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Edited Transcript of CF earnings conference call or presentation 13-Feb-20 2:00pm GMT

·50 mins read

Q4 2019 CF Industries Holdings Inc Earnings Call DEERFIELD Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, February 13, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bert A. Frost CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain * Christopher D. Bohn 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 ================================================================================ Conference Call Participants ================================================================================ * Adam L. Samuelson Goldman Sachs Group Inc., Research Division - Equity Analyst * Andrew D. Wong RBC Capital Markets, Research Division - Associate Analyst * Christopher S. Parkinson Crédit Suisse AG, Research Division - Director of Equity Research * Christopher Willis; Exothermic Global;Principal * Donald David Carson Susquehanna Financial Group, LLLP, Research Division - Senior Analyst * Jeffrey John Zekauskas JP Morgan Chase & Co, Research Division - Senior Analyst * Jeremy Noah Rosenberg Morgan Stanley, Research Division - Research Associate * Joel Jackson BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst * John Ezekiel E. Roberts UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals * Jonas I. Oxgaard Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst * Mark William Connelly Stephens Inc., Research Division - MD & Senior Equity Research Analyst * Michael Leith Piken Cleveland Research Company - Equity Analyst * P.J. Juvekar Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD * Steve Byrne BofA Merrill Lynch, Research Division - Director of Equity Research * Ziad Saada Scotiabank Global Banking and Markets, Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the CF Industries Holdings Fourth Quarter and Full Year 2019 Results and Conference Call. My name is Michelle. I'll 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 go ahead. -------------------------------------------------------------------------------- Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Good morning, and thanks for joining the CF Industries' full year and fourth quarter earnings conference call. I'm Martin Jarosick, Vice President, Investor Relations for CF. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its full year and fourth quarter 2019 results yesterday afternoon. On this call, we'll review the CF Industries results in detail, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find the 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. -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Martin, and good morning, everyone. Last night, we posted our financial results for the full year 2019, in which we generated adjusted EBITDA of $1.6 billion, a nearly 15% increase over 2018. We efficiently converted our EBITDA into cash, generating over $900 million in free cash for the year. As shown on Slides 6 and 7 of our materials, we are the most efficient converter of EBITDA into cash in the industry. Additionally, we have the best free cash flow yield. These results reflect the impact of lower year-over-year natural gas costs for the company, higher product price realizations and outstanding execution by the CF team. We operated our plants extremely well all year and set a new quarterly ammonia production record in the fourth quarter. For the full year, we produced more than 10.2 million tons of ammonia and delivered sales volumes of 19.5 million product tons. Most impressively, we did all these safely. Our 12-month rolling recordable incident rate at the end of 2019 was 0.48 incidents per 200,000 work hours. This is the lowest year-end rate ever at CF. We are tremendously proud of this achievement, and I want to thank everyone at CF who makes safety their top priority every day. In 2019, we delivered a 1-year total shareholder return of 13%, which was well above each member of our fertilizer peer group for the year, as you can see on Slides 9 and 10. We have outperformed our peer group index over 1, 3, 5, 7 and 10 years for total shareholder returns, and we were the single best-performing company overall but one of these time periods. We believe this consistent long-term outperformance relative to our peers reflects the enduring structural and operational strengths of our company. Our structural advantages are clear. We provide a nutrient that is nondiscretionary and for which demand continues to grow. We are among the lowest cost producers of nitrogen in the world due to our access to low-cost and plentiful North American natural gas, and we operate in import-dependent regions. We also have created operational advantages for our company by investing in our assets and our people. We have the highest ammonia utilization rate in North America, and our production sites have the flexibility to switch quickly between products to meet demand and maximize profits. We also have outstanding logistics capabilities in North America's most extensive distribution network. These advantages have enabled us to efficiently generate significant cash flow. Since the beginning of 2017, we have deployed nearly $4 billion in cash to strengthen our balance sheet, increase shareholder participation in our nitrogen business and return cash to shareholders. We believe we are the best-positioned company in the industry to continue to build on this track record of creating long-term shareholder value in the years ahead. Looking forward to 2020, we remain focused on safe and reliable operations and disciplined management of the company. As we've said before, we believe our operational performance will consistently deliver sales volumes between 19 million and 20 million product tons each year, and we expect to do this with one of the lowest controllable cost structures per product ton in our industry. With that, let me turn it over to Bert, who will talk more about current market conditions and our outlook, then Chris will cover our financial position before I offer some closing remarks. Bert? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [4] -------------------------------------------------------------------------------- Thanks, Tony. Since the start of the second half of 2019, low global energy prices have supported higher industry operating rates and increased nitrogen supply availability. This pressured global nitrogen prices in the latter part of 2019 and into 2020. Global demand in the second half of 2019 was a bright spot, highlighted by strong urea imports into India and Brazil. India tendered for a record volume of urea during the year due to favorable growing conditions and flat domestic production despite the start-up of new capacity. This demand, along with the effect of lower energy prices and favorable exchange rates, brought additional Chinese urea exports to the market, exceeding our expectations entering the year. Demand from India should remain strong in 2020, with the next India urea tender expected in March or early April. We also expect urea imports and demand in Brazil to increase over 2019, supported by the recent idling of a Petrobras ammonia-urea complex and additional planted corn acres in that