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Edited Transcript of CF earnings conference call or presentation 15-Feb-18 2:00pm GMT

Q4 2017 CF Industries Holdings Inc Earnings Call

DEERFIELD Mar 9, 2018 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, February 15, 2018 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

* Christopher D. Bohn

CF Industries Holdings, Inc. - SVP of Manufacturing & Distribution

* 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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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Lead Analyst

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research

* John Ezekiel E. Roberts

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

* K. Tong

Stephens Inc., Research Division - Associate

* Michael Leith Piken

Cleveland Research Company - Equity Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Oliver S. Rowe

Scotiabank Global Banking and Markets, Research Division - Associate

* P.J. Juvekar

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

* 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 2017 CF Industries Holdings Earnings Conference Call. My name is Tekia. I will be your coordinator for today. (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.

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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' Fourth Quarter Earnings 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; Chris Bohn, Senior Vice President of Manufacturing and Distribution; and Gene McCluskey, Vice President of Tax.

CF Industries reported its fourth quarter 2017 results yesterday afternoon as did Terra Nitrogen Company LP. On this call, we'll review the CF Industries' results in detail, discussing 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 may be difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.

Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

Now let me introduce Tony Will, our President and CEO.

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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 2017. For the fourth quarter, we generated adjusted EBITDA of $260 million. And for the full year, we produced $969 million of adjusted EBITDA after taking into account the items detailed in our earnings release. These results reflect outstanding execution in all aspects of our business.

The CF team this year produced, sold and shipped more product volume than ever before. Most importantly, we improved on our already excellent safety performance, setting a new company record as our safest year ever. It was a tremendous achievement by our manufacturing, distribution, sales and corporate teams. This level of execution was crucial in a year where nitrogen prices and the cost of natural gas were significant headwinds. Despite this, we did what we do best: focus on what we can control. As a result, our production levels, sales volumes and cost management efforts more than offset the challenges we faced.

As we look ahead to the balance of 2018, we expect the environment to be better than what we navigated in 2017. As Bert and Dennis will cover in more detail, the U.S. dollar is weaker against key global currencies, notably the ruble and RMB. Global oil price, along with corresponding Asian freight costs, are higher, while European gas and Chinese coal prices are meaningfully higher.

Meanwhile, North American natural gas cost is significantly lower 2018 versus 2017. Additionally, global nitrogen demand and pricing remains higher than last year. These factors, higher international cost structure, weaker U.S. dollar, cheaper U.S. gas and better nitrogen prices, create a set of industry conditions that make us optimistic about the year ahead.

Along with a more positive market environment, CF will realize the benefits in 2018 from our recent actions to lower fixed charges, reduce controllable costs and run the company more efficiently.

In December, we repaid $1.1 billion of our most expensive debt with a blended coupon rate of about 7%. This lowered our debt by about 19% and our interest payments by 25% or $76 million annually.

Last week, we announced that we are exercising our right to purchase all of the publicly traded common units of Terra Nitrogen Company LP. This will help simplify the structure of the company and reduce the administrative cost associated with operating TNCLP as a separately listed public entity and deliver network optimization benefits.

As shown on Slide 32, the expected results of these actions would have increased EBITDA by approximately $45 million and generated about $110 million of additional free cash flow.

Moving forward, we also expect to benefit from the recently passed changes in U.S. tax laws. CF has long had a cash tax rate close to the historical 35% statutory rate. There are a lot of moving pieces with tax reform that Dennis will cover, but it is clear that a lower corporate tax rate will generate earnings and cash flow that drop straight to our bottom line. Additionally, the new tax law will create a more level playing field for U.S.-based manufacturers like CF. This is good for the country, our company, employees and shareholders.

We're proud of what we achieved under difficult circumstances in 2017, and we are looking forward to the opportunities we see ahead in 2018.

With that, let me turn the call over to Chris to review our operational performance. Then Bert will cover our sales and market outlook, and Dennis will discuss our financials before I return for some closing thoughts. Chris?

