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Edited Transcript of CF earnings conference call or presentation 3-May-18 1:00pm GMT

Q1 2018 CF Industries Holdings Inc Earnings Call

DEERFIELD May 8, 2018 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, May 3, 2018 at 1:00:00pm 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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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* 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

* K. Tong

Stephens Inc., Research Division - Associate

* Michael Leith Piken

Cleveland Research Company - 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

* Robin Fiedler

BMO Capital Markets Equity Research - Associate

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. And welcome to the First Quarter 2018 CF Industries Holdings Earnings Conference Call. My name is Huey, and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to the host for today, 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' First 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 first quarter 2018 results yesterday afternoon. On this call, we will 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 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 the 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 the first quarter of 2018, in which we generated adjusted EBITDA of $296 million, after taking into account the items detailed in our earnings release. We also added $100 million of cash to the balance sheet, which is on top of a temporary increase in working capital from higher inventory as a result of delayed spring shipments. As product shipments continue to progress in Q2 and inventory levels fall, we will pull that extra cash back out. This is solid performance in a quarter where cold and wet weather delayed fertilizer purchases and applications across the Northern Hemisphere. It reflects strong execution by the CF team, capitalizing on lower North American natural gas costs and higher global nitrogen prices, despite the delayed spring and delayed shipments.

Our safety performance continued to be outstanding through the quarter, as our rolling 12-month recordable incident rate was down to 0.60 incidents per 200,000 work hours. This is our lowest rate ever and well below industry averages. It is a tribute to our employees' ongoing focus. And because of their focus and commitment, our plants continue to run very well. Despite multiple disruptions of electricity supply at our Donaldsonville plant, along with plant turnarounds and maintenance activities across the system, we produced more than 2.5 million tons of gross ammonia, equal to the first quarter of last year.

Additionally, we continue to enjoy the benefits of location, as our structural advantage from access to low-cost North American natural gas is growing. While energy costs in many other parts of the world were rising, ours were falling. In fact, during the quarter, the majority of our inland plants had natural gas costs lower than Henry Hub due to favorable basis differentials. We expect this favorable situation to persist. Our in-region assets have access to some of the most productive gas basins in North America. Technology is improving rapidly and increasing the ability to extract natural gas at ever lower costs. As a result, we expect to remain at the low end of the global cost curve. Along with the favorable North American natural gas environment, we are seeing more balance in the global supply and demand for nitrogen, driven by reduced production in high-cost regions, notably, Eastern Europe and China. This is supporting global urea prices well above the lows of 2017.

Producers in China face high energy prices year-over-year along with increased environmental regulation and enforcement. The impact of these factors is best illustrated in the dramatic decline of Chinese urea exports. Through the first quarter, Chinese urea exports were 77% lower than the same period in 2017. But the impact is not limited to China and Eastern Europe. Two unprofitable urea plants in Brazil are expected to close later this year and production in Trinidad has been interrupted due to gas availability.

The factors that helped drive our first quarter performance will support our cash generation over the long term: Access to low-cost North American gas, the strength and flexibility of our network, our best-in-class safety and asset utilization and the consistent, ever-growing demand for nitrogen. With the recovery in nitrogen already underway, we expect to benefit disproportionately going forward.

Now let me turn the call over to Bert, who will talk about the current market environment in more detail, then Dennis will discuss our financial position, before I offer some closing remarks. 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. Weather was a dominant theme for the industry in the first quarter. Wet and cold weather delayed fertilizer applications across the Northern Hemisphere. The impact of these delays was particularly pronounced given how early the spring application season started in parts of North America in 2017.

We were well-prepared for this environment. Our team has done a great job, leveraging the more than 3 million tons of ammonia, UAN and urea storage that we have in North America to meet our customers' needs over the next 2 months. Indeed, demand should be strong. We expect nitrogen consumption in North America to be approximately equal to last year, given anticipated crop plantings. Despite the late spring, farmers are far better situated today to catch up on plantings, given the technology they employ. Further, we have seen later and reduced pre-plant applications of ammonia because of the weather. Growers unable to apply pre-plant have the option to apply post-plant and side-dress ammonia. We also anticipate strong demand for upgraded products in order to make up for the lighter-than-normal early spring ammonia applications. We believe the industry's ability to supply all this volume to all areas will be challenged by the significant logistical constraints of poor rail service, stretched trucking resources and tighter application windows.

