U.S. Markets open in 5 hrs 38 mins

Edited Transcript of CF earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 CF Industries Holdings Inc Earnings Call

DEERFIELD Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bert A. Frost

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

* Dennis P. Kelleher

CF Industries Holdings, Inc. - Senior VP & CFO

* Martin A. Jarosick

CF Industries Holdings, Inc. - VP of IR

* W. Anthony Will

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

================================================================================

Conference Call Participants

================================================================================

* 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

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Harris J. Fein

Crédit Suisse AG, 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

* 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

* P.J. Juvekar

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

* Sean Matthew Gilmartin

Barclays Bank PLC, Research Division - Research Analyst

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

I would now like to turn the presentation over to your host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, please proceed.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and thanks for joining the CF Industries First Half and Second 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 half and second 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 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 first half of 2019, in which we generated adjusted EBITDA of $936 million after taking into account the items detailed in our earnings release. Adjusted EBITDA increased 23% over the first half of 2018 and 63% over 2017. Meanwhile, sales volumes have remained constant at 9.8 million product tons in each of the years 2017, '18, and '19.

Weather impacts significantly the timing of fertilizer applications, often forcing shipments out of 1 quarter and into another, but sales volumes have remained constant over the first halves of the years. This really demonstrates the uniqueness and power of the CF Industries business model that despite the most extreme weather on record and uncertainty in shifting of planted acres by crop type, our first half sales volume has been steady each of the past 3 years ever since our capacity expansion project started up at the end of 2016.

North America has some of the best, most-productive farmland in the world. And it will be planted each year, if at all possible, even in a year like this one. As it is planted, it requires nitrogen fertilizer, the only nondiscretionary nutrient.

This year also demonstrates why quarterly comparisons year-over-year are less meaningful than the comparability of first half results as quarterly volume is impacted by weather but first half volumes remains constant.

Our terrific results were driven by 2 factors, higher year-over-year nitrogen prices and outstanding execution by the CF team. Nitrogen price increases were underpinned by a tightening global supply-demand balance. We also benefited from higher-than-normal in-region premiums due to weather-related logistical issues that limited product supply at some inland locations. Meanwhile, the CF team and network performed exceptionally well during the first half. We set an all-time record for ammonia production. We took advantage of our system's flexibility to favor higher-margin urea production over UAN, leading to all-time record urea production and shipments. And we leveraged our distribution terminals and our logistical capabilities to reliably deliver for customers.

Most importantly, we continued to work safely. Our 12-month rolling recordable incident rate remained at 0.6 incidents per 200,000 work hours despite the high level of activity that included a record 5.7 million product tons shipped during the second quarter.

As we've stated, we believe that we will generate superior free cash flow through the cycle compared to most of our global competitors. As shown on Slides 6 and 7 of our deck, over the last 12 months, our free cash flow was the industry's best at nearly $1 billion.

It is clear that not all EBITDA is created equal. Many of our competitors' cash from operations is consumed back into their business to keep the lights on and the plants running. While we convert a significantly higher percentage of ours into available free cash flow, this efficiency of EBITDA conversion into free cash means that although most industry participants' equity is a valued within a similar band of trading multiples off EBITDA, investors in CF Industries are rewarded with significantly higher free cash flow yield than for any of the other industry competitors.

Why is that important? Because we use that industry-best free cash to increase shareholder accretion in our business as measured by tons of nitrogen capacity per 100,000 shares.

As seen on Slides 9 and 10, over the last 24 months, we have driven approximately 9% accretion for shareholders by investing in attractive growth, returning cash to shareholders through share repurchases and dividends. And we were also able to significantly reduce our outstanding debt levels at the same time. We believe that we are well positioned to build on this track record over the next several years.

As Bert will describe in more detail, there are a number of factors supporting our positive outlook. First, we expect strong nitrogen demand in North America over the next 2 years as farmer economics strongly incent corn plantings.

Second, the forward curve for the North American natural gas remains very attractive compared to the rest of the world. This will continue to provide CF Industries a significant cost advantage, keeping us on the low end of the global cost curve.

