution by the CF team that allowed us to capitalize on the market conditions. And even though it was the efforts of the entire CF team that delivered these great results, I want to highlight Chris' and Bert's organizations in particular.

Let me call your attention to Slide 7 of our materials. This data, taken from an analysis conducted by CRU, indicates our superior operating performance. We've talked about being great operators in the past, but this may be the first time we've quantified the impact for you. We've been able to achieve a 10% greater utilization in our ammonia plant production than our North American competitors. Based on the size of our network, that translates into roughly 800,000 tons of incremental ammonia per year that we produce versus what our competitors would be able to do with a comparably-sized asset base. Or said in another way, we basically have a full additional world-scale ammonia plant worth of production every year based on our operational capabilities. Given that a world-scale ammonia plant in North America would cost over $1 billion, our operational expertise is a significant competitive advantage.

On the supply side -- on the supply chain and marketing side, we realized higher selling prices across all products year-over-year. We also achieved lower cost of goods sold for the year. This execution across all parts of our business enabled us to generate an increase in adjusted EBITDA of 45% versus 2017. We operated well, and most importantly, we did so safely. We ended the year with a recordable incident rate of 0.6 incidents per 200,000 hours worked, and we accomplished that despite a very heavy turnaround and maintenance schedule. I am really proud of the CF team for a truly fantastic year.

Looking ahead, we're excited about 2019. As Bert will explain in a moment, we see a continuation of the favorable market conditions from last year. Based on January and February actual gas cost, along with the forward strip, 2019 gas could be lower than 2018 by almost $50 million. Additionally, year-to-date, index pricing at the U.S. Gulf for major products, as reported in the publications, is also running ahead of last year, and we anticipate a substantial increase in nitrogen demand in North America, given our expectations for increases in both corn and wheat acres compared to last year. All of that suggests a strong first half of 2019. Weather will have a big say as to if that materializes in the first quarter or the second quarter, but either way, the first half in total should be strong. The second half of the year is always a reset, and therefore, somewhat uncertain as we sit here in February, but we continue to be bullish about the long-term trends that extend out to 2022 and beyond.

New global nitrogen capacity is growing more slowly than demand, further tightening supply and demand. And the forward curve for North American natural gas looks really attractive compared to the rest of the world. So our story is more than just about a great opportunity in the first half of 2019. We are very well-positioned for the next 4 to 5 years.

In 2018, our business generated $1.5 billion in cash. We deployed that cash consistent with our long-standing capital allocation philosophy. We invested in sustaining and improving our existing assets. We grew by acquiring the previously outstanding units of Terra Nitrogen L.P. We paid our regular dividend and we returned our excess cash to shareholders by announcing and then completing a $500 million share repurchase program.

As shown on Slide 9 of our materials, the share repurchases by themselves should drive a roughly 5% accretion in 2019 over 2018. We closed the year with almost $700 million in cash on the balance sheet, and given our positive outlook for the next 4 to 5 years, our board has authorized a new $1 billion share repurchase program that runs through 2021.

In addition, we again reiterate our commitment to retire the $500 million in debt on or before its maturity in May of 2020. With that, let me turn it over to Bert, who'll cover our market outlook, and then Dennis will discuss our financials, before I return for some closing thoughts. Bert?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [4]

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Thanks, Tony. The CF team performed well throughout 2018, with total sales of 19.3 million product tons. This included a record volume of urea and near-record volume for UAN. Ammonia sales, while benefiting from higher prices, were notably lower in 2018 compared to 2017. This was due both to a higher number of plant turnarounds than in 2017 and a fall ammonia season negatively affected by poor weather. Global prices reached 2018 highs in October. Since then, they have been under pressure. First, due to moderating energy prices in Asia and Europe, and then due to seasonally low demand in the Northern Hemisphere. We believe that as demand begins to materialize, industry fundamentals will support global nitrogen prices in 2019. As a result, we see substantial opportunities to build on our 2018 performance. Net global urea production capacity additions are projected to be modest for the year at approximately 3.5 million metric tons. Additionally, we believe global nitrogen demand will be solid in 2019. Most notably, we expect strong nitrogen demand in North America during the first half of the year. The new crop soybean-to-corn futures ratio favors a substantial increase in corn plantings in the United States, which are projected to rise by 4 million acres to 93 million acres in 2019. We also expect a 1 million-acre increase in wheat plantings. These acreage shifts should drive incremental nitrogen demand in North America. Additionally, the poor fall ammonia season supports further incremental demand. Areas that did not apply ammonia in the fall would likely need to make up the resulting nitrogen deficit in the first half of the year with applications of ammonia or upgraded products in the spring. With the demand outlook in North America, we anticipate barge, rail and truck logistic assets will be in high demand and priced at a premium through the second quarter.

