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Edited Transcript of CF earnings conference call or presentation 2-May-19 1:00pm GMT

Q1 2019 CF Industries Holdings Inc Earnings Call

DEERFIELD May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, May 2, 2019 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

* 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

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Benjamin Isaacson

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

* Charles Nathan Neivert

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Daniel William Jester

Citigroup Inc, Research Division - VP

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Graeme Marc Welds

Crédit Suisse AG, Research Division - Research Associate

* 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

* Luke Emerson Washer

BofA Merrill Lynch, Research Division - Research Analyst

* Mark William Connelly

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

* Michael Leith Piken

Cleveland Research Company - Equity Analyst

* Martin A. Jarosick

CF Industries Holdings, Inc. - VP of IR

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2019 CF Industries Holdings Earning Conference Call. My name is Justin, and I'll be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your 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 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 the factors that may affect our performance may be found in our filings with the SEC, which are available on our website.

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

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

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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 2019 in which we generated adjusted EBITDA of $305 million after taking into account the items detailed in our earnings release. We're really pleased with this performance, especially against the backdrop of another first quarter with cold and wet weather that delayed the application season even more so than last year. Despite lower sales volumes, we exceeded our first quarter adjusted EBITDA from last year as selling prices were significantly higher for urea, UAN and AN.

We also operated extremely well. We set a quarterly production record for urea, and our ammonia production was our third-highest ever. Most importantly, we continued to work safely as our rolling 12-month recordable incident rate remained at 0.6 incidents per 200,000 work hours.

As we have said many times in the past, we plan our business on a 6-month increment. Weather patterns may move product shipments out of one quarter and into another, but we run our plants 24/7/365, and over the course of a year, we're going to ship everything we make. We believe this year will be no different. April saw much-improved shipments, and we are now ahead of where we were a year ago on volume.

As Bert will outline shortly, we expect high demand for nitrogen due to increased corn acres in the United States, amplified by low ammonia applications last fall. At the same time, we expect continued disruptions to barge and rail transportation due to the lingering effects of weather. This is testing the industries logistics capabilities to move upgraded product to farmers when and where they need it. We believe these challenges play right into our strengths. We have significant in-region production, unparalleled logistics capabilities and an expansive distribution network. These position us well as the spring application season progresses.

Longer term, these same operational advantages, along with our structural advantage of operating in an import-dependent region and our access to low-cost North American natural gas, will continue to drive our cash-generation capability.

Before I turn it over to Bert, I want to comment on the expected impacts of the European Commission's announcement of provisional duties on imports of UAN. We strongly disagree with the Commission's conclusions, which we believe ignore the market fundamentals of a globally traded commodity like UAN. CF purchases natural gas, our primary input, at prevailing market prices. We use that in our highly efficient plants to produce UAN and then sell it at prevailing market prices. The key difference between CF and Eastern European producers is that we have newer, more efficient, more reliable, more climate-friendly and lower-GHG plants than they do. We also have access to low-cost North American natural gas. That said, we fully expect that these duties will impact global UAN trade flows and that it'll take some time for the industry to adjust.

Fortunately, CF has more options than many others, and we have been taking appropriate steps to mitigate the financial impact to our company. We exported roughly 850,000 tons of UAN to Europe last year, and this is how we think about realigning those tons going forward: we'll make more granular urea and less UAN, which will absorb between 300,000 to 700,000 tons of that, depending upon the specific production mix decisions we make. We continue to build demand in South America and leverage our relationships there, and so we expect to increase our exports into that region. Finally, in the last 6 months, we have leased additional access to UAN space within North America.

Based on those -- based on these actions that Bert and Chris and their teams have taken, we can easily realign those tons that we previously sent to Europe without a significant financial impact. In the short term, we also benefit from an increase in corn acres in North America, which, coupled with poor fallout ammonia applications, will significantly increase UAN demand here this year. So net-net, we're well prepared to deal with the loss of access to the European market.

With that, let me turn it over to Bert, who'll talk more about the spring application season. Then Dennis will cover a few financial items 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. As has been well documented, wet and cold weather delayed fertilizer applications in North America. However, in April, the weather was favorable for fieldwork and fertilizer applications. Currently, it's wet in the Midwest and fieldwork is slow.

Over the past several weeks, we saw significant activity at many terminals from Eastern Nebraska to Western Illinois and Northern Missouri. To give you a sense of the movement, on 1 day in April, our Albany, Illinois terminal loaded 263 trucks. To do this, it loaded trucks for 24 hours straight for more than 5,000 tons of ammonia at just 1 terminal. And this week, urea truck shipments at Port Neal reached nearly 10,000 tons in 1 day, a record for the facility.