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Christopher D. Bohn, CF Industries Holdings, Inc. - SVP of Manufacturing & Distribution [4]

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Thanks, Tony. Our manufacturing and distribution system continue to run well in the fourth quarter as it has all year. We produced 2.6 million tons of gross ammonia in the quarter. Our annual gross ammonia production was a company record 10.3 million tons.

We also did an outstanding job moving all of that product, with sales reaching a record 20 million product tons for the year. We moved more than 7 million product tons by marine transport, including barge, Jones Act vessels and export vessels. We also loaded more than 50,000 railcars and more than 240,000 trucks at our facilities during the year.

What's most impressive about this level of activity is the commitment to and focus on safety in all our plants and facilities. At the end of the year, our 12-month average recordable incident rate was down to 0.67 incidents per 200,000 work hours. This is the lowest rate we have on record for the company. We also had a run of almost 4.5 million work hours without a lost time injury in 2017. To do this while making and moving so much product is a remarkable accomplishment by the team.

In the fourth quarter, we continued our momentum on cost management. For the year, we reduced our controllable manufacturing cost $13 per ton or about 14% as a result of cost-reduction initiatives and product deficiencies due to increased volume.

Going forward, we will maintain our focus on driving further savings and efficiencies, but you should not expect the large quarter-over-quarter improvements we have delivered in 2017.

Capital expenditures for the fourth quarter of 2017 were $183 million. For the full year 2017, capital expenditures were $473 million, of which approximately $350 million was for new activities. We expect CapEx for new activities in 2018 to be in the $400 million to $450 million range, reflecting a higher number of plant turnarounds than in 2017. As a result, we expect production levels to be slightly lower than the record volumes we experienced in 2017.

With that, let me turn it over to Bert.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [5]

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Thanks, Chris. Our sales volumes in 2017 demonstrated the advantage we've created through the optionality we built into our manufacturing and distribution network. For the year, we sold approximately 20 million product tons, which was a company record. This included record sales for each product segment as well. We sold 4.1 million tons of ammonia, about 4.4 million tons of urea and 7.1 million tons of UAN.

These totals include the impact of our work over several years to grow a global customer base. We exported about 3 million product tons during the year, maximizing our overall system margin.

We had the capability to export even more. However, we anticipate that exports in 2018 will be lower mostly due to greater domestic shipments under a long-term ammonia offtake contract.

Our sales volumes in 2017 also reflect the tremendous progress we've made building our Diesel Exhaust Fluid business from the ground up. This is important because DEF typically sells at a substantial premium to granular urea on a urea equivalent basis.

To support growth in this business, we completed in 2017 a new 400,000-ton urea equivalent ton per year DEF unit at Donaldsonville. This facility started up on time and under budget with returns well above our cost of capital. With a partial year of additional capacity in Donaldsonville, sales of DEF in 2017 hit 400,000 urea equivalent tons, a 75% compound average growth rate over 7 years.

As a result of our outstanding 2017 performance, we entered 2018 with low inventory and a solid order book. This has positioned us well for the first half of the year, which we believe will be noticeably stronger than the same period in 2017.

The North American and global nitrogen market is in a firmer position compared to this time last year, supported by fewer exports out of China, continued imports into India and Brazil and less imports into the United States during this fertilizer year.

Imports of urea and UAN to North America from July through December declined 37% and 24%, respectively. Projected imports for the first few months of 2018 are also running lower compared to the year before. This is not surprising as urea barge prices at New Orleans averaged $25 per ton below international parity during the fourth quarter, discouraging imports.

Because North America is and will remain an import-dependent region for the foreseeable future, they will need to attract substantial offshore volumes to meet demand this spring. The urea price discount to international parity at NOLA is therefore not sustainable. Further, prices in North America do not yet fully reflect a substantial steepening of the global cost curve since mid-2017.

Since the beginning of July 2017, higher energy prices outside of North America, higher freight costs and a weaker U.S. dollar have pushed up the global cost curve, particularly at the high end.

Energy costs have risen for marginal producers in China and Europe. The price per metric ton of Chinese anthracite coal has risen nearly 30% since the middle of 2017 to the beginning of February, while the price of natural gas at the Dutch TTF hub has risen approximately 25% per MMBtu over this same time period.