As we look ahead, we expect sales volumes to increase compared to 2018. In any given year, CF sells around 19.5 million product tons, which can be higher or lower based on turnarounds and maintenance, inventory levels entering the year and product mix. We also expect to continue to benefit from our access to low-cost North American natural gas. We weathered spikes in the fourth quarter well and the forward curve looks favorable. We continue to benefit substantially from basis differentials, particularly in Oklahoma and Alberta, and are actively managing our natural gas requirements, purchasing forward to lock in basis differentials to remove near-term price spike risk. Each of these factors make us optimistic about 2019. We're well-positioned for this environment. We have demonstrated our ability to effectively leverage the flexibility of the CF system to navigate market conditions, and we're confident in our ability to maximize our overall margin through the year and into the future. With that, I'll turn the call over to Dennis.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [5]

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Thanks, Bert. The company reported net earnings of $49 million or $0.21 per diluted share and EBITDA of $349 million for the fourth quarter of 2018. After taking into account the items detailed in our press release, our adjusted EBITDA was $341 million. As the global nitrogen recovery has taken hold, our cash generation has increased in turn. This has allowed us to deploy excess cash in line with our long-standing capital allocation philosophy.

As you can see on Slide 6, net cash provided by operating activities was approximately $1.5 billion in 2018. We used $422 million for capital expenditures on sustaining and improvement projects. We also invested in growth by purchasing all of the publicly-traded common units of Terra Nitrogen in April. It also enabled us to return $780 million to shareholders in 2018, which included $280 million in dividend payments and $500 million in share repurchases. The repurchase program reduced our share count by approximately 11 million shares.

As you can see on Slide 9, taken together, these have increased shareholder participation in the underlying assets of the business by approximately 5% or 2 tons of nitrogen for 1,000 shares compared to the end of 2017. As we look ahead, we believe we'll be able to build on this track record. We ended 2018 with ample liquidity, our cash and cash equivalents were about $682 million and our $750 million revolving credit facility was undrawn. We expect capital expenditures in 2019 to be $400 million to $450 million. And as Tony explained, we also expect substantial cash generation in the years ahead. As a result, the board approved a new $1 billion share repurchase authorization through the end of 2021. We also remain committed to repaying $500 million in debt on or before its maturity date in May of 2020. With that, Tony will provide some closing remarks.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [6]

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Thanks, Dennis. Before we open the call to questions, I want to again thank all CF employees for their outstanding work in 2018. Their commitment and dedication drive everything we achieve as a company. We're proud of what we accomplished in 2018, and we're looking forward to the opportunities we see ahead in 2019 and beyond. We're well-positioned to leverage our considerable strengths and take advantage of the favorable industry fundamentals we see for the foreseeable future. We expect this to drive our substantial cash-generation capability, and we -- and enable us to continue to create long-term shareholder value. With that, operator, we will now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Michael Piken with Cleveland Research.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [2]

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Just wanted to find out a little bit about your thoughts on the Magellan pipeline potentially being shut down and what that means longer term for both your business as well as the future of fall ammonia?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [3]

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Yes. And regarding the Magellan, we are disappointed, but not surprised by their decision to shut down the pipeline. They've had operational issues for the past several years, which has challenged them to support or ship the tons that we've wanted to move up into the CF Midwest. We ship about 4% to 5% of our ammonia on the Magellan and kind of projecting what we thought would happen, we've been working with our system, with our team, to create options and different avenues to move our tons up into that market. One is barge loading out of Verdigris, which we're able to do now as well as increasing our storage capabilities in certain terminals and working with our truck providers. So we believe that we will be in an okay position moving forward to continue to move those tons into the market and we expect the pipeline to shut down by the end of the year.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [4]

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Realistically, Michael, it was just the Verdigris tons that were the predominant tons that we transported on the Magellan. And as Bert said, we've got some good barge options coming out of there. So I think Bert's team has done a really nice job of preparing for this eventuality.

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Operator [5]

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And our next question comes from Ben Isaacson with Scotiabank.

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Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [6]

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When you think 5-plus years out, can you give us an update on how you see the growth of the U.S. LNG market impacting U.S. nitrogen economics? And specifically, CF's position on the cost curve? And do you have, kind of, strategies to manage that?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [7]

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Yes, Ben, I think both Dennis and I will take a look at this. But the good news is, from our perspective, the construction costs in North America are extremely high. And so anybody that's building an LNG liquefaction capacity in North America is putting a fair bit of dollars into the ground and are expecting a return on it, given that those are all for-profit entities over here. And the result of that is, given an expected rate of return, we see gas costs in the rest of the world continuing to be in a position where North America is substantially advantaged relative to our competitors abroad. And I think from a resource base in North America, if you look at what happened just in the last couple of years, we've gone from high 60s, low 70s Bcf production into the 80s or mid-80s now and the supply response is very quick in North America and gas price is below $3. So we don't think there's an issue of the resource drying up quickly and North American gas spiking, and we don't see the new LNG capacity dramatically lowering the marginal costs of production elsewhere in the world. So for the next 4 to 5 years, we think it's business as usual for U.S. producers.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [8]