Applications have begun to shift north and east more recently, as would be expected. In fact, CF's ammonia shipments are now ahead of last year's pace. We continue to expect nitrogen demand in North America to be strong during the first half of the year driven by an increase in planted corn acres in the United States. And though we've had a late spring, it is not too late for farmers to catch up on applications and plantings given the technology they use. If farmers switch to another end product, we have all 3 ready and positioned. As of this week, corn plantings were on pace with 2018.

We also anticipate strong demand for upgraded products this spring in order to make up for the lighter-than-normal fall of 2018 ammonia applications. We believe the industry's ability to supply all of this volume in a timely manner will be challenged. Most significantly, barge transportation has been disrupted by the aftereffects of the winter and spring rain. Barges are moving slowly, and we don't expect regular access to Minneapolis for a couple of weeks. This is the latest opening in at least 30 years. This has 2 effects. First, prompt urea barges in New Orleans so far into the second quarter have been in high demand. Barges need to be moving north for spring applications. Pricing has reflected this as NOLA urea barges' pricing approached $300 last week before retreating this week to $270.

Second, products already in region is trading significant premium to New Orleans barge prices. CF has benefited from this due to our strong production at our Port Neal facility and inventory in position. We have also leveraged Donaldsonville's logistics flexibility by railing urea into the Upper Midwest in anticipation of the high demand.

All of these factors should enable us to capture higher prices across most segments compared to the second quarter of last year. The first quarter was challenging because of the weather, but these challenges play into our company's strength. We're well prepared for the next 2 months and as a team, assets and flexibility to meet our customers' needs.

With that, I'll turn the call over to Dennis.

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

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Thanks, Bert. In the first quarter of 2019, the company reported net earnings attributable to common stockholders of $90 million or $0.40 per diluted share. EBITDA was $301 million and adjusted EBITDA was $305 million. Our first quarter 2019 net earnings of $0.40 per diluted share included a $0.13 per share net income tax benefit. This was a result of the net income tax credit of $30 million recognized during the quarter.

As Tony and Bert have described, our results in the quarter were higher than a year ago as higher product prices overcame lower sales volumes, supporting strong cash generation.

During the first quarter, net cash provided by operating activities was $306 million. We returned $127 million to shareholders during the quarter, including $60 million to repurchase approximately 1.5 million shares and $67 million in dividend payments.

Due to the seasonality of the fertilizer business, we evaluate our company's performance against our peers on a rolling 12-month basis. Looking at the most recent period with all reported financials, you can see on Slide 6 that CF generated $1.5 billion in operating cash flow in 2018. After deducting capital expenditures and distribution to noncontrolling interest, we generated $936 million, significantly higher than our peers in both an absolute sense and as a percentage of our April 30, 2019, equity market capitalization. This demonstrates CF's free cash flow power, which we believe provides ample flexibility to repay $500 million in debt on or before its maturity date in May 2020 and deploy excess cash in line with our long-standing capital allocation philosophy; that is to pursue growth within our strategic fairway, and in the absence of these opportunities, return excess cash to shareholders through dividends and share repurchases.

Capital expenditures for the first quarter of 2019 were $80 million. For the year, we continue to expect to spend approximately $400 million to $450 million. We ended the quarter with $671 million of cash on the balance sheet. This does not include $55 million in proceeds received in April on the sale of our Pine Bend dry bulk storage and logistics facility in Minnesota.

With that, Tony will provide 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 onto your questions, I want to thank everyone at CF for their great work in the first quarter. They operated safely, made the most of the opportunities and helped us to be well positioned for the remainder of the first half of 2019.

When we spoke to you on this call 1 year ago, urea prices at New Orleans were about to hit their low point of the year at roughly $200 per ton. Today, New Orleans barge prices are about $270 per ton, and our price for urea in the Midwest is over $370, more than $100 per ton premium, reflecting the logistical challenges the industry sees currently.

We are also benefiting from lower natural gas prices. The cost of natural gas at Henry Hub in the first quarter was lower than a year ago, and through the end of 2019, Henry Hub natural gas futures remain well below $3 and below 2018 prices. Added to that is the benefit we receive from basis differentials in Alberta and Oklahoma. These factors highlight the operational and structural advantages that we enjoy and that will drive our long-term cash-generation capability.

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) And our first question will come from Adam Samuelson from Goldman Sachs.