Ocean freight costs have risen for all nitrogen exporters, reflecting higher oil prices and a tightening vessel freight market. The cost to ship a metric ton of urea from the Middle East to the Gulf of Mexico has risen nearly 30% from July to the beginning of February.

Putting further pressure on exporters is the weaker U.S. dollar. The RMB has appreciated significantly against the dollar since the middle of 2017, moving from approximately 6.8 to 6.3. Currencies in other producing regions have also increased. This has pushed up the delivery cost of nitrogen fertilizer exports in U.S. dollar terms.

The impact of these factors has been evident on Chinese urea exports. China's role in global urea seaborne trade had already been shrinking, with urea exports declining about 65% in just 2 years from over 13 million metric tons in 2015 to 4.7 million metric tons in 2017. We anticipate that China's net urea exports will decline further in 2018, given the global factors we just discussed and the ongoing impact of environmental regulation enforcement in that country.

The removal of more than 8 million metric tons of Chinese urea from the global marketplace has helped offset some of the recent increases in capacity elsewhere. At the same time, global demand has been robust, driven by India and Brazil as well as Australia, Mexico and Turkey.

All of these factors point to global nitrogen prices sustaining levels above where they were in similar periods in 2017. This includes the second half of the year when we expect a traditional reset following the completion of spring applications in North America to be at a higher price than the unsustainable levels we saw in the summer of 2017.

We are 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 on 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 [6]

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Thanks, Bert. The company reported diluted earnings per share of $1.98 and EBITDA of $224 million in the fourth quarter of 2017. After taking into account the items detailed in our press release, our adjusted diluted loss per share for the fourth quarter was $0.02 and adjusted EBITDA was $260 million.

Our adjustments included a $3 million unrealized net mark-to-market gain on natural gas derivatives and a $14 million gain on the sale of our joint venture interest in a CO2 plant at our Verdigris, Oklahoma facility. It also includes a large onetime income tax benefit of $491 million resulting from the impact of the new U.S. tax legislation.

Let me take a moment to outline the impact of the new U.S. tax law on our income statement and balance sheet in more detail. The $491 million tax benefit is a onetime item that has 2 principal components. First, it includes a $552 million tax benefit due to the revaluation of our net deferred tax liability to reflect the new lower federal statutory rate of 21%. On the balance sheet, this is reflected by a reduction in the net deferred tax liability.

Second, it includes a $57 million onetime tax expense associated with the deemed repatriation of previously untaxed foreign profits. This repatriation tax will be paid over 8 years commencing in 2019. Approximately 1/3 will be spread across the first 4 years and the remaining 2/3 will be paid during the final 4 years. Offsetting this are $36 million of alternative minimum tax credits that are fully refundable by 2022.

On the balance sheet, the AMT credits have been reclassified from deferred tax assets to a long-term receivable in other assets.

From a cash tax perspective, we generated income tax net operating losses in 2017, and therefore, did not pay U.S. federal cash taxes. As markets improve and we experience higher margins and higher taxable income, we expect our longer-term cash tax rate to settle into the low to mid-20s range, which accounts for federal, state and foreign taxes on our worldwide income.

As Tony mentioned, we reduced our debt by $1.1 billion in December by redeeming all $800 million of our 2018 bonds and purchasing $300 million of our 2020 bonds. These actions reduced annual interest payments by approximately $76 million or about 25%. At this level of debt, interest expense for 2018 would be approximately $230 million.

Our cash and cash equivalents were $835 million as of December 31, and our $750 million revolving credit facility was undrawn.

I will now provide some thoughts regarding our expectations for 2018, understanding that this is subject to changes in market and other conditions. So far in 2018, prices for our products have generally been higher than the same period of 2017. Because of this and all of the developments that Bert and Chris explained earlier, we believe it is likely that our financial results for 2018 will exceed our 2017 results.

With that, Tony will provide some closing remarks.

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

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Thanks, Dennis. Before we open the call to questions, I want to thank all CF employees for their work in the fourth quarter and for the full year. This past Monday marks the 72nd anniversary of CF's founding. CF is a vastly different company today than when it began over 7 decades ago. It's also a very different company than the one I joined 11 years ago.