All of these factors should enable us to capture higher prices across most segments compared to the second quarter of last year. Over the next quarter, NOLA urea barge prices averaged -- or over the first quarter, NOLA urea barge prices averaged about $13 per ton higher than the year before. In the first 5 weeks of the second quarter of 2018, they have averaged nearly $40 per ton higher compared to the same period in 2017. However, NOLA prices remained at a discount to international parity. NOLA urea barge prices traded at an average of $13 per ton below global parity during the first quarter, a spread that has grown in the second quarter. These prices continue to discourage excessive imports into the region. North American urea and UAN imports from July through February has fallen 38% and 35%, respectively. Even with these declines, North American urea imports will be the third highest in the world, and we will remain an import-dependent region for the foreseeable future.

The first quarter was challenging because of the weather, but these challenges play into our company's strengths. We're well-prepared for the next 2 months and have the team, assets and flexibility to meet customer needs.

And with that, let me 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. In the first quarter of 2018, the company reported net earnings per diluted share of $0.27 and EBITDA of $302 million. After taking into account the items detailed in our press release, our adjusted EBITDA for the first quarter was $296 million. We generated $101 million of cash during the quarter, and our cash and cash equivalents on the balance sheet rose to $936 million as of March 31. Subsequent to the end of the year -- sorry, subsequent to the end of the quarter, we used $388 million of our cash on hand to purchase all the remaining publicly-held common units of Terra Nitrogen Company, L.P. The impact of this purchase will be reflected in second quarter cash flows.

Interest expense was $60 million compared to $80 million in the first quarter of 2017, due to our repayment of $1.1 billion in high-cost debt in December of 2017. Capital expenditures for the first quarter of 2018 were $68 million. For the year, we continue to expect to spend approximately $400 million to $450 million for new activities. As we have said previously, we have a higher number of plant turnarounds in 2018 compared to 2017. The impact of these on capital expenditures will not be felt until later this year, when most of them are scheduled to begin.

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, our product prices have generally been higher than the same period in 2017 and we expect that trend to continue. Natural gas prices have also been favorable so far this year and we expect our natural gas cost will be lower in 2018 than in 2017. As I mentioned earlier, we have more turnarounds in 2018 than 2017 and this will have a modest impact on production volumes in the second half of the year. Taking all of these factors into account, we believe it is likely that our adjusted EBITDA for 2018 will exceed our 2017 results.

With that, Tony will provide some closing remarks before we open the call to Q&A.

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

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Thanks, Dennis. Before we move on to your questions, I want to thank everyone at CF for their hard work this quarter. At times, it appeared that spring would never come, but the team kept their focus, worked safely and made sure we were well-positioned for the application season when it arrived. As we have said in the past, and it continues to be true today, we view this business on a 6-month and a full year basis. Weather patterns may move product shipments and applications out of one quarter into another, but we run our plants safely and efficiently, 24/7, 365. And over the course of an application season or a year, we are roughly going to ship what we make. Gas cost is low, with basis differentials in our favor. Nitrogen pricing has begun a cyclical recovery. Our plants are running very well and spring is finally upon us. We are excited about the opportunities ahead.

With that, operator, we will now 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 in queue will come from the line of Adam Samuelson with Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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I guess to start, maybe a little bit more discussion about the spring would be helpful. And as we think about the next 2 months and the late planting, I mean, how -- can you help size the risk to ammonia shipments in the second quarter and what that could do to the urea and UAN markets? And given the lower imports that we have seen in both of those products, how pricing could play out in inland markets if people need those for side and top-dress applications in May, June and potentially, even into July?