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

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So I guess I want to dig a bit more into the European Union tariffs on UAN and just the impact both on the company and how you're adjusting and as well just more a high-level market impact. In the quarter, you shifted the capacity utilization and the production more heavily to urea versus UAN. Is this a -- I mean I know there's more room to go based on the flexibility you have at Donaldsonville, but is this a decent representation of what the forward product mix looks like? Or is it even more skewed urea versus UAN? That's the one question.

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

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I mean it's really a question of where prices for the various products are trading. If we make more UAN, it uses both ammonia that would otherwise go into the nitric acid, the AN piece of it and urea. If we dial back UAN and make more urea, we're getting urea and some excess ammonia out of it. So what Bert and Chris are doing is they're looking at the relative values of the various product prices, where we sit in the inventory, what the demand profile looks like and then are trying to optimize what the production mix looks like. And as we talked about in the comments in the script, we've got sort of pretty ample room to move probably between something like 300,000 to 700,000 tons of what we historically ship to the EU into granular instead and make that just disappear. We've also got exports and more tank space. And it doesn't necessarily have to show up as granular, it can also go out the door as either urea liquor or DEF, which -- the demand for that continues to grow. So when we built the projects, we built a lot of flexibility into the product mix side, and Bert and his team have done a great job of continuing to open up additional markets for us. That effort has been on its way -- or underway for like last 4 or 5 years. So we -- I think even though it's disruptive and it removes a little bit of our flexibility, it's something that we're in a position to manage going forward.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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And along those lines and as part -- I mean your flexibility will impact this certainly. But I mean, historically, you UAN has commanded a premium on a nutrient basis to urea given kind of the value it adds to the farmers from a flexibility perspective and the added transportation logistics costs for the liquid product. Does that change at all as the market reorients itself and trade flows readjust?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [5]

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I mean I think they're going to kind of bounce back and forth for a while as the market sort of adjusts the new trade flows and people figure out what sort of product mix that -- because other people have flexibility, particularly the Russians have some flexibility between NPKs and AN and other options as well. So I think what you'll see is those relationships kind of bounce around a little bit. Long term, I think there needs to be a premium in UAN in order for people to justify putting the incremental capital into acid plants and a UAN plant because otherwise, if it doesn't command a premium, what you'll see is people stop putting maintenance into acid AN plants and just produce granular going forward. So I think long term, eventually, you've got to see that return. But I don't know whether long term in this context means 3 months, 6 months or 1.5 year. But it -- we feel pretty comfortable that it'll get back there. And in the near term, we've got a lot of options in terms of how we deal with it.

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Operator [6]

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Our next question comes from Joel Jackson from BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [7]

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A couple of question. Last year, during the Q1 release, you did talk about that you should expect that similar volumes in the first half of the year as the year before. You didn't have that commentary in this release. You did think you can -- maybe that it's not too late to catch up. Could you give a little more color? Do you think you can get the same volume as last year? First half of the year, sorry.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [8]

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Yes. Joel, I'll turn it over to Bert to give you some specific commentary here in a minute. But through April, we're ahead of where we were on volume shipments last year. And so yes, May -- or the first quarter was a little bit behind, but we've more than caught that up through April. So we're very comfortable with where we sit from a demand profile. But Bert, why don't you...

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [9]

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Yes, just looking at it from an agronomic point of view, if you're planting corn or nitrogen-consuming crops, which we still are estimating 92 million to 93 million acres to be planted, no matter the short cycle or long cycle, we still to have a month left of fieldwork and time to get the crop in, which is plenty of time. We've proven that the market can move -- or the farm community can move in a matter of days to weeks with new equipment that's available. And so if you plant, you're going to apply nitrogen. P&K I think are a little more directly at risk depending on what was put down in the fall, but we have a lot of fall to make up that was lost in terms of ammonia. That will be made up as well as if we do have to transition from ammonia to UAN or urea, we think that there's sufficient supply, at least from CF. And we would plan to drain our inventory to pick up all that volume in Q2. And so I think it's just understood that we would move that volume in the first half, and so that's probably why it wasn't stated.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [10]

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That's great. And my second question is on pricing. So we see where the Midwest premium is trading now. We see that you realized for urea and UAN some of your largest premiums to NOLA benchmarks for your realized prices for years. So should we expect in the second quarter elevated realized pricing versus benchmark NOLA?