In that time, we've grown from 6 ammonia plants to 17, exited the phosphate business, developed new product offerings and expanded our global presence. In doing so, we consistently improved operations and safety, delivered synergies and enhanced the free cash flow generation capacity of the company.

Our ability to do this is the result of what hasn't changed about CF: the enduring performance culture our people have built. Our culture drives our commitment to safety and operational excellence, disciplined capital allocation and corporate stewardship. These have made CF Industries more efficient, agile and forward-looking than ever before. We are one of the best commodity chemical companies in the world, and we are well positioned to meet the market challenges and to make the most of the opportunities in the years ahead.

With that, operator, we will open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) 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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Maybe we could start a little bit with kind of the current market dynamic in terms of the trade flows. When does the UAN and urea imports need to arrive in the U.S. to sort of guarantee an on-time level for the spring planting season? If you could kind of give us your color on that, that would be great.

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

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This is Bert. Good morning. The current market -- we just returned from the TFI, The Fertilizer Institute meetings in San Diego, had a chance to interact with our customers and just get a feel for where we are in the market. And we believe we're in a very good place.

Imports have been lagging behind. And you're right, there is a window of when those urea and UAN vessels need to arrive to be able to make it onto a barge or a railcar and move up into the Midwest. And I would say that is by arrival mid to late April at worst, and that means you need to get on the water probably by early to mid-March.

And so we're watching those vessels and we have been lagging behind on imports and we expect that to continue. However, there has been additional capacity that has come online, our own, in the United States and others that is coming or yet to come online. And so we'll have to wait and see how this plays out. I think the risk is that arriving too late into this market would penalize the importer and probably put them in a bad position as we get to the reset position in June or July.

Pricing is firm and probably getting firmer. Applications have yet to start. Normally they start in Texas. We have seen some of that, but it's a little bit dry. In Oklahoma and Kansas, for the wheat top-dress market where rain is expected in the next week or 2, so we expect that to kick off. And then you have spring applications of ammonia starting -- they already have started a little bit in Southern Illinois. So I would say we're weeks away. If we have an early spring, it could be pretty good.

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Operator [4]

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Our next question comes from Vincent Andrews with Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [5]

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This is Neel calling in for Vincent. It seems that a lot of the upside in volume in the quarter was from ammonia. And given the strong ammonia run in the fall, could that lead to less urea demand in the spring? Or do you think there's still pent-up urea demand?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [6]

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Oh, definitely. We did have a very good ammonia fall. We had record shipments, but that includes exports, our agreement with Mosaic, our industrial contracts as well as fall applications of ammonia.

We think the industry did very well on fall applications, but there are certain markets that are fall and there are certain markets that are spring. And so your I states and some in Nebraska are generally pretty big fall ammonia application markets. The spring markets are more in the East.

Canada did it pretty well in the fall, but there's still quite a bit to go up in Canada as well as the Dakotas. So we're ready and believe that we will still have a fairly large ammonia spring. And I don't think that will impact urea applications nor UAN. At the price of UAN today, we believe that UAN still has some upside, but also is an attractive end for the spring application.

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

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I think if you look at the aggregate amount of ammonia that went down in the fall, I don't think it's statistically outside the -- sort of the historical numbers. And as Bert said, we had a little bit of an improvement in terms of the ag application in fall of '17 versus fall of '16. But a lot of that volume was industrial, so we don't think it's robbing nutrient demand for the spring at all.

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Operator [8]

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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 [9]

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So the last slide on your deck has this roster of Chinese facilities that look like they have been down for the last 1 to 2 years. Would you say that that, whatever it is, 10 million tons of capacity -- that does not alone account for the sub-50% operating rate in China, I assume.

Is there -- is your view that the capacity that's running at a slower rate there because of, say, environmental initiatives there, is likely to come back onstream? And do you have visibility to how much inventory they have there? Could that market get tight this spring?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [10]

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So on the likelihood of the stuff to come back, I think that the combination of the gas plants that are down during the winter and some of that gas production could come back on, depending upon what LNG price shows up as you get into the spring and summer.