country. Just like the rest of the world, North America saw a lower year-over-year nitrogen prices throughout the fourth quarter. This has been reflected in North American nitrogen prices as we begin the year. Urea barge values at New Orleans at the start of 2020 were $220 per ton compared to $275 per ton at the start of 2019. Barge prices have appreciated recently as the industry has begun to take stock of potential spring demand. However, even with the increase, prices today are still lower year-over-year. Additionally, UAN prices in North America are lower than at this point last year and priced at a discount to urea due to an influx of imports as trade flows adjust to the impact of European Union tariffs. We expect strong nitrogen demand in North America during the upcoming spring application season, which we believe will support prices. Last year, we saw record prevent plant acres in the U.S. and a weak fall ammonia season due to poor weather. Despite a challenging year, however, farm income has improved for most farmers and input costs are at decade lows. This should result in an increase in planted corn acres as a whole over 2019 as farmers see typical planting conditions. We believe this should favor demand for nitrogen. Crop futures continue to support an increase in the planting of nitrogen-consuming crops. We estimate planted corn acres in the United States will be in the range of 92 million to 94 million acres. We also expect positive demand for spring ammonia as well as upgraded products, which typically see greater demand following poor fall ammonia seasons. We are well prepared for the active spring application season we see ahead. While our expectations are for normal planting conditions, each spring brings new opportunities for CF to leverage our extensive logistics and distribution capabilities. We are ready for whatever arises and look forward to working with our customers for a successful spring application season. With that, let me turn the call over to Chris. -------------------------------------------------------------------------------- Christopher D. Bohn, CF Industries Holdings, Inc. - Senior VP & CFO [5] -------------------------------------------------------------------------------- Thanks, Bert. For the full year of 2019, the company reported net earnings attributable to common stockholders of $493 million or $2.23 per diluted share. Our EBITDA and adjusted EBITDA were both approximately $1.6 billion. Lower natural gas costs year-over-year were a substantial factor in our financial performance in 2019. This was especially true in the second half when significantly lower natural gas prices compared to 2018 supported our results despite lower product prices. Looking ahead to 2020, we expect natural gas costs to continue to provide a tailwind, particularly in the first half of the year. This should be -- this should partially offset the impact of lower year-over-year product prices. Our full year net cash provided by operating activities was approximately $1.5 billion, and free cash flow was $915 million. In 2019, we continued to deploy capital in line with our long-standing priorities. We redeemed $750 million in debt, lowering our gross debt to $4 billion. We returned $265 million to shareholders through dividends, and we repurchased 7.6 million shares for $337 million. As a result, cash and cash equivalents on the balance sheet at the end of the year were $287 million. This is in line with our stated target of $300 million to $500 million of cash on the balance sheet. Given our significantly reduced fixed charges and our undrawn $750 million revolver, we believe this provides the liquidity we need to run the business through this cycle. Looking ahead to 2020, we will continue to pursue the balanced approach we have taken to manage the company, prudently allocate capital and return to investment grade. This includes increasing shareholder participation in our underlying business. Since the end of 2017, we have increased shareholder participation by nearly 10% through growth initiatives and repurchasing nearly 8% of our outstanding shares, as you can see on Slide 12. Given the current share price and our strong free cash flow generation, we believe our shares are the most attractive investment in our industry. Returning to investment grade also remains a priority. We entered the year with greatly improved credit metrics and financial flexibility compared to just a couple of years ago. Since the beginning of 2017, we have lowered our debt by $1.85 billion and have reduced our fixed charges by approximately $190 million on an annual basis. We are committed to redeeming the remaining $250 million of our 2021 senior secured notes on or before the maturity date. We believe this will further strengthen our case for investment-grade. We will also achieve our goal of a strong and flexible balance sheet that is well positioned for the future. With that, Tony will provide some closing remarks before we open up the call to Q&A. -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF for their great work throughout 2019. Their focus on safety, operating reliability and delivering for our customers continues to drive our success as a company. As you've heard from Bert and Chris, lower global energy costs have pressured product prices in both Q4 of 2019 and Q1 of 2020 compared to the prior year periods, and we expect this trend to continue through the first half of the year despite the expected increase in corn acres. The impact of lower year-over-year product prices should be partially offset by lower gas costs, but our results are much more sensitive to movements in product prices than they are to movements in gas costs, as you can see on Slide 13. So as we sit here today, in the early part of 2020, with most of the year still to play for and understanding the highly volatile and sometimes unpredictable nature of global commodity prices, we would expect that full year 2020 EBITDA would fall somewhere within the range of our 2018 and 2019 results, but our focus is on free cash flow rather than EBITDA. And as a reminder, in both 2018 and in 2019, we generated over $900 million in free cash flow. So given that, we would expect to continue executing on our capital deployment priorities of regaining investment grade while continuing our share buyback program, investing in the most attractive shares in the industry. Longer term, our company remains among the best positioned in the world. Our structural advantages are clear. We produce the only nondiscretionary nutrient, nitrogen. We have access to low-cost North American natural gas, and we operate in import-dependent regions. We believe these advantages will continue to drive strong free cash flow generation through the cycle and enable us to build on our track record of creating superior long-term shareholder value compared to our competitors. With that, operator, we will now open the call to your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Christopher Parkinson of Crédit Suisse. -------------------------------------------------------------------------------- Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [2] -------------------------------------------------------------------------------- Regarding the UAN market, can you just talk about the evolution of global trade flows and how you see them kind of moving in 2020, including out of the U.S. and then also the progress you've made in Latin America regarding your market development efforts? And if you could hit on that as well as just the U.S.'s net position from your perspective, it would be greatly appreciated. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [3] -------------------------------------------------------------------------------- The UAN market has been growing. We believe that it is a very good product due to its flexibility and adaptability and blendability, and we're seeing that growth taking place in South America, as you mentioned. So the changes that have taken place to the global market are the recent UAN European Union sanctions that came in place at the tail end of 2019. Last year, we exported -- we continued to export into Europe. And this year, I don't think we will, and that has really blocked a lot of the Russian or most of the Russian product as well as Trinidadian. We don't believe that this is a fair nor just nor correct result, and we think that there'll be some issues and contentions and disputes regarding what the decision was. But what that has caused is a disruption in the flows. And so our position is that it takes a while for those flows to rebalance for different companies to make different products and to develop different markets. We've been focused on that end of the situation, developing different markets since we brought up the production in 2000 -- or before we brought up the production in 2017. So we've been working in South America as well as what we were shipping in Europe. And our growth markets have been Argentina, Brazil, Colombia, Mexico, Chile, shipping to all those. And not much of that existed outside of Argentina 5 years ago. And we project that, that will be a 1-million ton market in 2020 and growing every year from there on out. When you look at UAN as a balanced product to CF's portfolio -- well, we start with ammonia then we make different subproducts. And so what we've been able to do because of the decisions we made in construction -- constructing the new facilities was we had tremendous flexibility of maximizing urea or UAN or subproducts like DEF and nitric acid, and we are utilizing those capabilities today and producing less UAN. So you've seen a reflection of CF bringing less UAN into the market, rebalancing our customer portfolio, pursuing more business on the East and West Coasts, developing some new terminals in interior as well as what I just explained in South America. So we're -- we feel like we're well prepared. You're going to see us continue to execute and focus on growth and opportunities, and we believe that UAN is a very good product. And on a price differential, where it's under urea today, we believe that, over time, we'll rebalance and be equal to or greater than urea. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Our next question comes from Stephen Byrne of Bank of America. -------------------------------------------------------------------------------- Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [5] -------------------------------------------------------------------------------- Yes. Just maybe continuing on this topic, Bert. When you look out at the spring demand in the U.S., you look at, say, channel inventories, you look at the lineup of imports coming into the U.S. Do you see the potential that urea in the spring could get short? And conversely, do you expect UAN to remain long? And how have your outlooks for these products affected your forward sales book for these products? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [6] -------------------------------------------------------------------------------- And so I'm always optimistic, but I always play a defensive game, and that's preparing for eventualities and not to put the company in a negative position. So it's a combination of what you just explained. Channel inventories, we think, are adequate, especially for the first round as products starts moving to the ground. But when you look at what we've -- what has happened with ammonia, ammonia being the building block, not only of producing the upgraded products, but to the farm community, ammonia has always been a baseload for the I states as well as Nebraska and some of the outlying states. And that has generally been about a 4-million ton product per year, moves through our terminals and the other providers' terminals. We had a poor fall ammonia season, so that N needs to transition to spring. And so we're projecting to have a healthy demand for ammonia, around that 4-million ton range; urea, around 11 million to 12 million tons; UAN, exceeding 15 million tons. And so for a global market, North America is 3/4 of UAN demand today, right around that number. And so looking at what has come in, we have received too much UAN into the market, and that's reflected in pricing, especially on some of the coastal markets. And so what do we need to balance? Well, we've added capacity and others have added domestic capacity. And so there's probably about a 2-million ton requirement of UAN imports, and we're probably a little bit over that. And again, that's reflected in pricing. Urea, we're importing 4 million to 5 million tons. And if you look at what's been brought in to date and what's in the lineup, we still have substantial needs to meet, and we're preparing for that demand to materialize with our interior storage and production and positioning product. And so we have a good order book on, and we're going to continue to build on that order book and have product in place for that second round and third round when people need just-in-time inventory. So our outlook is positive for the spring, especially for the interior. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from John Roberts of UBS. -------------------------------------------------------------------------------- John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [8] -------------------------------------------------------------------------------- Could we get your thoughts on the new Gulf Coast ammonia project and what that may mean for reinvestment economics? Do you consider that kind of a one-off situation or the sign that we're -- we might see some future expansion from the industry more broadly? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [9] -------------------------------------------------------------------------------- Yes. My perspective is that if you're air products, this is a great project because they get to get better utilization of their existing hydrogen production along the pipeline to get to expand their pipeline and build a new SCR. And as long as you've got a credit-worthy offtaker, you can get very good returns on that kind of business. So I can absolutely understand why your products wants to do it. I think if you are the back-end of the ammonia process, it's less clear as to this project to actually makes sense. And our understanding is the sponsors, who are the offtakers from air products, suggest that they need a dramatic increase in ammonia pricing, kind of getting Tampa up north of $350 per ton in order to make a reasonable rate of return on that kind of project. And today, Tampa isn't anywhere close to that number. So my hope is that they actually earn a great return on that project because that would suggest that the rest of our business is coming along really well, but it's a bet on the come. And based on where global energy prices are and the amount of ammonia production is in the world, it's hard to see that. But that's certainly not a bet that I would be making today, and it's hard for me to believe that there's a lot of people stepping up in line to double down on that. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from Don Carson of Susquehanna Financial. -------------------------------------------------------------------------------- Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [11] -------------------------------------------------------------------------------- Yes. Bert, just trying to get a sense of how much of the fall ammonia application season we missed and what the implications are for additional demand this spring? How much do growers have to make up? How much do you think they'll make up in ammonia versus urea or UAN? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [12] -------------------------------------------------------------------------------- Yes. Looking at the fall of '19 compared to the fall of '18, in the fall of '18, we had a wonderful run in Canada, in the northern tier, weaker in the southern tier. In '19, it was kind of weak everywhere. The north never got started -- Canada, North Dakota, in that area, Minnesota, just due to cold wet and then snow. And that was delayed in the south, but then we had a warming trend in December and got some loads out in the southern Illinois area. So really, throughout most of the Midwest, Iowa is okay. What we expect is that for a precise number. I would say, several hundred thousand tons need to move into spring, and probably that will be made up with upgraded products. We're expecting a normal spring for ammonia, which we didn't have in '19. And where product is priced today, urea is a little bit higher, and UAN is a bit of a value right now as well as ammonia. So it's going to be interesting to see what value plays, what tradition plays, what practices farmers will apply in 2019, and that's why our balanced approach seems to work pretty well. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from Joel Jackson of BMO Capital Markets. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [14] -------------------------------------------------------------------------------- I had a question with some of your price realizations for urea and UAN. The last 4 or 5 quarters, you've achieved really good price premiums to somewhat arbitrate NOLA benchmarks. In '17 and '18, you, especially for UAN, what you're realizing versus the NOLA benchmark was kind of flipping up and down between a premium and a discount. This goes back to maybe some of the numbers you would have seen a few years ago. So I guess I wanted to ask, is there something going on that -- in terms of your book and the market that -- and for an export dynamic that lets you now achieve sort of a better premium than -- sorry, good consistent premiums to these benchmarks? Or maybe help me understand the dynamic? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [15] -------------------------------------------------------------------------------- Yes, Joel. I mean my flippant response would be the team. And -- but I actually want to give credit to the team. We've -- over the years, have built an internal team of talent and diverse talent and with an effort towards utilizing different skills and languages and experiences, and that takes time. And we've put some people in some positions that have really done a great job. And I like the way our incentive program works, where we, as a team, everybody works towards the same goal, which is the betterment of CF Industries. So we're all rowing in the same direction. That really helps with focus on -- if urea or UAN, those product leaders are more focused on what's better for CF. We have that conversation every day. The other issue is the river. And there have been logistical issues, which we identified early or have been able to capitalize on later because of our distribution system and unique logistical assets. And so it helps to put the company in that position as we prepared it in the past. And then -- so what we're seeing is we have differentiated production in Canada and Northern Iowa as well as the Donaldsonville, so that we have arbitraged exports against imports. And when that is advantageous to the company, we've chosen to export. So a combination of all those factors have put us in a good spot. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from Vincent Andrews of Morgan Stanley. -------------------------------------------------------------------------------- Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [17] -------------------------------------------------------------------------------- Hey, guys, this is Jeremy Rosenberg on for Vincent. I just want to ask 1 on China. Just thinking about all the headlines we've been seeing on the coronavirus. I want to get your thoughts on -- if that could potentially weaken domestic urea demand in China and free up even more tons for export? I know I saw your export expectations were brought up from 1 million to 3 million tons to 2 million to 3 million tons, but just thoughts on coronavirus there? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [18] -------------------------------------------------------------------------------- So the impact, as we see it, is unfolding. What was announced yesterday with the additional deaths and disclosures is scary because it's probably spread farther, further and deeper than we're understanding. So what is the impact of that? It's the ability to operate the demands today that are being made to please show up to work from the Chinese government for your national duty is troubling when you're risking potential injury to you or your family members. So our take on the virus today -- its impact is on logistics and production. Will the mines open their short coal today? And inventory levels from our reports are at low levels. And so the ability to move and to keep that moving -- and then that extends into feed and just-in-time deliveries of feed for protein growth. And so the potential as you unravel this thing, where does urea shipments-to-exports rank in the pantheon of needs is probably not very high. And so I think it's going to be not much urea comes out of the Hubei province, it's more phosphate. So I think the first price differential will be on phosphates because of limited exports when China has been the marginal producer in that area. But overall, we're predicting fewer exports out of China anyway, and this will just further exacerbate that situation. And that's why we're more comfortable and confident with the tightening of the market. China was the marginal producer and more tons did come out than we had expected in 2019. We don't see that repeating in 2020. -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes, I completely agree. I think, if anything, this is going to be a negative impact on supply from -- coming out of China as opposed to negatively impacting demand. Because on the demand side, people are still going to eat. So -- and as Bert says, whether it's coalmines or urea plants, those are the places where I think you're going to see a reduction in labor hours. So we would expect it to be kind of -- nothing like this is ever a net positive. But from a humanity perspective, but relative to urea supply, it probably will tighten it up. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [20] -------------------------------------------------------------------------------- And I'd say we're positive in protein exports to China and then positive to feed grains and oil seeds from the United States and Brazil. So it's going to be -- again, the thing has to unfold, but those are the areas that I would see needs materializing from China. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question comes from Mark Connelly of Stephens. -------------------------------------------------------------------------------- Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [22] -------------------------------------------------------------------------------- We've seen some increases in freight rates in a number of markets. I'm curious if that's having any impact, or if you expect it to have impact on where urea products are going, whether it's yours or somebody else's? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [23] -------------------------------------------------------------------------------- Yes. The IMO impact is being felt. And you're right, there were some increases. We saw more substantial increases in the liquid rates coming out of NOLA as we looked at some exports to South America at the turn of the year. And then that, we believe, will have further costs. So we think the net benefit, because we're such a domestic producer, is increased costs for those coming to the United States. And so is that a $10, $20? We've seen some substantial bids in the short term. Does that balance out longer term? But I think it will add structural costs, and that would add to our cost curve for those bringing tons into NOLA or the -- either West or East Coasts. So for us, it's a net positive. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from Jonas Oxgaard of Bernstein. -------------------------------------------------------------------------------- Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [25] -------------------------------------------------------------------------------- Looks like natural gas prices in North America are now at borderline -- absurdly low levels. Is there any thoughts about trying to lock in these kind of low rates long term? Or are you continuing to do spot? What's the strategy? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [26] -------------------------------------------------------------------------------- Yes. No, good question. Where gas is traded today is about $1.85. It's been as low as $1.76 at Henry Hub. The basis way to CF, it's even lower. So it's a very nice place to be, and we're very thankful for being a North American producer locking in North American gas. But you're right. The question is, do you lock in? Or do you play it -- the daily or a combination thereof? And that's what we have chosen to do is to play a combination. There's a time period during the year where risk mitigation is the responsibility of the natural gas procurement team, and that's winter. November, December, January, February, and sometimes into March, we have cold weather and high demand, and you're pulling gas from the storage cavities that are placed throughout the United States. Then sometimes basis blows out, like we've seen in these polar vortex years, where it could be $50 to $100 over the spot price. And so a combination of protecting the company is prudent, but a combination of realizing that there -- excess gas availability and limited places for it to go until pipelines get built out or increased demand in power generation or LNG exports materialize. Net-net, we're at the positive end of that curve. And so you've seen us achieve better realized values than the market has predicted, and that's because we played a balanced game of how we acquire that gas for the company. I can't... -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- But I think, as we sit here today, Jonas, we're getting close to the end of winter, although it's snowing in Chicago. But as you look at the number of cold days left, with -- it's been a mild winter. Storage levels have increased. Gas production has -- continues to be very high. In our view, there's probably a price pressure coming instead of this is the low point. And so we're -- we are very positive in terms of buying daily or month ahead as opposed to taking long-term lock positions. The other issue, though, is in terms of the forward curve, you can't lock 2 years out or 3 years out at today's values because the curve starts increasing. And so that's why, as Bert said, there's a bit of a mixed bag in terms of how you approach it. But structurally, we're very optimistic about low gas costs through the balance of the year. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [28] -------------------------------------------------------------------------------- What I do like is the forward spread to Europe and to Asia on the NBP and JKM. If you look at that, we expand out to a $2 to $3 spread just based on forwards for each of the markets. That's -- again, when you throw in the previous question on freight rates, puts us at a very good cost position for the western markets, being North America and South America, and positions us well for the future. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from P.J. Juvekar of Citi. -------------------------------------------------------------------------------- P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [30] -------------------------------------------------------------------------------- So you mentioned lower energy prices incented nitrogen production last year. As we start 2020, it seems like energy prices are even lower. What does that mean for global production this year? And then I just want to make sure I heard you right. I think, Bert, you said that you expect more imports of grains and pork into China as a result of this virus outbreak. I just want to make sure I heard that right. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [31] -------------------------------------------------------------------------------- So the question was speculation, and so the answer was, I think, a line of potential outcomes. And a potential outcome clearly would be increased -- because the question was if urea production is unable to produce at the rate that they need and then move that into the market as they're entering their spring peak demand, which is about now, that would be a yield impact of corn, wheat and vegetables and fruits, therefore, the need would be to augment or replace that value -- carbohydrate value and protein value with imports. That's where I was going with the thinking. Regarding your question on -- yes, increased N production happened as well as increased output and exports in that export curve, but as a combination or a reflection of higher prices. As we enter 2019, the NOLA price was $275. As we enter 2020, it was $220 for urea. The Chinese tons that came out and went to India at 1 tender averaged $280 a ton metric FOB. The next tender was $260 a metric ton FOB. So energy prices were lower and product prices were higher. And guess what happened? Over time, product prices fell to a level that doesn't make it attractive enough, we believe, for some of those extraneous or excess tons to make it in the market. Therefore, a correction takes place and a slowdown, which we're seeing in production. China has run based on, let's say, 78 million tons of static capacity, has run between 55% and 70%. And that's how we get to our numbers of what was produced, exported and consumed internally. And that, and some other questions, I think, with like Brazil, the Petrobras plant shutting down, and some others that are experiencing higher gas values and an inability to bring in this low-value LNG, will correct the market. And so I just think that's where we're going to be and where our expectations to trade at higher values as we progress year-on-year. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question comes from Michael Piken of Cleveland Research. -------------------------------------------------------------------------------- Michael Leith Piken, Cleveland Research Company - Equity Analyst [33] -------------------------------------------------------------------------------- I just wanted to talk a little bit about your strategy on UAN here in the U.S. And I know you had the initial summer fill program, and you had a recent fill program. Maybe you could talk to us about kind of how that program sort of reached your expectations and how you sort of balanced the needs of some of your customers and making sure they're not underwater versus the need to keep imports out? I know it's always a tricky balance. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [34] -------------------------------------------------------------------------------- Yes. We are a North American participant. A large 90-plus percent of our volume is directed, focused and attended to this market. And we do participate in the export market, and we've built some great relationships. But we utilize that as arbitrage when the value is attractive or timing is attractive, for example, when we're in a low-demand period in some of those places or in higher-demand periods. So our UAN strategy is and has been focused on the United States. However, in previous years, before our capacity expansion, there are areas due to logistical difficulties, we had -- we weren't able to reach. And so we added capacity. We have rebalanced our system and then have worked with some of our logistics providers to access some of those markets, and then started targeting places where we should participate. And we're adding some tanks in California, converting some tanks in other areas that are already owned, leasing some tanks in other areas where we think we should be participating. And Cincinnati is a good example. We were not active in Cincinnati. Today, we're -- it's several hundred thousand tons for CF, a very good market. We will continue to grow in areas like that, utilizing our domestically produced tons where we're logistically favored, and then the remainder is what we'll export. So we feel pretty good about that. We work with our customers. We have extensive customer list from a few hundred tons per year to 1 million tons per year. And you're right, that conversation is we want our customers to make money. They need to make money, and that's because the business that they're in is serving the farmer. We serve the wholesaler, the retailer, the co-ops that serve those farmers. And so that's a combination of conversation and understanding where they are and what farmer economics are to make sure our products are appropriately priced and generally against imports. That is our competitor. And the position -- and then our marginal ton in some of the coastal markets we're competing directly with, Russian and Trinidadian production, we'll continue to do that. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from Adam Samuelson of Goldman Sachs. -------------------------------------------------------------------------------- Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [36] -------------------------------------------------------------------------------- Yes. Maybe continuing in UAN and in slightly different light. And Bert, Tony, I was hoping to get your thoughts on the UAN cost curve, I mean, it's obviously a different focus. Trinidad, U.S., Russia are the principal producers. With NOLA prices kind of where they are in the $110 to $120 range, are some of those producers now underwater? I mean how do we think about capacity rationalization there that might be getting forced at these price levels and/or, just on the other side, the demand response domestically of UAN trading at such a big discount to urea? I'm just trying to think about how this price disparity kind of closes over time. -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Yes. I mean, I think -- Adam, I'll give you sort of my quick take, and then I'll throw it over to Bert for the real answer. But my view on this one is the companies that are -- or the region that is probably the most at risk from an economic standpoint, I think, is going to be Trinidad because most of the favorable Caribbean gas-indexed contracts are kind of rolling off or have rolled off and the renegotiation with NGC has happened at higher price levels. You've seen a couple of plants on the island actually close as a result of not being competitive anymore. And given that Europe is no longer really a destination option for that production, I think that puts a pretty big challenge on those plants. Relative to Russian production and in the U.S., we're still fine. If you look at UAN, the margin structure is still, well, superior to that of ammonia. And on a dollar per nutrient ton, it's still a very attractive product for us to make relative to having excess ammonia. The -- I think anyone, though, that has an ability and flexibility in their system to upgrade into different product types, like we do, into producing more urea, urea liquor, DEF and nitric acid and not making UAN, that turns out to be a great margin opportunity for us. And I think some of the Russian producers are making more AN and doing some other things with upgraded products as well. So our view is the -- over the longer term, I think you're right, given where values are today to a farmer, you might see incremental growth in terms of switching toward UAN in the near term over the longer-term because it is a more capital-intensive process to make UAN than it is urea. You've got to earn a fair rate of return on that incremental capital, otherwise, people stop investing in it. And so we would expect margins to kind of -- once you get through the trade flow rebalance to get back to, as Bert said earlier, kind of net neutral between UAN and urea or even positive UAN. So I think this is kind of like what we saw in '16 and '17, where the new capacity came on and it took 1 year or 2 to -- for trade flows to rebalance and for us to really kind of get our sea legs under us. And the same thing is going on right now globally with UAN in the European anti-dumping situation. Bert? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [38] -------------------------------------------------------------------------------- Yes. No, I think it's good. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question comes from Ben Isaacson of Scotiabank. -------------------------------------------------------------------------------- Ziad Saada, Scotiabank Global Banking and Markets, Research Division - Associate [40] -------------------------------------------------------------------------------- This is Ziad on for Ben. Just maybe dragging back to the inventories you were talking about earlier, I believe you were describing them as like adequate inventory levels now and how the system kind of demands about 4 million tons of ammonia. Could you talk maybe a little bit about what those inventory levels are specific to that in light of the weak application season specific to ammonia, where farmers have been consuming other end products to kind of make up for that? -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Well, the ammonia system from an inventory standpoint is there's a cap on it because it's really sitting, for the most part, with 3 major producers. Coke, Nutrien and CF are the ones that have the cryogenic storage tanks or terminals in-market. And while there's some storage at plant locations, generally speaking, it's not more than 50,000 or 100,000 tons. And so the vast majority of the inventory sits with the 3 producers, and there's a limit in terms of what that looks like. So in order to get the 4 million tons out, you actually need relatively -- given a weak fall, you need to be able to resupply some of those tanks. So if you end up in a situation where weather is not cooperating in terms of being able to dump the tank and then resupply it and get more than 1 turn in the spring, it's going to push farmers toward upgraded products simply because you can't get the amount of nutrients that you need to -- from the ammonia system. That said, given the weak fall, we think the tank situation is relatively full and ready to go. So I think in terms of whether you get to the 4 million tons is really dependent upon kind of how early the fields open up to begin ammonia application and how long that lasts for. And if you have a situation like we had last spring, you're not going to see anywhere close to 4 million tons go down. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [42] -------------------------------------------------------------------------------- And when you look at the -- how that system is balanced, it's in a combination with your -- our and others' industrial customers and those that have a ratable 360-day demand. And we supply that as well as exports. So we've been exporting and then rebalancing the system through shipments to our terminals or our plants, and that gives a benefit -- or we had the benefit of our logistical options. We have the ammonia barges. We have the ammonia pipeline. We have our own railcars, and we lease or work with our truck providers to move that product. So we feel very good about whatever will take place in the spring that we'll be ready. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Our next question comes from Andrew Wong of RBC Capital Markets. -------------------------------------------------------------------------------- Andrew D. Wong, RBC Capital Markets, Research Division - Associate Analyst [44] -------------------------------------------------------------------------------- So with investor interest in ESG picking up a lot over the last couple of years, can you just maybe highlight what CF can do or maybe has already done to raise its profile in that area? -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [45] -------------------------------------------------------------------------------- Yes. I mean, I think from an ESG perspective, there's 4 or 5 plants here that we're focused on. The first is that nitrogen is actually a product that is very beneficial to, from a global perspective, carbon emissions. And the reason for that is, even though agriculture, sort of, it depends upon which agency you look at, is estimated somewhere between 25% and 30% of -- responsible for 25% to 30% of aggregate greenhouse gas emissions, the vast majority of that comes from land use. And so as you are cutting down carbon sequestering for us in order to cultivate those acres, you're releasing a lot of carbon and you furthermore don't have the mechanism to further sequester carbon going forward. And so the use of nitrogen allows you to increase crop density and increase yield per acre, which means that, in order to feed the world's population, you need less acres in use. And net-net, the world is a much lower-carbon footprint by producing and using nitrogen than you are not producing nitrogen and cutting down trees in order to feed the growing population. So that's #1, which is actually our product on a net basis is beneficial instead of negative. The second issue is, particularly with our new plants, we're among the lowest carbon-intensity producer globally. And with our plants turning on, you've got Chinese coal-based plants that shut down and that, again, is sort of good from a global perspective. So I think this is one of those questions you have to ask writ large instead of very locally. Now in addition to that, we're very focused on responsible use of the product and have invested heavily in kind of the 4-hour plus program, which is teaching farmers best management practices to both reduce nitrogen loss to the environment but also reduce volatilization in a way that creates nitrous oxide or other emissions that are high from a carbon-intensity perspective. And then finally, we are investing in our asset base in order to further reduce what our footprint looks like on a sort of act locally kind of basis. And so I think if you look across all of those things that we're doing, we have an exemplary, yes, ESG standpoint. And we're reporting on a comprehensive GRI basis from a transparency and disclosure perspective. We're one of a very few number of companies that actually reports on the GRI index on a comprehensive basis instead of just on a spot or line item basis. So we feel very good about our ESG profile. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question comes from Jeff Zekauskas of JPMorgan. -------------------------------------------------------------------------------- Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [47] -------------------------------------------------------------------------------- Since the beginning of the year, the price of Brent has gone from, I don't know, $68 a barrel to $54. How much of a difference do you think that makes to the global nitrogen fertilizer cost curve? And secondly, in the fourth quarter of 2019, there were very large imports of urea into India. And how do you see India urea imports in the first half of 2020 and for the year versus the year ago period? -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Jeff, let me handle the first part of the question, and I'll throw it over to Bert to deal with India, which is, as you think about Brent coming down, there's no doubt that anyone that's receiving oil indexed-based LNG or gas is in a more favorable position today than they were a year ago. That said, the real marginal production costs globally is still Chinese anthracite coal. And Brent price does not really affect the Chinese anthracite coal price directly. And in fact, as Bert indicated, whether it's coronavirus or other things going on, you've seen actual coal price strengthen a little bit. So the high end of the cost curve has gone up or stayed flat relative to what looks like a bit of a windfall for some other people in more third or early fourth quartile. So it's not really affecting global pricing today, the fact that Brent has come down. Bert, you want to deal with the Indian situation? -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [49] -------------------------------------------------------------------------------- Sure. So with India surprised to the upside, importing close to 10 million tons, when you include the OMIFCO tons, so almost a 30% increase over the previous year. Production stayed relatively flat, about a 2% to 3% increase, and stocks are a little bit higher so a healthy consumption base, good monsoon seasons and then good demand. Big country, and they've got to feed themselves. And some exciting things are taking place in India with the Modi government regarding investments, infrastructure and in terms of an educated population, a growing population. So when I look at -- we look at, going forward, we expect another tender, probably in late March, early April and kind of running on the same pattern, whether being equal of continued import and being the largest importing country in the world. There are 2 plants that are set to come onstream at the -- kind of this year, early next year. And generally, those plants have been late. And then there have been issues with feedstock supplies, and so not sure when that overall production will come on. But there are some old -- especially the naphtha-based plants, are suspect. And so even with the increased production in 2019 -- or run rates, they have been fairly stable in their production, really, over the last 5 to 8 years. And so we see good things. And we've mentioned both India and Brazil in our prepared remarks on -- in terms of growth, growth of demand and not necessarily too much of an increase in supply. -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- Yes, the one thing with respect to that is, despite new production coming on in India that -- Bert mentioned this earlier, you saw aggregate production within India remain relatively flat. And so that means, whether it's because of production problems that the older plants or just the fact that they're not economic to run them relative to being importing, you haven't seen this negatively impact India's imports. And so that, I think, is a very optimistic time around global S&D balance going forward. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Our next question comes from Chris Willis of Exothermic Global. -------------------------------------------------------------------------------- Christopher Willis; Exothermic Global;Principal, [52] -------------------------------------------------------------------------------- I was just curious with the length in the market, and I recognize there's a pretty big spring, potentially, in the offing. Why wouldn't you just cut back some ammonia production, maybe idle some production in the fall and idle -- throttle back a little bit in some of your derivative products just to tighten things up a bit as we move into the spring? And I'm just wondering about the -- what was the rationale behind doing a tender in the UAN market? -------------------------------------------------------------------------------- W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Chris, I'll handle the first one on the production side, and then I'll let Bert talk about our UAN programs. We're among the lowest absolute cost producer globally. And so our assets should be the last ones to turn off, not the first. And there is enough production out there on a global basis that, if we were to curtail, I wouldn't expect that to move the market a bit because there's sufficient supply elsewhere in the world. And so our business model is all around asset utilization. Our uptime and production efficiency and onstream factor is among the highest in the world and, certainly, the highest in the U.S. And because we're able to achieve those kind of levels, we basically get kind of the equivalent of an additional ammonia plant worth of production compared to the asset utilization rates that our North American competitors are able to achieve. So that's a huge competitive advantage when you think about the capital that goes into it. And even at the low prices that we're seeing out there for ammonia, it's still a very attractive product from a margin standpoint for us. And again, we're -- we would be kind of the last producer to shut down, not the first. And on a full year basis, last year, we still generated 21% gross margin in our ammonia segment, which is pretty remarkable that -- in a lot of businesses that talk about that being a depressing situation, for an industrial business to achieve 21% gross margin for the full year is pretty outstanding result. -------------------------------------------------------------------------------- Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [54] -------------------------------------------------------------------------------- Regarding to the UAN tender, we are always seeking ways to effectively communicate with our customers different messages and treating our customers equally. And so there are times when some people are willing and ready to buy and want to. And so announcing a tender where we have a specific period where we're receiving quotes or offers, and we go through that then select what's attractive with kind of a price point in mind, allows us to have a conversation directly with customers as small as several hundred tons and up to several thousand or even larger than that. And so we've utilized that now for the second time at different points, and it's, I think, a unique forum to have that conversation that sparks further conversations. This isn't a static market. Because we're a commodity that is used to make a commodity, but we're buying it. But you have all these interactions as well as logistical interactions, and time and values are different at different times. And that's why we want to interact as much as possible and have that dialogue to make sure we're positioning our company correctly. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the call back to Martin Jarosick for closing remarks. -------------------------------------------------------------------------------- Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [56] -------------------------------------------------------------------------------- Thanks, everyone, for joining us today. We look forward to your follow-up calls and seeing you at the upcoming conferences. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- This concludes today's presentation. You may now disconnect. Everyone, have a great day.