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

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Well, as we went through the first part of the year, we positioned product in the interior. We have the tanks for UAN as well as ammonia. And we have the dry storage for urea, the barge capacity to move it, the rail capacity to move it and the relationships in place to receive it if it's even not in our own control. So with that being said, yes, there is a premium to NOLA today and has been -- and it has been expanding. I think it's also expanding for P&K, and that's the reflection of proper planning and distribution. And so I do think you'll see that carry through into -- for Q2 realizations, a nice spread.

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

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It's a nice conversation to have as opposed to us trying to defend the notion of an in-market premium being sustainable when people a few years ago were talking about that's getting wiped out, and the fact of the matter is the evidence doesn't support that thesis. Like we're trading in $100 in-market premium right now because of supply disruptions and other issues, and that's kind of what we've said all along, and we really enjoy the benefit of our network as a result of that.

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Operator [13]

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Our next question comes from Ben Isaacson from Scotiabank.

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Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [14]

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On the logistic challenges, and you talk about your in-region production and transportation and distribution network, how -- their advantages, can you talk about that $100 premium? And how much of that do you benefit from? And how much of that is a cost?

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

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Well, the costs haven't really changed. There -- I think there was some disruptions in Q1, which I think I have been communicated to the market, relative to flooding that took place that limited some rail service from the BN and UP as well as just poor service from the CP coming out of Canada. That has been corrected. The barge logistics, there's been a lot of accumulation of barges at the northern end of the -- for river opening. And -- but I think part of it is just a dislocation. Some tons were sold short and not supplied, and so a bit of a squeeze got put on. And also I just think that with the additional acres and the timing, that moves to our advantage with our assets in place and our short moves from where our assets are in the heart of the Cornbelt. And so that spread has expanded, and we've followed that and taken advantage of it.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [16]

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But I think also, Ben, on that point, the big issue is we've got a lot of rolling stock. We've got access to multiple rail lines. We've got our own barge network and our contracts in place, and traders and people that are bringing tons over don't have access to that. And so what the end market premium is really kind of reflecting is that there is instantaneous challenges of moving products from the Gulf or other import ports into the interior, and we've got an ability to move diesel tons into the interior. We've also have Port Neal and Verdigris and other in-market plants that are already there. And so from the coast, it's probably -- or from diesel, it's $30 to $40 to move most of those tons kind of up into the Cornbelt. And so the spread between that price and what we're realizing today is sort of just the arbitrage that Bert was talking about earlier of either short squeezes or inability for traders to move tons because they don't have access to logistics.

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Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [17]

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Great. And just quickly, my second question is maybe just to expand on Joel's question. You talked about how you are -- through April, you're ahead of you where you were a year ago. And I think you mentioned for ammonia specifically, but what about urea, UAN and ammonium nitrate?

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

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Yes. I mean shipments in aggregate are up at this point year-on-year. So we feel very comfortable, both with kind of how demand is shaping up for this year, what our inventory position is, what our book looks like, and again, where prices are and where gas is, we're well ahead of what last year looked like. So all of that's shaping up to be a really solid first half for us.

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Operator [19]

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Our next question comes from Michael Piken from Cleveland.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [20]

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Wanted to touch base a little more in terms of the outlook for Chinese exports. You said that you're looking for relatively flat levels of Chinese exports year-on-year. Where do you see them on the cost curve? And where do you see the Europeans right now?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [21]

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Yes. Relative to China, they're producing, due to some of the shutdowns and lower operating rates, we estimate in the 53 million to 54 million metric tons per year run rate. They did export more in Q1. We believe that was a reflection of a couple of issues, one being the higher prices than Q4 that were realized, and then product moved into position and exported in January and February as well as possibly some of the Iranian tons that have come in and have been re-exported. And so for that reason, we're fairly confident with where pricing is worldwide and where it's -- whether you're looking at the Arab Gulf, Asia price, NOLA price and the cost curve with their cost generally driven by coal. Gas today is around $5 in China. The forward strip, especially for Q4 -- late Q3 and Q4, is back in the $7 to $9 range. And so that would curtail, you would expect, if we stay at this current pricing level. And so that's why we feel fairly comfortable estimating in the 2 million ton range for China to export.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [22]

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Okay, great. And then if you could talk a little bit about your expectation for the Iranian urea in terms of how much product is theoretically available at this point? And if you think India, who's been aggressive in tenders, or is it China or where could the product theoretically go? And what's your expectation?

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

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I mean our expectation is that all of that production finds its way out in the public marketplace. For -- there's enough people and the world demands that product, and there's enough people kind of willing to chase the dollars that -- we're just planning on all of that production coming out. So we don't believe, all of a sudden, there's going to be some huge disruption to the supply side. That said, if the U.S. actually does get tough on sanctions and makes it more difficult, there's possible upside there for us, but we're certainly not planning on it.