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Yes, Ben, I think the key thing for you to look at on the resource side is what is sort of the resources to production ratio and that's seen at anywhere from 80 to 100. And when you've got a ratio that high typically, it in -- when you get -- when you can tap into the resource with short cycle time, low cost, land rig projects, the production response can be, as Tony has talked about or outlined it. And so the small increments that we see in LNG capacity that have come or that will come, are pretty small compared to what the resource base is capable of producing in a fairly short time frame.

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Operator [9]

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And our next question comes from Christopher Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [10]

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Given we're approaching the tail end of capacity expansions for the last build cycle over the last half decade or so, how do you believe urea trade flows are going to evolve given the decreasing importance of Chinese exports? And if you could also touch on how you believe the UAN trade flows will evolve in the context of European anti-dumping duties? Both of those would be appreciated.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [11]

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So you're right. Regarding expansions, we're, as I said in my notes that about 3.5 million tons are coming on this year, a declining amount of tonnage -- new tonnage coming on, and with expected growth, we expect that the urea market will be good and positive going forward. However, the capacity expansions that have come are from lower-cost production areas, Nigeria, Northern Africa, Middle East. I'm not sure about the Indian additions that there -- are unannounced, just because they'll be having to pay high-cost LNG. And we do believe that China, over time, is moderating down to this level of about 2 million tons of exports. So trade flows, I think you've seen the additions come on and operate well in the United States. We're going to move down into a lower level of imports and stay in that range of, let say, 4 million tons, and we expect growth in Brazil, as Petrobras plants are shut down, so moving from 5 million tons to over 6 million tons. Still expect India to be in that 6 million to 7 million ton range for the next couple of years. And so it's a classic supply and demand and high cost to marginal producer, back to those economics and the cost curve will work. And at these higher costs, higher LNG markets will have to moderate down and absorb the lower-cost tons. And that's a direct reflection of these EU discussions. We're actively participating and cooperating with this analysis. We expect an announcement to come out in the next month or 1.5 months, and they can lead to duties, no duties or continuation of the same duties, which we pay today at 6.5%, while millions of tons come this way and pay no duty to the United State. So our position on that one is pretty clear. The low margins of the European producers is completely unrelated to the U.S. imports that we have shipped -- or exports we have shipped over to there, that is caused by a combination of what we would experience, lower price UAN and urea global prices, and then high European production costs driven by high gas cost, whether that be LNG or Russian imports. And so we expect, and I would, if you're thinking economically and reviewing the economic analysis that we and others have provided, that, that analysis should come out that we did something that was shipping tons at prices similar to what the United States were and was not anything close to dumping.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [12]

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Yes, I think on that point, as Bert said, we're cooperating actively with the commission investigation. We are not dumping. It is a global price point for UAN and our delivered price into France and Belgium is above what our netback price would be using a Jones Act vessel to hit the East Coast of the United States. So those are very rational kind of moves for us to make and at the end of the day, it is not the Western European producers that are filing this complaint. It is not EuroChem; it's not OCI; it's not Yara. It is the Eastern European producers, Lithuania, Romania, Poland, Fertiberia, that are bringing this lawsuit, and as Bert said, they're running very inefficient, very high-cost and logistically-challenged plants. Because if you at where the center of mass of UAN consumption is in Europe, it's France and Belgium. And where those plants are located in the East, they have as high a transportation cost to land that product as we do or even higher. So the fact of the matter is, if the European Commission goes forward with some sort of duties, what they're basically telling is the French farmers, you have to subsidize the high-cost Eastern European producers. And if you're sitting in Belgium, that's probably not a terribly attractive message to be sending out to the French farmers, particularly given the yellow vests situation and so forth. So we'll see how it develops, but Bert, you want to talk about plans that we've made to deal with the situation if it goes that way, if the farmers are subsidizing high-cost producers?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [13]

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Yes, either way, regarding your question on trade flows, we're constantly looking at our options and optionality to the system, whether that be moving it to this market or that market. We're ambivalent to where the tons go, we'd like to move into the highest netback. But that being said, we constantly review. We brought on 1.8 million tons of capacity in '16 and '17 of UAN. And we've got additional capacity growth because the Port Neal Plant, urea plant, is running so far above capacity, we have extra liquor and we're making extra UAN up there also. So when you look at the buckets that are available to us, it's the production mix that we choose to work with each -- we can move really on a ship, but let's say, each day of the week, and probably right now, we're running a little higher urea mix because that is more attractive. We're looking at extra terminaling opportunities in United States along the Coast, and we're working with our domestic customers for additional tonnage to remain in this market. And then you've heard us talk about the development of South America, Argentina, Brazil, Chile, Colombia and Mexico. All of those markets have grown substantially in the last 5 years, and we're at the forefront of that effort for very attractive margins. So when we look at, at least CF's UAN book, we think we'll be able to continue at the same level or above that we're participating in the market today and see good opportunities going forward.