But most of the plants that are facing shutdown or curtailment as a result of the environmental regs, we don't really expect those plants to likely come back. The cost associated with the scrubbing and elimination of the emissions is so high. And given where kind of the product is trading on a global basis, it just doesn't make sense.

So we think that ultimately the -- kind of the denominator is going to continue to shrink in terms of the available capacity in China. Relative to are they going to be sort of just reducing export volumes versus changing to a net importer, I'll turn that one over to Bert.

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

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I think you covered the factors that we're watching, and we do believe that they will continue. They've already imported some from the Arab Gulf and some Iranian supply. And we believe that that will continue especially in the northern ports.

They have announced an inventory build program. We think that's a little bit late. But when you look at where they are on operating rate and production output coupled with demand and inventory, we think they're going to be challenged to meet their spring requirements.

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Operator [12]

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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 [13]

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Looking at some of your price realizations versus NOLA benchmarks, could you give some idea of what we could see for urea and UAN in the first half of the year versus second half of the year considering some of the shifts going on in the market and your import -- and your domestic and export mix, because some of the premiums you've achieved have been a little bit skimpy versus the benchmark.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [14]

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Well, you always have to remember, Joel, as you roll through the fourth quarter what the prices were when you roll into the quarter, and as you're selling into the market, what that looks like. So urea today is about $255 per short ton in NOLA. UAN is probably $170-plus per short ton in NOLA, and we've moved volumes at those numbers and we believe that those numbers will increase as we get closer to spring.

But like as we said in the prepared remarks, to bring a vessel in from the Arab Gulf at today's prices, urea needs to value probably closer or above $270 and UAN probably at a discount on an end basis needs to increase in price also just to be at parity with urea.

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Operator [15]

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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 [16]

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So the market commentary you provided today sounded very positive, more than it has for a while, I think. When I look at the published cost curve that you have, it looks like the cost range for the marginal cost is maybe only up about $10 per ton year-over-year. So I'm just trying to reconcile those things together. And are we maybe at a turning point where the market price is above -- meaningfully above where the cost curve is?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [17]

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Yes. So historically, what we've done is we've tried to put out the next year's cost curve as part of our third quarter call, and then we tend not to do a lot of updating on it during the year. And so the cost curve is on Page 25 of our material but Page 26 has the embedded assumptions in it.

So in that curve, which was generated kind of back in the September time frame for publish in kind of October, November, the RMB exchange rate was 6.8 versus 6.3 today and Henry Hub gas has also come down kind of $0.10 or $0.15. And what's not shown in there is the basis differentials in a lot of the locations where we're actually buying gas has also gapped out in a favorable way for us.

So as we look at what the forward curve of gas plus basis differential is into 2018 versus 2017, we're about $100 million favorable '18 versus '17 just in gas alone. And meanwhile, putting in the exchange rate and ocean freight factors into the cost curve increases the top end of that curve, kind of call it, $15 to $20, maybe $25. So the balance of those things has created a pretty favorable tailwind for us.

And if you think about kind of our opportunity to participate in an improving nitrogen environment, a urea price of $25 translates into about $350 million of incremental EBITDA generation for us over the course of the year. So that's why you're hearing some pretty -- more positive commentary from us than we've said in the past. We also although expect there to be the normal reset come third quarter.

Given where European gas is and Chinese cost structure is, we don't think we're going to be back in the world of $160 urea for this year like we were last year. We were there for, what, 3 months, almost 4 months last year. So it's both a combination of some pretty favorable first half indications as well as our belief that the lows don't get anywhere close to where they were last year that makes us pretty optimistic about where the year ends up.

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Operator [18]

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Our next question comes from Ben Isaacson with Scotiabank.

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Oliver S. Rowe, Scotiabank Global Banking and Markets, Research Division - Associate [19]

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It's Oliver on for Ben. So recently an ammonia plant in Trinidad closed or was shut down due to the supplier and producer not being able to bridge the bid-ask spread on gas pricing. Are you having any issues over there? Or what's the status of your gas contract? And maybe your thoughts on the outlook for gas supply development in the region?