Bert, you have other...

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

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No, I agree. I think the surprise was the tonnage that has gone to Brazil that was bartered for soybeans or corn. That was a new development. I think we're seeing further restrictions, and especially the sanctions that were announced recently. The tighter full-on sanctions for oil, which will transition to urea, we believe, does make it difficult for those extraneous markets. And then I think there is an issue to the sustainability of their production with an inability to work with the providers of services and products and materials that, longer term, if this stays, would make that probably a question mark on production.

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Operator [25]

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Our next question comes from Mark Connelly from Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [26]

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So a big seed company surprised us recently by saying that it sees corn acres moving back to soy, or maybe moving back to soy. I'm curious what your market intelligence says about the extent of that risk.

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

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Yes. At this point, I think it's too early to tell. You can -- if you look at the -- really, it's an economic decision on the corn-to-bean spread and that's still attractive to corn. And I -- if I were to look at it and being able to yield it on trend with corn and/or soybeans, looking at what the difficulties could be out there with soybeans and the production that's expected to come out of South America and already has as well as the consumption in China with the possible impact of the African swine fever that -- what that could be or communicate to demand. So I think a safer choice would be to stay with corn. I don't think -- we have gone through wet years, we've gone through dry years. And as Tony articulated and Dennis and I did also, that there's still plenty of time to plant, and we believe that people will make an economic choice.

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

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I mean the other thing I'd add to Bert, if I can, Mark, is if you look at stocks to use, soy is really high and corn is actually kind of down to 2012 or below levels. And so as we just look at our own, we don't have the intel that the seed guys do. But as we look at our order book and where product prices are for nitrogen, as we look at what the in-market premium is and the urgent demand for our products and just kind of what the overall shipment pattern has been, despite it being a pretty tough first quarter, we're very comfortable with kind of the -- what the acreage numbers looks like and what we see developing for the first half of the year.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [29]

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Yes. That makes a lot of sense to me. I don't know how easy it is separate this out, but how are you thinking about transportation costs this year versus last and first half versus second half? We obviously go hit a lot with transportation last year, but now we got all this logistics noise. So I'm just curious if you can figure out what's happening and whether we're going to see a benefit in the second half.

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

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I would say it's probably roughly flat, maybe up or down, just -- up a little is what I'm getting the nods around the table on. But I think it's -- whatever small amount gets moved there, if you think about it on a per MMBtu kind of costs in terms of the gas content of the product, we're going to see net a favorable impact in terms of the price that we're buying gas at relative to the distribution cost. So net-net, on a COGS basis, in terms of moving those tons into market, they ought to be at a lower aggregate cost. I think we're also seeing a movement in the form of transportation. We're seeing a little less barge availability just given what's going on in terms of the river. And as Bert talked about, ice locks still in the northern part, inability to access Minneapolis and so forth. So we're seeing a bit more rail and probably a bit more truck, less barge, so that's a little bit higher mode cost. But I think it's not going to be one of those things that jumps off the pages all of a sudden, wow, I'm shocked that this number is what it is.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [31]

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I guess, Mark, the only other thing I'd add is as I said in my prepared remarks, we think of our business as a 6-month business at least, more like a year. And I've been in this company now for 8 years, and I've never seen a so-called typical first quarter, typical second quarter in what we sell and where we sell. It differs every year, and that changes the mix on transportation, so.

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Operator [32]

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Our next question comes from Chris Parkinson from Crédit Suisse.

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Graeme Marc Welds, Crédit Suisse AG, Research Division - Research Associate [33]

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This is Graeme Welds on for Chris. Piggybacking on earlier question around the global cost curve. You mentioned the fact that you expect gas prices in China to increase as we go through the year. I was just kind of curious, you had a slide a couple of quarters back that kind of spoke to the average range that you saw for NOLA pricing kind of based on the global cost curve. I'm curious if there are any updates on that. Or kind of roughly where those ranges would kind of shape out based on what you're seeing now?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [34]

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Yes. I mean I'll give you just a quick bit, and I'll toss it over to Dennis. But we publish kind of an estimated cost curve for the year only about once a year, and it's one of those things that changes very dynamically. I mean, obviously, the day that it's published, which tends to be October, it's already out of date because the stuff moves very quickly. Obviously, because of a fair bit of glut of LNG, gas prices in Europe, for instance, are lower than the normal sort of oil index basis would have traditionally had them pegged at. But if you look at the forward curve for an NBP and TTF, it's got it going back to $7 plus by the fourth quarter. So we think in the near term, there's a little bit of dislocation. But honestly, if you look at where the price curve was that we published last October, it projected a price range of like $260 to $300, and we traded within that range and we're still within that range today. So even though it's kind of a little bit older and some of those bars have moved, it's not like wildly inaccurate. That's still where urea is trading today.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [35]