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Operator [14]

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And our next question comes from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [15]

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The last few months, you saw a lot of volatility around Indian tenders, which -- urea tenders, which you don't participate in. But maybe from your perspective, you can comment on what kind of volatility in the market this created among our participants in terms of different trade flows going in between China and India -- excuse me, China and Iran. But also, there's a lot of discussion on maybe some of the bid volumes into the tenders were double-counted in different ways. So maybe talk about how the different play on the Indian tender has affected your market that you participate in?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [16]

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Yes, when you look at the India tenders, they do, depending on the size and the timing, can have a big impact. They're the only country in the world that purchases this volume -- this amount of tons fixed -- let's say, 5.5 million to 7 million tons depending on the year. And in the past, that came principally from Iran and China. As we've talked about over the last couple of years, these trade flows are changing. And we see a decreasing amount of tonnage coming out of China over the next couple of years, and that has happened. And then with the sanction on Iran, that has been difficult, if not impossible, to participate in these recent Iranian tenders. So the tonnage has moved to the Middle East, principally supplied out of Qatar, Saudi Arabia and some of those countries as well as Nigeria and some Northern Africa. And so I think, as traders and producers have participated, some producers are going direct and some traders, you're right, some people took some shorts and then covered later. And so that does have a disrupting impact on the overall market when you get in and buy 1 million-plus tons in a week and then that ships over a 6 to 8-week period. So we look at that for us and how we manage our position and how we manage what we expect to come into North America. And I think, for us, it's a good outcome that Indian buyers are buying and the Middle Eastern producers are shipping, it's like a $7 freight to go to India rather than spending $20 to $30 to come to North America. But this goes back to my earlier comment that this is just how economics works. Lower-cost providers are providing into a market that's attractive for them. And so trade flows will continue to evolve. We have some spot tonnage that comes into this market as well as Brazil, and when that is too much, that overwhelms the market. That's what happened to Brazil and that's what happened to us in the last couple of months. We think that will moderate and we see a positive market going forward.

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Operator [17]

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And our next question comes from Mark Connelly with Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [18]

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Just a quick follow-up on the pipeline issue. With cold weather affecting the barge season, there's already talk of high barge demand through second quarter. Is that going to drive your freight costs higher?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [19]

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For CF, we've contracted our barge logistics and as well as we have our own railcars, we are 5,000, and we have our own trucking group that's managing an increasing amount of our truck logistics. You are correct. I think with the cold weather, the ice and ice block probably will be a little bit later. But the volume of water that is probably going to be going down the rivers will make barge traffic going up slow. So the impact of the Magellan for us is ammonia, and we do move barge, ammonia from Verdigris as well as Donaldsonville and we are already putting that, what we believe will happen, into motion and I think we'll be fine. But I do think that barge freight probably will go up, and we can see what other competitors and customers are doing, locking up load points like out of St. Louis into the Upper Midwest or securing barge logistics for some of these spot vessels that are coming in, or an inability to get that. That's what I think will be impacted, these vessels that come in without barge service connected to the sale might suffer an inability to get service for a short period of time.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [20]

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The other thing I would add, Mark, to what Bert just said is, generally speaking, that much of the tightness in the barge market is focused around dry product, and we have -- we own our own ammonia tows and have long-term leases on the other ones. So we've got pretty ready access to the vessels and have power on long-term lease as well. And because of the basis differential favorability in Oklahoma, we can actually move Verdigris ammonia down into New Orleans for about the same price or even some days, cheaper than what we can produce into Donaldsonville. And because Donaldsonville is already on the NuStar, what we tend to do when we do an ammonia export is, a lot of times, end up making that the Verdigris tons that go out. So the -- on the glass half-full side of the equation, high barge costs and freight costs in general just increased the in-market premium that we got. And so given the in-market networking capacity that we have, that's actually a really good thing for us as opposed to a bad thing. High oil, high freight costs, high scarcity of vessel and other options, all play to our advantage instead of becoming a detriment to us.