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

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Yes. So we have 50% of one ammonia plant down there at Point Lisas Nitrogen Limited, and the original gas contract on that plant ran through 2018. We had a unilateral right to extend it an additional 5 years, and NGC Gas Company in Trinidad was kind of disputing our right to extend.

We went to arbitration in London and won, so they upheld our right to do it and NGC has recognized that fact. And so we have a gas contract in place through 2023. We're getting 100% of our requirements, and we're pretty pleased about that.

We do think longer term, Trinidad does face some pretty sizable challenges around being competitive just based on where the cost structure is compared to North American natural gas. And I'd say from our perspective, that's not a bad thing. We'd rather give up the economics on 1/2 of 1 plant and see all the rest of that production challenged from a global basis than have that be a low-cost production source. So we're pretty constructive on the impact that has overall.

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Operator [21]

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Our next question comes from Adam Samuelson with Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Lead Analyst [22]

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I wanted to talk a bit more about the spring outlook and really understand maybe by product between urea, UAN, ammonia kind of how you're thinking about the price trajectory from here, kind of the upside and downside risks to the base outlook.

Ammonia, the offshore prices have started to come off a little bit. Meanwhile, urea, UAN, the imports are well down, as you highlighted, and could be setting the U.S. market up short. But just trying to think about how you think about the puts and takes around that outlook that could really change things one way or the other.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [23]

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Yes. Just starting with, like I said earlier, the weather and the possible negatives are that we are having some drought-type conditions in Oklahoma, Kansas and the Panhandle of Texas and just looking at that area. But that represents maybe 200,000 to 300,000, total tons of urea. So not a big impact on an 11 million ton market.

And even if that goes and urea price rallies, we're believing that that would just then move to Canada and you'd see greater applications of [annum] plantings for your spring wheat in there and in the PNW.

And so when we look at urea today, we are behind on our imports and what we believe needs to be in place to satisfy demand. We do believe that some of the other plants have not operated optimally and that product is probably not in position. We have operated well. We do have product in position.

And when you look at the global pricing structure of $265 out of the Arab Gulf today on a vessel and on a barge without a margin, that lands at NOLA about $270 per short ton. We're not there yet and we need to get there. And I believe that we will and probably exceed that number.

UAN has been trading in the $160 to $170 range and has been trading at a discount to urea, which, just traditionally, not the case. And again, our plants have been operating at capacity. We've exported a significant amount of product. But it's also been working to get our inventory positions in place.

And again, we look around at some of the other operating units in the North American market that probably have not operated at capacity, and the imports are down on UAN also. And that's a harder product to get into position as you're moving a liquid product either from the East Coast all the way to the Eastern Midwest or the Gulf Coast up in the Midwest.

And so we believe as we move into our spring application season, especially if it's early, that could be a very good dynamic for us.

You're correct on the international ammonia market. It has weakened. That's a reflection of a lot of ammonia plants that were on turnaround, extended turnaround, during the low-price periods of Q3 and Q4, have since come back on, especially in Northern Africa. And so some of those prices have moderated down a bit.

But we're seeing healthy demand out of the phosphate market as well as Asian industrial demand. And so we believe that will hit a nice floor and probably operate at a higher price range than we had last year.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [24]

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The other thing on that one, Adam, in terms of ammonia is that last year, the vessel wasn't ready so we weren't able to ship to Mosaic under our supply agreement and we ended up having to export a bunch of that ammonia.

This year, there's -- we're shipping against that contract, which is between, call it, 600,000 and 800,000 tons of ammonia that we'll ship to them. And the impact of that means that we're not -- because that's a gas-plus based deal, we're not really looking at ammonia exports for the year.

And because that's a gas-plus arrangement, we're less exposed to kind of where international ammonia prices trade because there's not a 1 for 1 correlation between the international ammonia price and Midwest ag ammonia. Because if you don't have the terminals, you can't get the product there anyway. So the good news is even though it's weakening, we're pretty insulated against that price change.

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Operator [25]

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Our next question comes from Mark Connelly with Stephens.