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I just want to just expand a little bit on Tony's point. If you look at Western Europe or Eastern Europe where you've got gas- or oil-linked contracts, if you look at those forward curves into the next 2 years or so, what you see is that the gas price restores to its sort of, if you will, relationship to oil around 60% to 65% price on an energy equivalent basis. So although we see this sort of anomalous period right now with an LNG glut because of the warm winter in Asia affecting Europe, both Eastern and Western, the market certainly expects the historical relationship between oil and gas to be restored in the relatively near term.

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Operator [36]

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Our next question comes from Steve Byrne from Bank of America.

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Luke Emerson Washer, BofA Merrill Lynch, Research Division - Research Analyst [37]

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This is actually Luke Washer on for Steve. I wanted to touch on the logistics challenges in the Upper Midwest. I appreciate the detail there. But do you see -- and I know you talked about your in-region production, but do you have any urea in barges that are -- it can't get to the Upper Mississippi? You talked about challenges in Minnesota because of these lot closures and flooding. And is there any risk that some of your product was -- could be challenged in getting to the retail channel a little bit too late?

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

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No. I think for how we manage our relationships with our customers, who are the retailers and the wholesalers, we're actively selling that product on an FOB-basis NOLA. And if we send barges upriver, selling them along the way, and then we have barges -- the only place that we receive CF material is in Minneapolis, which, Tony mentioned, we've been supplying by rail. We do have barges set to go up to Minneapolis, but we also supply Cincinnati, which is a rented facility, by barge. That has not been constrained. And so when you look across our network in Medicine Hat where we ship up by rail and truck, Port Neal also, as I mentioned, we shipped 1 day of 10,000 tons by truck. That's not constrained at all. So we leverage each of those points with each of the modes possible in order to operate them efficiently, safely and with an economic opportunity available to us.

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Operator [39]

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Our next question comes from Andrew Wong from RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [40]

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I just wanted to ask about capital allocation plans. So beyond your current repurchase program and the debt payments that you have planned, what thoughts do have on just growing the business either organically, through debottlenecks, expansions or maybe just looking externally and adding to your business?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [41]

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Yes. I mean we always look at all kinds of things, whether it's organic or inorganic. And I don't see us doing a big sort of bold brownfield or greenfield kind of expansion like we did back in 2012 because assets traded -- are trading below replacement cost. So there's no reason to go out and do that kind of thing. What you have seen is the industry undertaking a fair bit of upgrade kind of projects. So Coke and Nutrien and Dakota Gas and others have taken on urea projects and other things that have been converting more ammonia into urea. And those are -- it doesn't change the nutrient balance from an S&D standpoint, but it improves economics for those people that do it, largely because there's very expensive transportation logistics cost around ammonia. And then when you have weather vagaries in the fall and in the spring, sometimes, you're not able to move as much ammonia as you want in the ag space. And so it's just more predictable and reliable if you've got upgraded products. So we certainly would think about a debottleneck or 2 on some upgrades. I don't know that we need a lot more ammonia right now just because we've got a lot of ammonia as it is, but I could envision us thinking about doing debottlenecks on some of the upgrades and converting more ammonia into upgraded product. And we're constantly looking at logistics plays and other things to make our existing network more efficient, whether it's exporting out of D-ville or moving product into the interior, giving us a different access to multiple modes of transportation so we can -- our different lanes and so forth. That's kind of what we are thinking about. And on the inorganic side, it's always a question of is it cash flow accretive or are there other alternatives? And if there's something that we can find that fits within our capabilities that way we can leverage our skills and create some value that's cash flow accretive, we think about it. But in the absence of that, we're very comfortable continuing to drive and improve our existing network.