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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. And it has been an odd spring. In my 10 years back in North America, this is the latest we've seen movement. We've had some early springs and some late, but ammonia generally does go down. Over the last several years, more ammonia has moved to spring from the fall, and I think this challenges that thinking. As we're looking at where we are today, we've seen a lot of ammonia go out the door over the last week, last probably 10 days. And so as we look at the 2 months forward, there is a risk to pre-plant ammonia, the volume of pre-plant ammonia, that could go down. But as I said in my prepared remarks, I do anticipate some of that to move to a post-plant or a side-dress application. Now instead of putting down 120 to 180 pounds per acre, you might put down 50 to 100 pounds per acre. So if that does happen, I think you will see some transition into urea and UAN. And you're exactly right, that premium in the Midwest probably will either hold or expand during that period, as the logistical rush to move those additional products, because if you lose 200,000 to 300,000 tons of ammonia, that could be 1 million tons of UAN. So we're pretty positive going into the next couple of months, but it's going to be fast. We need to get -- I think we'll see a planting report coming out next week with a large or a big acceleration in the acres planted and the percentage planted and that will signal that the seed's in the ground and that we are having to move to urea and UAN.

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Operator [4]

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Our next question in queue will come from the line of Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [5]

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Bert, can you hear me?

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

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We can.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [7]

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Okay, sorry about that. Just following up on that line of questioning you just had there, would you say that some of the volume shortfall in the first quarter may have been somewhat intentional, in that you were holding back on some of your spot sales, knowing that your second quarter could get tight, as you saw imports well below prior-year levels?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [8]

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Yes, as you're looking at imports into the United States or into North America, since July, and really, since the beginning part of the year, they are lower. As I said, 38% and 35%, respectively, for urea and UAN. We have seen additional tons come online through new capacity from our domestic industry. But there will be tons moved from Q1 in Q2. And yes, we did build inventory in anticipation of probably a normal spring and some of that will then move into Q2, just as a result of the weather, as I said. So I do expect it to be tight, yes, especially up in the Midwest.

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Operator [9]

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Our next question in queue will come from the line of P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [10]

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So a quick question. NOLA moved to a bigger discount in 2Q compared to -- I'm sorry, 1Q compared to last quarter. And it looks like the 2Q discount has grown again. And last quarter, you talked about, I think, that NOLA should go to a premium, so U.S. can attract all the imports. And that didn't happen. And now you're saying that NOLA being at a discount is a positive because it's discouraging imports. So there is a little disconnect, and I'm a little confused. Can you explain your comments and drill down on this premium discount issue?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [11]

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Yes, P.J., let me go ahead and start, then I'll throw it over to Bert here in a minute to follow up. But there's sort of an interesting phenomenon going on, which is if you look back a couple of years and in sort of over a fair bit of time, a number of the Middle Eastern producers became enamored with this notion of market share in different regions. And I don't know whether this is sort of an outgrowth of the philosophy they have around oil production or other things, but they had this notion that they wanted to maintain market share in North America, regardless of the fact that there was going to be this new production starting up. So they signed long-term offtake contracts with a number of importers that basically said, "We're going to ship X number of tons over to NOLA or one of the coasts and deliver it on an index minus 2% kind of basis." And effectively, what happened then as a result of that, is the Saudis in particular and a number of others, are leaving a bunch of money on the table, because there's better places from a netback perspective to take those tons and they'd be far better off by just tendering those tons to the trading community on an FOB basis. But instead, they signed these agreements, and so those tons are coming here regardless. And it's a result of that, that kind of put a ceiling, I think, a bit on NOLA pricing, so that we haven't had to go out and actually attract the incremental ton because there's already been too much committed here. Now from the importers' perspective, this is a great deal, right? Because they sell at cheap barge, they drop the price, they tank it, they are effectively taking money out of the Saudis' pockets and then they turn around and export those tons to other places in the world, and they're making money on the backs of the Saudis who could otherwise save a fair bit of money and keep it in their own coffers. So we think over time, they'll wise up and they'll actually start to do things that are a little more in their own interest instead of in the interest of the importers over here, but that's going to take some time.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [12]

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I also do think, don't discount the fact we're in a late spring and you've had a pileup of these barges that Tony mentioned and an extra month to come in of around 800,000 tons. And that, I think, pressured the market, which we didn't anticipate. Like I said, we anticipated a normal spring. I think that discount would have evaporated sooner.