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Operator [21]

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And our next question comes from Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [22]

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What would you say contributed to your UAN net realized price in the quarter that seems more below our spot expectations for the quarter? Was it any particular key end markets you were selling into that weighed on that? Or maybe it was forward sales? And then in terms of your outlook for UAN with respect to pricing that has been a little bit weak here in the last 2 months, what gives you the conviction that the channel is not already full? Your outlook for more corn and the fall application season was light, that seems very supportive. But how do you know that the channel is not already full or your competitors haven't already sold forward?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [23]

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Steve, let me answer the first piece of that and then I'll turn it over to Bert to handle the forward look. So I'm going to take you back to our November transcript. I'm not sure how much clearer we could have been about saying, look, our forward order book, we liked the price when we took it, we didn't see the huge run-up coming in the fall and expect most of the fourth quarter to contain a heavy dose of fill from the summer. So I understand that a lot of people sort of have a "miss" out there on UAN price, but it's not clear to me what we could have done differently to help provide visibility into what people should have been expecting. And I -- my only sense is, and I say this with the utmost respect for your work, like you've got to listen to what we say instead of what the publications are posting for spot price, because we gave you the script for what was going to happen in terms of the fourth quarter results. But that said, I'll turn it over to Bert and let him talk about our view into the first half of '19.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [24]

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Yes, so looking at it, I don't believe that the channel is full. We've spent considerable time over the last several years identifying tanks and size of tanks and the ability of the distribution system to absorb the tonnage that's produced and imported. Today, the UAN market, we believe for North America, will be above 14 million tons and I think demand for specifically UAN will be robust, given that the fall ammonia season was so light. And when you look at the fall ammonia season comparisons, 2018 was a very poor year, comparable to 2016. The difference being that in 2016, we didn't get a lot in Canada and the Northern Tier, but did in the Southern Tier. It was the opposite this time, and we did get a lot of movement and product applied in Canada and the Northern Tier and did not in the Southern Tier, which is a bigger consumption area. That means that in the kind of the industry talk, it's about 40% went down, so 60% did not, and that could be conservatively, 700,000 to 1 million tons of ammonia. That -- it will be impossible for that to all go out as ammonia. It would have to go to upgraded product. And so we believe our customers are preparing for that and realizing that they need to get those logistics in place. Those logistics can -- reserved, and that is with us and others. And so competitors may have sold forward, that's fine. The market, in terms of being weak, on an [N basis], it's actually very strong. With urea trading where it is in NOLA, at the current UAN price, it's trading above its historic premium, and we think positioned very well, and we're probably, I'd say, 4 to 6 weeks away from spring starting. And that just plays right into our strengths with our storage network, in-market production, and we think that UAN pricing will fare fairly well in Q1, Q2.

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Operator [25]

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And our next question comes from Don Carson with Susquehanna Financial.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [26]

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Yes, I had a question on your thoughts on the moderation of Asian and EU energy prices on the global cost curve. Now normally in your presentation, you've got a cost curve and what the implications are for what you think U.S. pricing would be. For example, Q3, you were implying that the then cost curve would give you a $260 to $310 NOLA urea price range in 2019, when you went through some of the -- your cost advantages over TTF and anthracite. So can you update us on where we are now compared to what you were talking about in the third quarter, given lower energy prices?

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [27]

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Yes, Don, this is Dennis. When we talked last time, we -- the delta, as you said, the range was as you laid it out, a little bit above $300. What we're seeing today is that basically, the floor that we talked about, because of where the shelf sits, is roughly the same sort of that, say, $260, but the ceiling has come down to, say, sort of $285, $290, to account for what's happened to oil prices and then to the related effects that they've had on gas prices. So we still face a pretty steep cost curve, even with what's happened to energy prices. And if you look at those 2 numbers that I just gave you, you can see way at the left-hand side of the cost curve, that there is still, as Tony and Bert have been discussing, a tremendous margin opportunity still left in the business. And we'll have to see what happens to oil prices. What we see now is that OPEC compliance has been reasonably good, OPEC plus, and price did come up. We're, I think, at $64 Brent today, I'm not sure exactly what the forward curve is going out. But it looks like it's perking up just a little bit.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [28]

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And I would just add, Don, on that one. You're absolutely right. When we published that curve, I think Brent was at $70, mid-70s and now it's low 60s. The one thing that's moderated against that a little bit is, internal to China, not what they're importing, but internal China, at least according to Wood Mack, their coal prices have remained relatively flat, if not increased a little bit. And so as Dennis said, you may have a couple of those bars on what was otherwise a fairly flat shelf that have changed positions a little bit here and there. But -- and you've got compression in terms of the width of that high to low. But it's not like the low end of that has collapsed by any stretch of the imagination. The other thing that we're pretty excited about, honestly, is after we published the curve in October, you got into November and December and U.S. gas price had spiked for quite a while. It looked like the forward into the first quarter was up, with a four handle on much of that and when you look today, it's come down dramatically. We're in the mid-2s now and so there is -- I think it goes to what we spoke about earlier in terms of the supply response in the U.S. and just how much capacity there is to move gas around here. And if anything, our cost structure is favorable to when we produced this chart back in October. And we'll have to see what happens through the rest of the year, but we're very pleased to be largely open gas right now, and because I think there's some upside for us out there.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [29]