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Operator [42]

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Our next question comes from Don Carson from Susquehanna Financial.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [43]

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Tony, a question on offshore ammonia. We've seen the Tampa price just hit $237 for May, which is a 20-month low. So what's going on in offshore ammonia? Is this pressure from just lower-cost product out of, say, Iran? Or the lower global cost curve? And what does this imply for your export opportunities in ammonia at these kind of price levels?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [44]

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When you look at what has been taking place in ammonia globally, there has been additional supply that has come on. The Russian plant that came on recently, it's a full-world scale. There are other in terms of new additions. But with -- we have also seen a weakness in phosphate, and so -- and a little bit less industrial demand not only in North Africa but in -- with Mosaic shutdown of Faustina -- or not Faustina, excuse me, of the Florida asset. And so with less available demand at this point and additional supply, pricing had to, I think come down to a level of where it has and that's also reflective of some of the gas movements that we've seen globally. We do expect that to improve, obviously, as gas prices modulate or move back to what Dennis talked about on a global comparison to it's -- to the energy equivalent of oil as well as some of the other high-cost plants coming off and increased demand. As phosphates and industrial demand improve, we see that improving.

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

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But obviously, Don, at current prevailing prices, ammonia exports into the industrial space are kind of our last resort. So that goes into the math as we think about mixed decisions on UAN versus urea and whether we've got options domestically to take more of that product or be forced to export some of it. And ammonia exports right now don't look good for anybody regardless of where you are.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [46]

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Okay. And then as a follow-up, there's some talk north of the border of extending the carbon tax to industrial uses of natural gas. If that happens, what does that do for the competitiveness of Alberta production? And could that raise the price floor in the Midwest given all the urea and ammonia that's coming down from Western Canada to the Cornbelt?

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

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Yes. I mean I -- carbon is one of those things, and we spend a fair bit of time talking to regulators on both sides of the border about this, which is as long as any regime that's put in place is applied to imports as well as local production, then it just raises the bar for everybody, and ultimately, it's passed onto the consumer. And the problem is if you just apply it for domestic production and don't apply it to imports, then what you're doing is shifting production and jobs offshore and you're going to end up effectively closing domestic manufacturing, and that's just poor economic policy because it's carbon leakage. We operate some of the most efficient plants in Canada. There's already a tax regime on carbon in Alberta, and we're working with the regulators up there. It's obviously changing dynamic given the new parties in power in the provinces, and that's a shifting dynamic. But I don't anticipate that it's going to have a dramatic effect one way or another on pricing in the U.S. or in Canada or in terms of our financial results.

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Operator [48]

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Our next question comes from P.J. Juvekar from Citi.

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Daniel William Jester, Citigroup Inc, Research Division - VP [49]

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It's Dan Jester on for P.J. So with all the talk on the call about the in-market premium and logistics challenges, I'm wondering if you could just comment why you chose to sell your Pine Bend facility in-market logistics facility. And just maybe longer term, is there an opportunity for a bit of investment in sort of the Upper Midwest to capture a few extra incremental tons, whether it's storage or logistics more broadly?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [50]

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Yes. I mean we view Pine Bend the same we do, for instance, our phosphate business back in the day and so forth, which is are we the best economic owner for it or is somebody else? Are we getting maximum value? What's the return on capital employed as we think about what the market value is worth? And can we solve that in a different direction? That asset was a legacy from the period of time where we were a co-op and we were sourcing all kinds of product for our member owners and holding it there and moving it around. And it became sort of incrementally less valuable to us when we sold our phosphate business because we used to move a lot of phosphate there and also became incrementally less important when we built the urea plant at Port Neal because that gave us access to that same region on a truck-reach basis. And the fact of the matter is, we were just underutilizing that space. There was over 200,000 tons of space there and we were using about 20 of it. And so it didn't make sense for us to continue to own it. The agreement that we reached with Mosaic gives us access to be able to continue to put tons through that facility, and they are a much better economic owner of that asset. It's good for them, it's good for us. And so like any other decision we make, this is strictly who is the right owner.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [51]

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And looking at it, we were already working with Mosaic and a few others, providing services. And we just didn't see ourselves as a service provider in that space. As Tony said, they were the best economic owner and kind of reverse flow that we become a service taker and moving our product on an as-needed basis. So we have an agreement to move our urea up through Pine Bend but utilizing the space that we need, and then Mosaic has the rest for P&K. And we have 130,000 to maybe a little more tons of space at Port Neal as well as space in Medicine Hat. We have been out, not acquiring but leasing and opening up new space for our UAN throughout the Midwest, so that has been accretive to us also.

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Daniel William Jester, Citigroup Inc, Research Division - VP [52]

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Great. And then just a quick one for Dennis about the free cash flow conversion from EBITDA. You've got this nice chart in your slide deck. I'm just wondering, over the cycle, is that 2/3 of EBITDA into free cash flow a reasonable benchmark? Or has there been a onetime factors over the past year or 2 which has boosted that?