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Operator [13]

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Our next question in queue will come from the line of Joel Jackson with BMO Capital Markets.

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Robin Fiedler, BMO Capital Markets Equity Research - Associate [14]

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This is Robin on for Joel. When you indicate similar nitrogen demand in the first half year-over-year, how much demand destruction would you expect year-over-year due to the poor weather and lower corn acres? And with the expectation of a shift to UAN and urea, should we expect higher volumes year-over-year in Q2 from those segments?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [15]

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Regarding demand destruction, we are projecting 88 million to 90 million acres of corn, similar to what the USDA is projecting. Last year, we were a little bit above that. And so when you look at the total structure of N-consuming crops in North America, it's pretty constant. And so our -- as we extrapolate that forward to what the total consumption will be, it's fairly similar to last year. Wheat acres down, canola -- down in the United States, wheat acres up in Canada; cotton up in Texas, that region; and then corn staying, as I said, at 88 million acres to 90 million. And so demand should be fairly stable. And yes, we will see some higher volumes in the aggregate, especially, for North America, specific to CF, as Tony said, we produce what we produce and then if we have excess inventory, that will be bled off in Q2, but we anticipate similar volumes to last year.

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Operator [16]

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Our next question in queue will come from the line of Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [17]

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Tony, if I'm right, there are some new strategy or capital allocation slides in the deck, at least versus last quarter, and maybe I'm being a little semantical here, so correct me if I'm wrong. But in a couple of these slides, you talk about being a leading chemical company, and a lot of them seem to be about your capabilities sort of around your ability to operate assets and so forth. And then there's sort of the pursue growth within the strategic fairway quote. So I'm wondering if you could just talk a little bit about what is the strategic fairway right now? How wide is it relative to what you're doing now? Are there things outside of fertilizer you might be interested in over time? Or just sort of, where's your head at in all of this?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [18]

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Vincent, part of the reason why we put forward, as you said, kind of a bit of a strategy and our strategic capabilities, was a little bit in response to a desire, I would say, from the investment community to get some more disclosure and transparency on a number of topics, one of which was, kind of just a specific, crisp articulation of strategy from -- and this was BlackRock that was asking for this, and New York City Comptrollers and a fair bit of others. And this has not changed. This has always been our long-standing strategy. And we've talked about our strategic fairway in this context going back for 5 or 7 years. So there's nothing new about this. The only thing that's new is that we have put pen to paper on it and actually been pretty crisp about articulating it. And part of that is because we're in the process of doing a bit of a refresh on our board. We've had some long-serving board members that are getting close to retirement and you don't want a big slug of board members moving off at one time and then having to add a bunch of new ones. And so when you talk about what the strategy is for the organization, it then leads into what sort of skills and capabilities you're looking for in terms of your board members. And then we can evaluate what skills are rolling off, what do we need to replace those with, and to be able to do that in a very transparent and open way, is I think, part of what is a hallmark of good governance and good interaction with our investors. So there's nothing in here that's new, other than we're trying to be very transparent with the outside world about what's going on. As we think about what's within our strategic fairway, I would say wherever we can leverage our core capabilities to create value, is something that is somewhat open. Now that said, I think we always have to compare that against other investment alternatives, i.e., buying back our own shares. And I think we are maybe a little biased in this regard, but we believe we've got the best collection of nitrogen assets in the world. So it puts a fairly high bar out there in terms of what something else would need to look like from an opportunity set to get us to want to invest in that -- in something different other than our own assets. And that would either have to be a lot of very tangible, clear, easily identifiable and quick-to-capture synergies. Those kinds of things are more likely than not to show up in other nitrogen assets. Or it would have to be just an absolute screaming deal that on the face of it, everyone would look at and say, "Yes, that makes sense." The problem with screaming deals is there's often a reason why things are low-priced to begin with. And we're pretty hesitant about that. So it's a long way of saying there's got to be a pretty -- it's a pretty high threshold to get us to think about doing something other than investing more into our own assets, because we really like our asset base.