And third, we expect global demand growth for nitrogen to outpace net capacity additions over the next 4 years, further tightening the global supply-demand balance. Because of these 3 critical drivers, we see tremendous opportunities ahead for us that will continue to support our generation of substantial free cash flow.

With that, let me turn it over to Bert, who will talk more about how we delivered these strong results and our outlook for next few years. Then Dennis will cover the financial items, before I offer some closing remarks. Bert?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Tony. The first half of 2019 demonstrated the tremendous flexibility of our manufacturing and distribution system and the skill of CF's people. We shipped 9.8 million tons in the first half, including a company record 5.7 million tons in the second quarter, achieved higher prices compared to year ago and ensured our customers received product when and where they needed it.

We're very proud of this performance given an extremely challenging spring application season, historic flooding, disruptive planting, applications and rail and barge transportation in many parts of the United States.

Our focus under these conditions was to be a reliable supplier to our customers. We did this in 3 ways. First, we had strong production at our facilities, including shifting our production mix to favor urea over UAN to capture higher margin opportunities. We also benefited from having inland production sites given the transportation challenges. Our Port Neal, Iowa facility ran very well, which enabled record urea shipments that achieved higher-than-normal premiums to prices in New Orleans.

Second, we've positioned product well at our distribution terminals in advance of the spring season. This was critical to our ability to shipped 1.2 million tons of ammonia, a quarterly record for the company despite a limited window for application. Third, we put transportation flexibility to full use to overcome river closures during the flooding. We procured extra railcars that enabled us to a rail a significant volume of urea from our Donaldsonville, Louisiana facility to Minnesota in order to capture higher margins. We also secured additional barges that allowed us to focus on river terminals along the Ohio River, which remained open through spring. Additionally, we had record levels of truck shipments.

All of this activity continued through July as nutrient applications went much later than normal across the United States. This is why we didn't launch our UAN fill program until earlier this week, the latest we have ever done so.

As we look ahead, we believe that industry fundamentals are very favorable over the next several years. We expect farmers to have a strong price incentive to increase corn planting significantly in the United States over the next several years. We believe that the U.S. will have around 85 million planted corn acres this year, much lower than anticipated heading into 2019. Additionally, late planting will lead to lower yield. As a result, we expect ending corn stocks to be at their lowest levels since 2013. It should take several years of higher corn acres to return to normal ending corn stocks.

Forward curves for North American natural gas continue to be extremely favorable compared to 2018 and to the rest of the world. Natural gas production in the U.S. averaged a record 88 bcf per day during the second quarter, which is almost a 10% increase over the second quarter of 2018, supporting continued low natural gas prices in the region. With Henry Hub forward price curves averaging well below $3 per MMBtu through 2025, we expect our production cost advantage to remain robust for the foreseeable future.

Globally, we anticipate continued strong demand for urea in Brazil and India. We also continue to expect that global demand growth will be above net capacity additions over the next 4 years given the limited number of projects currently under construction, including none in North America.

The flexibility we've built into the CF system served us and our customers well during a challenging spring season. We're looking forward to the rest of the year, continuing to work with our customers and preparing for the strong demand we expect in the years ahead.

With that, let me turn the call over to Dennis.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Bert. In the first half of 2019, the company reported net earnings attributable to common stockholders of $373 million or $1.67 per diluted share. EBITDA was $973 million, and adjusted EBITDA was $936 million.

There are 2 items affecting our first half result that I want to highlight. Our net earnings included an after-tax gain of $35 million recognized during the second quarter on the sale of the company's Pine Bend dry bulk storage facility in Minnesota. Our net earnings also include a previously announced net incentive tax credit of $30 million recognized in the first quarter.

During the first half, net cash provided by operating activities was $693 million, and free cash flow was $453 million. We repurchased about 4.2 million shares for approximately $178 million under our current $1 billion share repurchase program. We also distributed $133 million in dividend payments.

Cash and cash equivalents on the balance sheet at the end of the quarter were $858 million. Since the end of 2018, we've added $176 million of cash to the balance sheet, even as we have returned $311 million to shareholders through share repurchases and dividends. This demonstrates CF's free cash flow power, as Tony described earlier.