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K. Tong, Stephens Inc., Research Division - Associate [26]

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This is Joan Tong for Mark Connelly. Just wondering if the U.S. dollar remains weak past application season, are we more likely to see an imbalance in the U.S. market? Or do you think that your netback would still support exports on Donaldsonville?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [27]

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Well, I mean, these structural changes in currencies are not short-term issues generally and they're driven by economic as well as economic policy and interest rates and what is perceived to be growth opportunities driven by those various economies. And so the weak dollar we think is -- could be around for quite a while, especially with what we're seeing coming out of Washington with fiscal spending or lack of fiscal control.

And so when you look at an imbalance, obviously, we're pretty focused on calculating what we produce and move as well as what enters the United States. However, we don't view CF as a balancing mechanism. We are market-driven. And if we can make more money going to the international market, we will export -- as I said in my prepared numbers, we can export even more.

And so how we look at this market is there's a natural buildup and drawdown in the North American market as we work through the agricultural cycle. And then we have layered into our business our industrial book, which is an important part because it's 24/7 in terms of demand. And then we look at as we roll out of the spring season in the United States, the opportunities that are available to us.

And we have consistently and constantly worked with our international customers to be able to be a nice receiving point for our products. At Donaldsonville, with our deepwater docks, we can load several vessels at a time. And so yes, the netbacks are attractive for us when we go to whether it's Europe, South America or even Asia, which we've done all of the above last year. So we're ready for that eventuality if it does come, and we do believe it will be netback-attractive for the company.

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Operator [28]

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Our next question comes from Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [29]

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I don't want to get ahead of myself, but given the significant degree of deleveraging you've undertaken and consequent interest rate reduction, what are the next stages of capital deployment, especially as the market is now relatively more stable? Do you still feel industry consolidation is necessary? And just generally, what do you see as your own potential role in the process? And should we limit our thinking to North America?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [30]

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So I think on the role of capital deployment, we have been pretty consistent saying that we want to take out the rest of the $500 million of 2020 bonds that are at a relatively high interest rate. And that will get us down to, once that is taken out, to a place where we feel is a very sustainable amount of leverage for the business across the cycle.

And so I would say another kind of $500 million. And then, we'll start thinking a little bit more broadly about other opportunities. Obviously, we went out with just under $400 million to buy in the TNCLP units that were out there because it represented, I think, a tremendous opportunity for us both in terms of what it will add on a free cash flow basis and also just simplifying our corporate structure and cost reduction efforts back here in the home office.

So you've begun seeing us start deploying capital in what I would term a more offensive way. I think ongoing industry consolidation is inevitable, and it's really a function of kind of what are the market prices required to clear a trade in terms of when that kind of stuff starts happening.

We're open to being outside the U.S., as you've seen with our U.K. acquisition. That has been a tremendous benefit for us and we're really pleased with it. But there are some regions in the world where we're more likely to go than others. It's easier to operate as a U.S. company subject to FCPA and OFAC and other kinds of challenges in certain regions and more difficult in others.

And we'll be focused on places where we think we can operate in ways that are in keeping with our culture and the strict interpretation of the law. So that limits the universe to some extent.

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Operator [31]

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Our next question comes from Don Carson with Susquehanna.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [32]

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Bert, you talked about how imports are down significantly. What's the psychology of the domestic buyer? I know in the past they've thought that startup of a new U.S. capacity would lead to lower prices and they tended to have low channel inventories. How is that situation now?

And then just one clarification on '17. You said for 2018 that 10% of your gas is hedged at $3.21, [20% is] naturally hedged through your industrial contracts. I noted that that's the same as third quarter. So is this kind of your ongoing policy on hedging to be relatively unhedged going forward, which would be a market break from what you've done in the last 2 years?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [33]

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So let me answer the gas question first. You're correct in where we're hedged and you're correct that it -- from our previous announcement that has not changed. It's really -- so never say never, but the opportunity available to us on gas at today's production rate, almost hitting 80 per day, where consumption is and you look at the build into fall of 2018. We feel very, very good where we are with the resource base and the activity that's going on.