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Operator [19]

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Our next question will come from the line of Ben Isaacson with Scotiabank.

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Oliver S. Rowe, Scotiabank Global Banking and Markets, Research Division - Associate [20]

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It's Oliver on for Ben. So Chinese demand has been quite weak over the last couple of years. There's been the removal of the corn subsidies, environmental policy and now we're seeing a trend for NPK applications over direct urea, which seems to be eroding some demand as well. What's your view on these, and I guess, just Chinese demand going forward over the next couple of years?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [21]

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I think China's going to be challenged anyway on production of grains, not necessarily oilseeds. They're importing a significant amount of oilseeds, but challenged to produce the grains, not necessarily due to nutrients, but due to water. You have to remember, 50% of the nitrogen that's consumed in China is for fruits and vegetables, which are their majority crops, and they tend to be moving towards imports of the commodity crops. The NPK change is a reality, but you have to remember that there is an N as a part of NPK, and that N is just urea that's melted and put into the granular for the NPK. So we see the demand for nitrogen as being stable. Stable in the context of the total production for industrial and agricultural use in China of around 52 million, 53 million tons. We've been watching China for several years, and we've seen a lot of this production capacity built up and now come off-line and China seems to be moving towards a state of self-sufficiency, if a little bit in a deficit. We've seen their operating rates go down as low as 50%. Today, they are estimated to be in the 60-plus percent range. We actually think it's higher because the denominator has changed and a lot of production has come off-line prominently. So the China story continues to evolve. We are structurally positive what is happening and think it's going to be better for the global supply and demand basis, where more Asian tons will be supplied by the Middle East, less tons available for the Americas, which should improve the pricing structure in NOLA longer term.

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Operator [22]

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Our next question in queue will come from the line of Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [23]

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When you think about your long-term natural gas needs, has there been any changes whatsoever as it pertains to your thoughts on hedging? You've seen a lot of favorable developments in terms of basis in Oklahoma. So has there been any way, the chance you're thinking about even hedging long-term basis, just any color there would be appreciated.

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

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Chris, I'll comment a little bit and then ask Bert and Dennis to both weigh in on this. But we have a high degree of confidence in the technical capability and the resourcefulness of the engineering innovation that's going on. And there are not a lot of pipeline developments that are happening quickly these days. And so what that's doing is it's backing up gas into certain regions, Oklahoma being one of them in particular that some of our lowest-cost gas in the entire system. And so, in the near term, we think that, that's likely to persist. Eventually, when gas -- when new pipeline capacity shows up, that may disappear in terms of the significant basis differential. But also, if you look forward in terms of being able to hedge out that basis differential, that differential collapses on the forward hedge. So what we -- we'll look at it and evaluate that we do hedge bases a little bit here and they're particularly in places like Dawn, which feeds our Courtright facility, because it was more prone to weather freeze-up challenges during the deep winter. But it's not something we are anxious to run out and do, but we might do it a little bit opportunistically. It's much more likely to be on a basis spread, though, than it is on Henry Hub basis. Bert, Dennis, you guys want to...?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [25]

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No, I agree with what you said. In terms of the -- the only thing is -- it's a developing story in the SCOOP and STACK, which is Oklahoma, which feeds our Woodward and Verdigris plants, and that collapsed, that happened, Q1 is currently going, has allowed us to purchase gas in the $1.30, $1.40, maybe even $1.50 range. So extremely attractive. And so we're evaluating, as Tony said, and we'll see if there's some opportunities, but we're structurally positive what the gas industry is providing to us and not only is North America now, when you layer in the pricing that we're able to achieve in the Midwest, the cost structure that we have in the Midwest and the logistical cost of delivery to the farmer, net-net, it's the lowest cost basis, highest margin location in the world. Great place to be.