Our strong cash generation has provided us the flexibility to repay $500 million in debt on or before its maturity in May of 2020. It has also allowed us to 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 those opportunities, return excess cash to shareholders through dividends and share repurchases.

Capital expenditures for the first half of 2019 were $154 million. For the year, we continue to expect to spend approximately $400 million to $450 million. As we noted in the press release, we expect ammonia production in the third quarter to be somewhat lower than the first and second quarters as we enter the heaviest period of [planned] maintenance for the year.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Dennis. Before we move onto your questions, I want to thank everyone at CF for their great work in the first half of 2019. They put all of the capabilities we've talked about for years into action to enable us to deliver for our customers and to generate strong financial results. Most importantly, they operated safely.

I also want to recognize the team at our Ince, U.K. facility, who won the Stephen R. Wilson Excellence in Safety Award for their innovation that protects people and equipment while servicing high-voltage switchgear.

As I close, I want to offer a special thank you to Dennis Kelleher on his final earnings call with us. As you know, Dennis is retiring from CF on September 1 after 8 successful years as our Chief Financial Officer. Dennis has been a tremendous leader in our company and an invaluable partner to me and to our whole senior team.

As the scale and complexity of our business has grown, he has played a pivotal role in all of our significant initiatives; our major capacity expansions; our capital return program; our M&A transactions; our balance sheet management and navigating some of the most challenging Nitrogen industry conditions in over a decade. We will miss him and wish him continued success.

Dennis, thank you.

--------------------------------------------------------------------------------

Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [7]

--------------------------------------------------------------------------------

Thanks, Tony, appreciate it.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

As we announced, Chris Bohn will be appointed Senior Vice President and Chief Financial Officer. Chris is very familiar to many of you, having led our Manufacturing and Distribution group for the last 3 years, in addition to holding other senior roles in the company since joining CF in 2009. Chris brings deep knowledge of CF and the marketplace to the role and will provide continued strategic leadership as we capitalize on our future opportunities. Chris and Dennis have been working closely together the past several months, and we expect a seamless transition.

CF's future is bright. Our unique and powerful business model has enabled us to generate and return to shareholders nearly $1 billion in free cash flow over the last 12 months. With our structural and operational advantages along with the favorable industry fundamentals we see ahead, we are well positioned to drive substantial cash generation and long-term shareholder value creation in the years ahead.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Adam Samuelson of Goldman Sachs.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I guess, Bert, Tony, Dennis, just interested for just market dynamics as we come out of spring, and what this quarter and the spring kind of have shown about the U.S. marketplace. Thinking about the premium that urea has kind of captured to UAN specifically, you obviously shifted the production pretty sharply towards urea. But still with UAN and some more limited export opportunities, how do you see that marketplace evolving over the next 12 to 24 months?

Do you just see things rebalancing as people who can flex to urea and the nitrate premium returning? Just seems unusual for that to trade at such a sharp discount on a nutrient ton basis for a prolonged period of time.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's interesting you pointed out the market dynamics. And what we've seen over the last several years, those dynamics in play and again, back to the creativity and the flexibility of the CF system. We've seen heavy springs, where we've applied -- and falls where we've applied a lot of ammonia. And the past fertilizer year, being fall to spring, limited ammonia and what was going to happen, and how were those end tons going to make it to the ground.

And so when you look at what we've done and what the market has done when we look to future dynamics, what has shifted these tons has been more weather-driven not necessarily agronomic decision-making driven. And so we're seeing small shifts over time, urea to UAN, UAN to urea. But when they can apply the products, they choose the product that is economically or system advantageous for that producer.

And so that's where you see the balance that we have in our system with all the products that we make, all the markets that we have access to, all the rail lines, pipelines is very good for us. Specifically focusing on UAN and why it is trading at a discount today, and it is, is I think is a reflection of the EU antidumping duties. That has forced additional Russian tons to come to the United States. And during the indecision time, probably additional Trinidadian tons to come to the United States.