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Yes. Don, the other thing I'd point out, because it's always important, I think, to remind people who look at the cost curves what they are, basically, what they are is a good indication of sort of what average prices would be for sort of the year, if the energy prices that we lay out in the detail were prevalent. And it really is a price floor, not a price ceiling. And so you can get into periods during the year, and you can get into years, in which demand is a lot stronger than the immediate supply and you can get prices on average that rise above the cost curve, as we have seen in prior years. And one thing that -- I think the other thing that makes us confident in this perspective is as you look forward, going from '19 through '21, '22, the rate of growth in capacity is outstripped by the rate of growth in demand. And so the supply-demand balance is moving in the right direction for us.

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Operator [30]

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And our next question comes from Duffy Fischer with Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [31]

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Two questions off the impact of the poor application fall season in North America. First is, with -- if we get the big expected spring, like you think, does that change the mix of nitrogen products between urea, UAN and ammonia? Or will the mix be normal? And then two, what does that do to your inventories, both dollar amount that you carry through the year and then how much kind of product do you have pre-placed to meet a big demand season?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [32]

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So the impact of the poor fall, you cannot -- as you enter fall, we planned for a normal season, and we've got decades of -- to show us what normal is. And some of that is pre-sold, and some of that is sold spot. As we rolled through the fall, it was evident early, like I'm talking about by the 10th of November, we would not have a fall ammonia season. And so we quickly pivoted in and redirected tons to different markets and positioned the plants differently. Our intention is always to be able to run our plants full and to then prepare for the spring and position those products for demand starting kind of now in the Texas and Oklahoma market. And as the market moves north, those markets come into play. So first, spring, we are planning for a big spring. With 93 million acres, we're constructively positive what can happen in the corn sector. One, because of the low stock-to-use ratio on corn. We believe that the $4 position today of corn has some upside. Beans probably has downside with the carryout of -- almost 100% increase in the carryout in soybeans. So it will be difficult to store and to move and especially if we don't get some resolution to this Chinese limitation on imports there. Plus, you're going into Brazilian shipment season now. So we're planning on a lower level of soybean exports in the 24 million ton-type range going forward. And that, I think, puts pressure on soybeans. So the attractiveness of corn, I think, can go up to 95 million acres. And then moving this additional demand from the fall to the spring will make it difficult to get all those tons out on a timely basis. The ammonia season moves in a period of days and weeks. And that's where, I mentioned earlier, truck and other logistics become paramount. And so I do believe the mix is going to change. Let's say, there is 700 to 1 million -- 700,000 to 1 million tons of ammonia did not go down in the fall. If you bucket that in 3 different positions, just dividing it by 1/3, 300,000 tons of ammonia will move to the spring, we're ready for that. And then you have to multiply it by the N-factor, because UAN is 32%, urea is 46% and ammonia is 82%. You're going to see a substantial amount of urea and UAN being needed in the Upper Midwest. And inventory-wise, we plan to go in full and prepared and then the challenge will be resupply. So we're having our railcars positioned to move those tons as well as our barging assets, and we're up to the challenge.

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Operator [33]

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And our next question comes from Jeff Zekauskas with JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [34]

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In your fourth quarter results, can you talk about how much your volume was limited by a short season and how much it was limited by your own turnarounds? And can you also say something about the level of imports of nitrogen fertilizer you expect into the United States in the first half of 2019?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [35]

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Jeff, let me handle kind of the first piece of that or at least a piece of the first piece of that and I'll throw it over to Bert. If the -- the turnaround activity, while it is high for us, really, had we had extra ammonia in the fourth quarter, it would have either had to go out as exports, which the ammonia exports are fine. They make some money, but they're certainly not as valuable as the in-market ag sales are. And so the volume shortfall on ammonia was really a seasonal issue as opposed to a turnaround issue, and we had pretty good movement of the upgraded products. And at the end of the day, that was a couple hundred thousand tons we're talking about. So it's a relatively small number in the context of 19.5 million tons. But it -- I would largely point that to the volume of ag ammonia that didn't go out versus what a normal season is, as opposed to anything else. And then Bert, I'll let you comment on the rest of it.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [36]

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Yes, so looking at the imports, where we are to date, I would say we're ahead, expecting a 4 million to 4.1 million tons of urea and 1 -- probably needed 1.5 million tons of UAN and we're currently trending towards above that level. That's why I think you've seen the weakness in NOLA. And you have to remember, as New Orleans is one of the few markets in the world that has liquidity at all times. In Brazil, you have to bring that vessel in and nominate it and have it sold. You don't have to do that in NOLA. In India, you work off tenders. And so we've seen some traders -- this has what has happened over the years. These traders bring product in, market gets lower and they take, or somebody's taking these losses. And we believe that's just declined over time, as we've gone from 8 million tons imports to 4 million, but it takes time for people to learn lessons, I think. And so we expect the imports coming in, in Q2 will be probably be lower, just because of total demand that's in position. And we think the market will balance that way.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [37]