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Operator [26]

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Our next question will come from the line of Michael Piken with Cleveland Research.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [27]

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Yes, just wanted to touch base a little bit on kind of the UAN dynamic. NOLA urea prices have come up quite a bit, but UAN has sort of held in there. Typically, I know they don't always trade one to one, but UAN tends to lag urea. Do you think UAN prices have the potential to firm a little bit or do you think they'll kind of stay where they are through the spring? And then any sort of thoughts on fill pricing? I know it's a little bit early, but any sort of thoughts there, early reads on fill?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [28]

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We are encouraged about where we are with UAN, how we've positioned ourselves for the spring. And as I said earlier, if you do have this dynamic of lower ammonia volume, you're going to see that transition most likely to UAN. What I like about this whole UAN, urea dynamic is the premium. The premium in the Midwest and something that has been talked about in our industry, would collapse. Quite the contrary. It's holding and it's firmed at times. We're achieving a nice level of premium for our Iowa production as well as our Canadian production. And that's on urea as well as UAN. So most likely what will happen, you'll see the traditional spread between the 2 products widen a little bit in favor of UAN, just because as you said, urea has dropped off in NOLA and we're currently trading in the $220 range for urea and the $180 range for UAN, and so you can do that and numbers as you move up in the Midwest, that UAN number gets as high as $220 maybe even higher. And so we'll see that unfold. We have another couple of months before we want to talk about fill. So we'll lay that -- leave that to the next conference call.

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Operator [29]

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Our next question will come from the line of Andrew Wong with RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [30]

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Just a few questions on the supply and demand. Looking at Slide 10, I know it's not new, same slide as last time, but I was just thinking like 2019, it looks like the capacity additions are outpacing demand. So what does that mean for prices next year? Does that indicate that the market's getting a little bit more oversupplied? And then just longer term, I mean, a couple of years ago, there's a notion that there is no new projects really being built in 2020 because -- 2020 and beyond, because prices are too low and the market tightens up considered -- considerably. But it does look like there's still more projects coming online. What does that mean for longer-term pricing recovery in the nitrogen market?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [31]

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When you look at the supply and demand situation worldwide, we're generally always in an oversupplied market. But then you get into the nuances of gas costs, logistical costs, domestic consumption for the producer and the international market. We do anticipate, with growth being at the 1% to 2% range and growth coming from industrial demand, to continue globally, and that will add on the demand side. Yes, there have been some new plants that have come on and new projections in Nigeria and Iran and a few other locations that are low-cost supply points, but when you look at the global structure we're seeing that -- the significant move in China, and we're seeing the Petrobras tons come off in Brazil. OPZ just announcing they're permanently off-line in Ukraine. These are the things that are happening in our industry and the inability to operate in this type of structural market relative to pricing and the economic opportunity available to a producer. So we do see it, maybe not tightening, but maintaining a -- heading into a good trend, as we go into 2020.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [32]

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Yes, the other thing I'd say, Andrew, on that is as we do our -- this is, as you know, this is a net capacity addition slide. So it basically nets out what we can see coming against what we estimate closures to be. And typically, we're pretty conservative in what we count as potential closures. We really do wait till it's pretty clear from an announcement perspective that stuff is going to be closed before we actually put it in there as closures. So there is, I think, some upside to this chart and the closures could, as the next few years unfold, be larger in magnitude than we've estimated here.

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

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To that point exactly, Dennis, I think you look at what's going on in Trinidad right now as the shape of things to come. So CNC was off for several months because of a lack of a gas contract, saying that the terms that were being offered made that plant unprofitable and they couldn't afford to do a turnaround on it. They eventually struck a deal, but it's only, kind of sounds like it's marginally squeaking by. And I think the next rounds of gas contracts that come up are going to be -- continue to be equally challenged, if not more so, in Trinidad, particularly as you look at the fact that the curtailed molecules going into the Atlantic LNG train there. So our view is, there are areas of the world that today are pretty substantial producers, that may experience some pretty rapid decline going forward, and that's not baked into this chart.