And as well as CF, we have focused on building out greater access to the North American market for CF, and that has happened. So we have repatriated more tons to the coastal regions as well as additional tank spacing that we thought would be good for our system where we had holes. And then I think what you're going to see over time is as the Trinidadians have a lower penalty rate, will probably focus more of their tons to the EU, and then we'll see what happens with the market overall. We'll still be active in South America and some of the other areas that we're developing.

So I think right now, it's natural that UAN would trade at a discount to urea. I think over time, as it balances, we'll come back until anticipate UAN to trade at a parity or premium. And the interior spreads that you mentioned, this is something we have articulated year after year that we believed that was something that was structural to the United States and achievable as well as maintainable. And this year, we proved that in spades, where these expansions just went way out, and we profited from that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And Adam, I'd add to that -- kind of what Bert was saying. I think one of the things that the EU antidumping duties did is it led to some globally inefficient behavior. So you've got a set of EU producers that are basically running full, that on a purely economic basis, ought to have been shut down or at least largely curtailed, so that the lower-cost Russian and Trinidadian tons and even our tons could have backfilled into that marketplace.

But sort of the real kind of irony, I guess, on all of this is, what you've seen is UAN prices to the European farmers, in particular the French farmers, has gone through the roof. And UAN pricing in the rest of the world has been relatively maintained. And so what Brussels really did is put a huge tax on the European farmers and turned around and given it to the inefficient European producers, some of which are owned, ironically, by Russian entities.

So they've kind of taxed the French farmers and funneled the money back into the Russian oligarchs' pockets, so it's kind of a weird twist the way that worked. But as Bert said, we've got a lot of different levers to pull, and we're navigating it as best as possible.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Our next question comes from the line of Joel Jackson of BMO Capital Markets.

--------------------------------------------------------------------------------

Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [6]

--------------------------------------------------------------------------------

A question about ammonia. I think that the feeling was, I think, ammonia inventories are higher in the country and so I think the play was to be exporting a lot of ammonia in June into July and August, I guess, exports, higher netbacks -- excuse me, lower netbacks. Your ammonia netbacks were incredible in the quarter, Q2, because of the Midwest inland premiums.

How should we think about that export dynamic? How you're dealing with it and sort of the convergence of maybe some lagging inland premiums but also having the export at lower netbacks?

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [7]

--------------------------------------------------------------------------------

So when we look at ammonia, we look at a balanced portfolio always. And so we're constantly focused on the highest netback, which is our ag business, and you see that we did very well and the team executed extremely well. Part of that is in the preparation of where we place the tons and utilizing our terminals and our logistical capabilities. Part of that was Chris and the plants running extremely well.

And so we were prepared. I'm not sure if our other market participants were as prepared as we were. And so we did execute and did achieve very good netbacks. But look, there is a system. When you look at the total consumption of ammonia per year -- on a fertilizer year, fall to spring, it's around 4 million to 4.4 million tons of ammonia. And from fall, we knew -- know that number was low, and we expect that the spring number was also lower than normal. So there is less -- or there was less ammonia consumed.

And so all of our system that's the inventory that's higher than normal but manageable. And we believe we executed extremely well based on that industrial export ag. And then spot sales during the quarter positioned us to get to fall and then participate in that ammonia season and capitalize on it.

We will be exporting, we have exported, we exported more on a year-to-date basis than last year, and like you said, that's to be expected. But I don't see that significantly higher. And so premiums are good, market is good, and we expect good things for this fall.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I mean I think the other thing I'd add to that Joel is, as Bert said, because the ammonia system ran so well and set an all-time production record in the first half, we're really pleased with the volumes that Bert and the team got down on the ground from an ag perspective because ammonia still represented a great value to farmers compared to the -- on a nutrient basis compared to ammonia or UAN and urea.

But historically, Q3 is always our lowest-volume and typically lowest-priced quarter for ammonia. And then when you get back into the application season in Q4, you see more of that ag business come through again. And so I wouldn't expect that to be anything different this year than it is in every other year. And as Bert said, we've got the right plans in place to be able to manage the inventory.

It also helps that we're entering the period of the year where we've got most planned maintenance and some downtime. And so the combination of some incremental exports, some of the industrial business that we've taken on as well as the planned maintenance, we feel very comfortable with managing the inventory situation.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from the line of Christopher Parkins (sic) [Christopher Parkinson] of Crédit Suisse.