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Bert, why don't you just comment a little bit on -- so you do have those extra imports kind of slopping around in NOLA, but the in-market premium, what's happened to that, given the constraints on being able to actually move that product out of the region?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [38]

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Yes, I think a direct reflection of the importance of logistics, contracts, positioning and timing is where we are on both the in-market premium for urea and UAN and ammonia, for that matter. Ammonia is trading below $300 in Tampa and at $500 in the end market terminals. Urea is trading at $240 in NOLA and trading at $290 to $300 in the interior. UAN is trading at $185, $190 in NOLA, trading at say, $210 to $240 in the interior, depending on the production location. So you're exactly right. This is something we've talked about and we plan on continuing, because there is a value to being able to pick up and not have such a substantial position, taking a vessel of 30,000 tons at a price of several million dollars, where you could take it by the truckload. And I think that's called just appropriate positioned risk for our customers, and we want to provide that opportunity for them.

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Operator [39]

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And our next question comes from P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [40]

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So with the lower fall application that goes into spring, farmers can decide to apply a little bit of ammonia, but maybe more likely urea and UAN. And how do you think that will play out in terms of volumes of each, because your margins are different on each product? So how do you maximize your profit while helping your growers? And related to that, just quickly, how much urea did you export during the off-season here? And what was the netback on the exports?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [41]

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Okay. So looking at that question, and we don't sell directly to farmers. We work with our retail and channel partners to do the optimal decision-making for the farmer. And that is directly correct -- connected to the 4Rs, or finding the right product at the right rate at the right place at the right time. And so we make these products and we can move our products in different places, whether that be export, domestic, up the river, on the rail, with a truck, through a pipeline, with the idea of having or the ideal of having that product in place for our customers to pull. And so when you're looking, though, at a corn farmer who is planting for yield and they have trend yield, this year is at 176 bushels an acre. If you're in the I states, Iowa, Illinois, Indiana, and probably Nebraska or pivot irrigation areas, your target is probably 220 to 280 bushels an acre. And that's what was pulled off last year. So you're -- as you're planting, you're pulling nutrients off the soil and those nutrients will be needed, and especially needed for seeds -- optimal seed growth. What we're seeing is a combination of applications, but ammonia plays a pivotal role in the initial growth stage of the corn crop and then either urea or UAN or a combination thereof of split applications. And so yes, margins are different for upgraded products as we go, but we're driven, I think, to serve the needs of the farm center and retail center, and that's what we'll continue to do. On the urea exports, what -- we kind of -- we're ambivalent to where our products go and it's netback-driven for that market also. So when there is an attractive opportunity, we will export, and we did that last week. We took a vessel to Chile, or we're going to be loading it next week, and that was a positive netback compared to what the domestic market was giving us. Last year, we exported a little over 400,000 tons of urea, about 450,000 tons and UAN, close to 1.5 million tons, focused on Europe and South America, but we shipped to Australia and Ukraine also. And so those are great opportunities for us. We are happy to build our customer base as a global participant in this market and as those opportunities come to us, we will execute against them.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [42]

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And particular on urea, I would say, much of the year last year, the U.S. was a little bit of the port of last resort for a number of international producers. And so what you saw was NOLA trading at a bit of a discount to international parity. And so on virtually every one of those exports that we conducted last year, the netback was substantially above what NOLA was offering. And so I think from the standpoint of urea in particular, export is a great option for us.

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Operator [43]

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And our next question comes from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [44]

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Was the buyback activity in the fourth quarter about the max rate that you could do in an open market program? Or could you have bought back a lot more stock? Just trying to think about the pace of buyback that we might expect.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [45]

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So John, we had an authorization that was capped at $500 million. And in mid-October, we were -- the share price was trading in the mid-50s and then as you wound toward the end of the year, we had dropped to the low 40s. So I think what you saw was an increased activity that was reflective of where the share price was and the fact that taking shares out in the low-40s is also providing about a 3% after-tax yield for us, given the dividend on the share. So we think that's a great opportunity to take that down. And going forward, I think what you'll see is a pace that is going to be reflective of market conditions and cash generation as well as where the share price is, and with a lower share price, expect us to buy more. So that's kind of the -- how we think about the world.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [46]

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And then on Slide 16 in the back, on the expected closures in China, about half of the expected closures are assumed rather than actually announced. Could you talk a little bit about the assumptions behind that estimate?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [47]

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Yes, the assumptions that weigh into that is looking at where the coal prices are as well as the electricity price and the internal pricing versus being able to get kind of import parity, what are the number of plants that are below breakeven from the standpoint of cash flow perspective? And so we have a sense of the aggregate loss from a cash perspective on a number of those plants, and that's what goes into that assessment. We can't tell you which are the ones that are going to turn off the lights first, but we see that as likely coming, and we think there's going to be about 5 million tons of closures as we make our way through this year. And a lot of those plants may not be producing today. They could be on curtailment or shut down, but because they haven't been announced as closures, they haven't hit the list yet. But it certainly wouldn't surprise me if it doesn't change the net balance from a Chinese production demand standpoint. It's just they're going to be moved into the permanent closure as opposed to temporarily curtailed.