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Operator [34]

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Our next question will come from the line of Jonas Oxgaard with Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [35]

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I was curious, these persistent discounts in NOLA, it seems to be a very inefficient global system. Is there an opportunity for you guys to do trade arbitrages? And a follow-up on that, is there anything that's -- that can be done to close these, apart from simply waiting for the Middle Eastern producers to shape up?

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

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Yes, I mean, we sort of do look very carefully at do we want to send an incremental cargo up into the Midwest from Donaldsonville or do we want to export it? So Donaldsonville's got a very good set of stocks and ability to export, and we've got the opportunity to do that. So when we have a chance to get better netbacks to D'Ville, we'll go ahead and export urea and that's been happening, I would say, on a somewhat regular basis for us here, given the fact that where NOLA is trading. I think it's one of those things that when the Middle Eastern producers wake up and realize that they're basically leaving $20 per ton on the table, they'll start changing those things. But it's probably going to take a couple of years for it to fully work itself out. Those things will come up for renegotiation and when they do, we'd expect them to get sorted in the most economic way possible.

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Operator [37]

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Our next question comes from Mark Connelly with Stephens Inc.

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K. Tong, Stephens Inc., Research Division - Associate [38]

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This is Joan Tong on for Mark Connelly. Just staying on with the export question or answers that you just talked about. Are your export capabilities from Donaldsonville fully up and running at this point? I'm just wondering if there are any limitations on what you can do with tonnage there, any sort of ramp in export capabilities beyond just finding the customer?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [39]

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Yes, we did over 2 million tons last year of exports coming out of Donaldsonville or close to 3 million tons. And we've got the ability to probably export as much as 7 million tons. On urea, is right now the place where it makes probably the most sense, because with NOLA trading at a discount and it being kind of the same cost to get product up into the Midwest as it is to get it to areas in Latin America or other places around the world, we have the opportunity to get a little bit of additional cash by exporting. UAN, because it tends to not be used quite as widely as urea is, and you're shipping a lot of water, while we've done a lot of UAN exports and continue to look at it, the opportunities there are not quite as easily achievable, but Bert and his team have done a great job of establishing relationships in Europe and also in Latin America on the UAN front. So it gives us a lot of optionality. Bert, you want to...?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [40]

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We are netback-driven and as we can make profitable decisions for the company, we will export as much as necessary. We like the opportunities, we like the relationships we developed and like the flexibility it gives to the company. So we'll keep doing it.

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Operator [41]

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(Operator Instructions) Our next question will come from the line of Alexandre Falcao with HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [42]

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With the -- from the perspective of not having any further delays or -- in the second quarter, picking up the slack for the first quarter, the Indian contract and the surge in oil prices, when do you think you guys are going to be able to reassess your guidance for the year? It seems like if weather is not really going to affect your numbers, it seems like it's -- the outlook is more positive than when you provided the guidance. Is that a fair assumption?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [43]

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Well, we don't -- we try not to give point estimate numbers or even tight ranges, because this business is pretty volatile and subject to weather and other vagaries. So our position is to try to discuss what the major factors are that are driving it. So gas costs in North America, energy costs elsewhere, kind of where nitrogen is trading and kind of what we think the demand profile is and then use that as a way to provide kind of directional information, which Dennis did. It's consistent with where we were the last time we were on a call, which was after the fourth quarter results. And so I don't -- you know, when you say update our guidance, I wouldn't expect to update it in a different direction and if we're -- as long as we're providing directional information, I think it's going to be pretty consistent. You'll likely hear the same thing from us in the next call. But we're not going to go to providing specific numbers or ranges. That's a level of precision that we just don't have in this industry, given the volatility.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [44]

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Okay. But you would say that when you first provided those views, is that a more favorable environment than it was before?

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

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I mean, I think, when we said that before -- I don't know that gas has changed that dramatically versus where we were. And I think pricing has moderated a little bit but not a lot and demand has been delayed out of the first quarter into the second. But again, we expect to continue to move all of the tons that we produce. So I don't know that there has been a substantive change in our outlook.