--------------------------------------------------------------------------------

Harris J. Fein, Crédit Suisse AG, Research Division - Research Associate [10]

--------------------------------------------------------------------------------

This is Harris Fein on for Chris. Just given the current energy price stack and construction cost, can you update us on your views on brownfield versus greenfield economics for both U.S. and global players?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I mean I think, what you'd see is in limited locations, it's actually is labor cost and your ability to lock in fixed cost labor is as important if not more so in some cases, than absolute gas cost as you'd expect new capacities to be added where it is being added. So places like Nigeria, Iran and Russia are places where you can actually get fixed labor cost. And in a place like that, current economics if you can get reasonable gas cost and manage with -- manage the political risk situation, I'd expect there to be some level of build in those locations. And I think you've seen kind of that -- those announcements here and there including people like EuroChem and others looking at incremental units.

I think the challenge in North America is that the labor cost because it's on a reimbursable basis and not on a LSTK basis, no one is willing to take that risk is that urea prices would have to rise quite a bit over where they are today for someone to really take a serious run at it. And if anyone's talking about or directionally thinking about it, it just means they're completely inexperienced in terms of dealing with major construction projects over here or just not that financially astute because we just don't see the current price stack as being supportive of new builds here in North America.

By the way, if you find someone that wants to build, we'll sell them a plant for the cost of new construction.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [13]

--------------------------------------------------------------------------------

Sorry, I am still laughing at that.

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [14]

--------------------------------------------------------------------------------

It's a fair offer, Vincent.

--------------------------------------------------------------------------------

Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [15]

--------------------------------------------------------------------------------

I believe it. Anyway, so my question is this, we've seen Chinese exports pick up year-to-date. And on one end, that's a good thing because obviously you needed higher prices in order to get the exports out of the country. But on the other hand, Chinese production is supposed to be declining for environmental reasons and so forth.

So how do you reconcile those 2 things? And do you have any visibility on how much other shadow capacity might be there and sort of what incremental prices would be needed to get it out? Or just in general, how you're thinking about the market?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'll give you the general and then let Bert, kind of, dive into more of the specifics. I think what you're seeing is, based on where coal prices are, we absolutely believe that Chinese coal-based capacity is the marginal production capacity globally, particularly given where gas price is in Europe today.

And so we do think that there is a fair bit of capacity that gets campaigned. And it runs for a portion of the year or runs at slightly below 100 -- or somewhat below 100% rates for portions of the year. And what -- that's why their operating rates, depending upon what publication you look at and what the denominator they use, is somewhere in the 60% to 70% range. So we do think that there is a fair bit of capacity that can turn on and economically, will turn on when it's profitable to export. And so I do know that there's a sort of a bear thesis out there that says upside in pricing is somewhat limited because of this overhang or this shelf-up capacity.

And I'd say, yes, there probably is some truth to that. I don't see urea going back to $450 or $500 anytime soon. I just -- I think that bids in way too many plants in the interim, and people can find a way to make reasonable money as price comes up.

But the price indications from India, from Brazil, from the world in total in terms of the demand side bid in that production in the China, and the world really needed those tons. And I think as our first half results indicate, even if price doesn't go up dramatically, we're very comfortable operating in this sort of environment we can generate a lot of cash.

And I do think our view over the next 4 years is a somewhat tightening S&D balance going forward, which means that we don't see prices retreating versus where they are today. They may not double, but they're not going to retreat.

And so I think the overarching view is, I think China will be there to export when the world demands those tons, it'll be sort of the flywheel that gears up or down depending upon what global demand is. And it's really going to be cost curve-driven because they're much more economically -- or active in the much more economically rational way now. Bert, you got...

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [17]

--------------------------------------------------------------------------------

Yes. Just some key points about that issue is that 5 years ago, where China was producing 71 million, 72 million metric tons to today at 52 million metric tons, they do have a domestic consumption base, which is the largest in the world of approximately 50 million tons -- I would say 48 million to 50 million tons. And so the disposable incremental ton that will be exported has been consistent in the numbers that we've been talking about the last couple of years is 2 million to 3 million tons, and this year, that looks to be 3 million to 3.5 million tons.