And now with oil at around $60 for WTI, the associated gas that's going to be coming online with that production puts us in a very comfortable position. And as Chris or Tony mentioned, the collapse of the basis has made it even more attractive not to position ourselves with hedges. And so I think we'll stay in this current environment through 2018. But we look at these things monthly through the gas committee.

The psychology of the retail, wholesale and trader group of our customers is interesting because a lot of people got punished last year. A lot of excess material came into the United States. Pricing collapsed in late February or early March and just worked steadily down week by week. As we entered May and early June, that's probably when it hit its low of $160 per ton for urea and NOLA and stayed there well into Q3.

And I think because of the losses that were incurred, there is a lot of hesitation on taking large important positions and bringing them in and distributing them. That's why -- in our communication with our customers, why we believe we're well positioned and that our customers can buy a truck at a time, a railcar at a time, a barge at a time, take larger positions if they want to, and we structurally positioned ourselves with inventory throughout the United States to pick up that opportunity.

And so I would say -- I would classify that the retail, wholesale and trader group is risk-averse but positively inclined to participate in the market this spring believing that we're going to have 90 -- 89 million to 91 million acres of corn, probably lower levels of wheat, higher levels of soybeans, but overall good applications of NP&K. And we're preparing ourselves to participate in a good way this year.

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Operator [34]

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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 [35]

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A couple of questions on China. Can you talk about coal price in China? And is there a potential for coal prices to drop post winter? And if that happens, how much capacity comes back online? And secondly, you mentioned that China has become an importer here near term. I guess strategically, don't you want a high-cost player in the export market?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [36]

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So on the coal side, P.J., part of what is helping on the coal is a little bit of government hand in terms of managing output production at the mine. So there has definitely been some restrictions on the number of operating days, and the number of mines that have closed is an astronomical number. And additionally, you see the seaborne coal rates have gone up quite a bit.

Now could they reverse that trend? Sure, but I think that that's going pretty much against what the stated policy has been, which is to try to make the companies that are remaining more profitable both from the coal side all the way through the conversion and get rid of some of the zombie industry problems that they've had.

Additionally, there is a strong desire from an environmental perspective to kind of clean up the environment and reduce emissions. So we don't believe that we'll see the coal price go back down again. And there's a lot of factors that are impacting the economics there, coal being one, the exchange rate being another one, the elimination of subsidies to chemical plants and on rail and for electricity being another.

So I think there's a lot of factors that are driving the reduction of production in China. And going back to the notion of on a global supply basis, to the extent that those plants aren't running and China continues to need to feed its population, that's just going to -- instead of putting tons out into the marketplace, that's going to soak up tons.

And so from our perspective, that's an outstanding result because ultimately, they're going to be buying tons in and it's going to further tighten up the overall [S&B] balance.

If you look at the anthracite lump on a per ton basis, in 2016 it was like $115 a ton. In '17, it was up to $151. Currently, it's like almost $180. So again, that is a dramatic increase in terms of the cost structure there, and we really don't see that turning around and going the other direction.

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Operator [37]

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(Operator Instructions) 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 [38]

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On Slide 39, in 2018 and beyond, almost all of the capacity that you had to start up is by emerging market players. Are these almost all experienced firms with good track records of bringing capacity up online? I really don't know many of those companies that well.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [39]

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When you look at what's coming on in terms of these new plants in the various regions you articulated, generally, I do go out and contract with, in terms of -- the major equipment comes through from the builds, whether it be German, Italian or -- and then with support. So we believe that we're not holding back thinking that these are substandard groups. We think they're world-scale with world-scale capabilities.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [40]

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Yes. I think the only thing I'd add to that, John, is if you look at the experience that we've had here in North America with companies that actually are in the business of doing this, if -- things have tended to cost more and things have started up later than what people thought here in North America, it's sort of hard to believe as you look at some of these other places that you'd likely see sort of a different experience. And in some cases, you might see an experience that's adverse compared to what we experienced.

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Operator [41]

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

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Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [42]

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Thanks, everyone, for joining us on the call this morning, and we look forward to seeing you in the various conferences in the next few months.

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Operator [43]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.