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Operator [48]

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And our next question comes from Vincent Andrews of Morgan Stanley.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [49]

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This is Jeremy Rosenberg on for Vincent. Just had a question on, just from a modeling perspective for 2019, any puts and takes to think about, whether it be the tax rate or really, just anything to flag from a modeling perspective would be helpful.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [50]

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Yes, I mean from a tax perspective, what we're looking at is probably a federal tax rate of around 25%, we sort of said mid-20s, so that would be the 21% statutory rate plus some state and foreign taxes. Remember that they're -- our largest foreign jurisdiction, Canada, has a higher tax rate than we have here today. That, however, is for provision purposes, from a cash perspective, you will see in the 10-K, we have a substantial amount of net operating loss carryforwards, which are laid out there. But in addition to that, we have the ability to take bonus depreciation, is to deduct 60% of the cost of capital in a year and we've got a capital budget next year for $400 million to $450 million. So I'm not sure how good our earnings and so forth from a tax perspective will turn out, you all have different perspectives. But we've got ways to shelter those. So I wouldn't expect that in 2019, we'd be paying a significant amount of federal cash taxes, despite what we have in the provision.

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Operator [51]

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And your next question comes from Jonas Oxgaard with Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [52]

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You mentioned in your press release, you've been monitoring the Iranian sanctions and the Chinese re-exporting. I was wondering, is there a role for you to take a more active stance than just monitoring? You do have pretty active market intelligence, as far as I know. How do you see this playing out? Can the Chinese traders just keep re-exporting, with no interference from the U.S. government?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [53]

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Well, I think there certainly is the option for some of that to continue. And then more recently, there's been, I think, some discussions about doing direct business with India and trying to do some currency payments and movements that don't touch the international wire system. So that would allow some of that activity to happen. Our view all along has been that the gas is virtually free, the plants are built. They're going to run those plants, and those tons are going to find a way into the international market through some vehicle. And it does create a bit of an overhang and some disruption. But our view is that, that was just part of the global supply picture, and we weren't counting on them not happening. I would say that the U.S. government is well aware that those tons are coming out. And some of the stuff is just outside the areas that we can provide or the government can provide appropriate pressure against. But I do think, longer term, the -- as long as the sanctions stay in place, whether it's access to technical expertise, access to new parts, particularly some of the more exotic materials that need to be fabbed in Europe or other places that are more directly affected, you may see a -- either a reduction in operating rate or slowness for, like the Lordegan plant coming up, kind of thing. So I think what's running is going to continue to run, but depending upon how long this goes on, that could drop off a little bit.

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Operator [54]

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And our next question comes from Andrew Wong with RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [55]

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So just regarding the $500 million of debt that's due next year, do you plan to repay that or do you plan to roll it over? And maybe just more of a general question on capital allocation, aside from debt repayments and share repurchases, is there anything else that you look at investing into, maybe expansions or M&A?

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [56]

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Well, I mean, if you go back to our capital allocation philosophy, and we would like to invest in growth of our business, where we can do that and have it be accretive on a cash flow per share basis and above our cost of capital. There are, however, not a million of those things for us to do, and we're pretty picky about the projects and the M&A prospects that we look at. So absent anything of significance in that area, we want to return the cash to shareholders, but we want to do that within a framework that reflects our commitment to long-term investment-grade metrics. And so what we've committed to the market is we're going to repay on or before its maturity date, which is in May of 2020, the last of the $500 million of the 2010 or 20 -- I think it's 2010, bond, those are -- they carry a coupon rate of about 7 1/8%. So when we finally get that done, we'll be sitting at an interest cost per year, cash interest cost, of below $200 million per year, so a significant reduction in fixed charges. But I think it's also important, as Tony pointed out, that we also do share repurchase as a means of returning cash to shareholders. And it has like a 3%-ish after-tax yield on that. And it does eliminate a lot of fixed charges as well. So we believe that both taking the debt out and also reducing the fixed charges associated with dividends are credit positive.

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Operator [57]

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Ladies and gentlemen, that is all the time we have for questions for today. I'd like to turn the call back to Martin Jarosick for closing remarks.

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Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [58]

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Thanks, everyone, for joining us. And we look forward to following these conversations at various conferences we'll be at over the next few months.