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [53]

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I think the question is where does it -- where do you sit with sort of your operating cash flow and sort of EBITDA. If you think about our CapEx, what we said is we intend to be sort of around $400 million to $450 million a year, that's kind of flattish. So that piece of equation that we're showing doesn't change. Obviously, as the EBITDA and cash flow of the -- of our company, CF, changes, it changes as well for our noncontrolling interest distribution, which is to CHS. And obviously, they own a piece of our biggest subsidiary, CFL, so that's going to move up and down. So what I'd say is it's -- a lot of the pieces are going to move up and down with EBITDA in that equation except for CapEx. So that fixed portion will have a somewhat muting effect on that.

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Operator [54]

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

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [55]

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This is Jeremy on for Vincent. So I wanted to start on the Chinese export, just wanted to circle back on that. Now we've seen some data that suggests that China may even be considering importing urea in the near term. Does the kind of expectation for flat urea exports depend on that dynamic?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [56]

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No. I think that has been a reflection of kind of where market pricing was in Q1. You saw the Qataris move some prilled urea into China into the northern ports I think -- and as well as the Iranian tonnage that has been moved up into the same area and where the preponderance of production is in the South. And so I don't think that's an unreasonable expectation over time that as these inefficient plants to go offline or cost to transport become more market-based that you would see additional imports or incremental imports into China during that Q1 as they're ramping up into their peak consumption season. I think that's a positive for the market.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [57]

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I also think it demonstrates a real commitment on the part of central government around their environmental policy, which is urea production, particularly in China, which it tends to be largely coal based, carries a very large environmental footprint, whether it's scarce water usage, particulate matter emissions and so forth. And I think with the question that they're rightfully asking is, is this something we need to be doing given the toll it's taking on the environment. And I think the answer is no. There's plenty of freely traded urea out there. They're importing soy, they're importing corn, they're importing other things. Why go out of their way to be self-sufficient or excess on urea production when it just carries a big toll. And I think you're seeing a recognition that, that doesn't really make a lot of sense.

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Operator [58]

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Our next question comes from Charles Neivert from Cowen.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [59]

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Just one question. Given the fact that things seem to be delayed and that maybe there's a chance that some of the N that would typically go down pre-plant is going to go -- isn't going to get don't. Does it look like there's going to be a longer-than-normal side-dress season? Or larger than amount of normal product going in on side-dress, and therefore, maybe getting pricing and volume that extends out maybe even into early 3Q this year as opposed to normally sort of ending during the late part of 2Q?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [60]

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Yes, for sure. I mean I think you're spot on. Just because it's not in the pre-plant does not mean that you lose that. You get the post-plant, side-dress, top-dress. The application technology that's available as well as this is why we're aligned with the retail network and why the retail network adds value and why we want to have these relationships with our customers like CHS and GROWMARK and Nutrien and people like that, Helena, that are active in the market dealing with these issues. They can run 24/7 and will and will move from end-to-end to make sure that, that product gets applied and the crops are fed. So I can see us going well into -- not well into but into July for sure. And we normally do with the pivot season in Nebraska and the irrigated acres does go into July. I would bet more of that -- more tons move that direction because of this later application.

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Operator [61]

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Our next question comes from John Roberts from UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [62]

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It's a bit of a tangential question, but does IMO 2020 affect some of the global trade in fertilizers late this year? It's a lot of ocean-going product, obviously, and they've got a sort of time, I guess to switch over in their fuels that's there. So will maybe some shipments occur earlier in the year so they're not the right at the year-end deadline when the shipping companies have to deal with that issue?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [63]

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Go ahead, Bert.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [64]

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Well, we've experienced similar issues with positive train control and the changes that are required legislatively or by government bodies, and this is something that the industry has been watching. I'm not sure if there'll be delays or extensions allowed, but it is a big change going from the bunkering system that we have today and how either vessels are retrofitted or just junked and new vessels are built to accommodate these issues. I think that we -- for us, there's more to come.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [65]

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Okay. You're not hearing anything at this point about maybe doing shipments earlier in the year just to avoid a year-end kind of logistical challenge possibly?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [66]

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No. I mean I think the issue, though, is the industry runs 24/7/365, and so it's hard to kind of "preship" stuff because it's not that you're running on a shift basis and building a bunch of inventory disgorging it. You got to ship it as you produce it, and so there really isn't that kind of opportunity to do that in any meaningful way.

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Operator [67]

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

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Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [68]

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Thanks, everyone, and we forward to speaking with you in the next few weeks. And then we'll see many of you at several conferences over the next month.

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Operator [69]

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