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Operator [46]

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Our next question in queue comes from the line of John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [47]

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Do you have any thoughts on China's corn ethanol plan? I've been skeptical, but I've seen some recent refinery consultant presentations that say that China's going forward with E10, but from a corn balance perspective, it seems pretty hard to envision.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [48]

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When you look at -- yes, we have looked at that and that would be an exciting change, because then the imports of corn would go up and that would satisfy the need to move Brazilian as well as our excess corn to a new demand center. There is construction taking place, or plans for additional ethanol production. We've heard about this mythical corn stock that is an aged stock of corn in China and that this probably not -- or has degraded some and probably ethanol would be the best next use of that corn. And so the scale and the size and the timing of the exact construction of these assets, I'm not aware. But the movement to ethanol as an oxygenate, as part of their environmental cleanup, makes sense. And they would have dual supply, not only out of Brazil, I think, for their excess production, as well as our own. So I think there's more to come on this story.

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Operator [49]

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(Operator Instructions) At this time, presenters, I am showing no additional questions. As I said that there, we have one additional question that just came into the queue, comes from Jonas Oxgaard with Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [50]

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I was looking at your -- the very last slide in your deck on the Chinese closures, and it seems that, that slide hasn't been updated in a while. And not implying that you guys haven't been working on it, I'm just saying that most of those closures on there are from '17, or most like '16 or early '17. But we've heard a lot of closures in '18, particularly, winter, we expect more. Can you talk a little bit about what you're seeing right now in China and how you -- well, is there incremental to this slide that you have in your deck?

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [51]

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Well, Jonas, that was the point that I made earlier, which was, we don't tend to put that stuff on our slides until we can convince ourselves that those things are actually permanently closed down, okay? And so that may be the delay you're seeing -- in just our process. But what we're seeing in China today from an overall dynamic perspective is, we are seeing more aggressive enforcement, we are seeing increased regulation and reductions in subsidies and the like and higher coal prices and also in addition to that, an exchange rate that's gone the wrong way in the Chinese versus where perhaps people would have thought it was going to go 1.5 years, 2 years ago. So all those dynamics point in the direction of additional closures through time. But again, our process is such that we're only going to count that as a closure once we can get ourselves comfortable that it's confirmed actually really closed.

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Operator [52]

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And we do have an additional follow-up from the line of P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [53]

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Another question on these China shutdowns and exports. Exports declined, I think you said, 77%. And clearly appreciate that China has been shutting down capacity among these pollution control issues. But in some other industries where China had shut down capacity, the producers are getting innovative, they are relocating plants, installing for pollution control equipment and to bring some capacity back. Now again, this may not happen right away, but looking forward, do you think there is risk in urea of that?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [54]

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I don't see that same dynamic playing out in urea, and part of it is because there is a pretty sizable environmental footprint that happens outside of just the emissions coming out of the urea plant itself. From an air quality perspective, there's -- it's a pretty sizable water user, and you've got all of the particulate matter and other emissions coming out of the mines as well and there's been a big push by the central government to get rid of the zombie industries and leave healthy, profitable, smaller industries behind and that has been particularly true within the coal sector. And so when you look at effectively producing excess urea in order to export it at a net loss relative to what their cost structure looks like, when it takes a high environmental toll, when what you're effectively doing is exporting energy and then importing in the form of urea from coal production and then importing LNG at $10-plus on top of it, that's a pretty negative arbitrage. And we just don't see that happening. It's not like it's affecting their self-sustainability in terms of food production. And it -- again, it's taken a pretty heavy environmental toll. So when you rack all of that together, we just don't think that there's going to be this big slug of Chinese capacity that comes back on the marketplace.

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Operator [55]

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And at this time, presenters, I'm showing no additional questions in the queue. I'd 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 [56]

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Thanks, everyone, for joining us this morning, and we look forward to seeing you at conferences in May.

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Operator [57]

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Thank you, presenters. And thank you to all of our attendees for joining us today. This does conclude today's call. Thank you for your participation. You may now disconnect. Have a wonderful day.