So on a global exportable ton of around 45 million metric tons, you're talking about an additional 1 million tons. And so I don't think bear or bull case, it's no fun being a marginal producer, and United States used to be in that position in the early 2000s. And so I don't think they can gear up a system to be a major exporter when it's idle a portion of the year.

And let's not forget that a portion of those tons that are being exported today are Iranian tons. And so many Panamaxes have been loaded in Iran and discharged, and that's a loose word, into China and then reexported or move to -- or reflagged to other locations. And so I'm not sure all of that 3.5 million tons is really Chinese.

And so if that is the case, and let's say 1 million tons of Iranian product has been moved in, then we're still back to that original thesis of 2 million to 2.5 million tons, and that's digestible by the international market.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from the line of Don Carson of Susquehanna.

--------------------------------------------------------------------------------

Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [19]

--------------------------------------------------------------------------------

I just want to go back to the very high in-market premiums we saw this year. I recall seeing you sold some product out the gate at Port Neal for 400 when NOLA was below 300. Does that become headwind next year on pricing along with somewhat lower gas costs offshore? So could you quantify what that in-market premia benefit was to you in EBITDA this year?

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [20]

--------------------------------------------------------------------------------

So we did experience a very nice position in our in-market premium. And what we're seeing over time is, like I said earlier, that premium expands and contracts. And so it has maintained over the years with this new capacity because we're an import market. And you're bidding in tons that have freight and have costs. And so as you have difficulties moving tons or as you have delays or advancement of the season, let's say we have an early season next year, those issues come into play and come into value.

You're exactly right in terms of a tailwind on gas. Gas been as low as $2.15 on -- in Henry Hub. And on a basis wave, that's below -- that's actually very cheap in Canada and in some of the places that we produce like in Oklahoma. So those are tailwinds. I don't necessarily see this issue as a headwind in terms of the in-market premium. I don't think there's something to execute.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I mean I think Don, in that regard, the U.S. remains an import-driven marketplace, and we need to attract still a fairly sizable amount of tonnage coming here, particularly when Bert's team is exporting out of diesel, even requires more tonnage come in this direction. And it's always a question in terms of where those exporting regions go with their tons when they're looking for the best netback. And so the U.S. has to bid those tons away from India, from Brazil, from Europe, from other places in order to get them here and then someone's got to get them into the marketplace. And what we've seen during periods of time, even during fairly, what I'd call, normal operating conditions, is you get some spikiness in market depending upon the particular year in question, and then it has to do with availability of product, when and where people are applying and planting because there's a high urgency factor when they're doing the fieldwork.

And so that's one of the benefits that we have with in-market plants and the distribution network that we've developed, which is we typically can capture some of that when it pops up. It just happened this year. It was a little bit more prolonged. But we've had river issues in the past. We've had rail line embargoes on some of the major rail carriers, other things like that, that have created these kind of opportunities on a more spot basis.

This year, I'd say, it was a little more widespread. But that is kind of the power of our system, which is we can capture that when the opportunities present themselves.

--------------------------------------------------------------------------------

Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [22]

--------------------------------------------------------------------------------

Yes, Don, the other thing I'd add is, you asked about the cost curve. If you think about lower gas price internationally, and let's just focus on LNG in Western Europe. Western Europe is not the marginal producer, and I think that we -- that's proven by the fact that this is taking high prices that we're seeing currently to get tons out of China that are produced by coal people -- coal-based manufacturing. So that really hasn't changed much. And if you looked at our slide on -- in the deck, you'll see that the cost per ton of ammonia, whether it's using a -- whether you're using anthracite coal in China, which is basically the marginal producer today or TTF gas on a forward basis average for the year, we still have a very substantial cost advantage and we expect that to be maintained.

The gas prices we saw earlier in the year in Western Europe like $4 ourselves at our plant gate. I think if you think about it, the Great Britain, the marginal MMBtu being seaborne LNG at $4 plant gate our plants, it's very clear that in that value chain, there are people who are not getting paid. So we don't view those prices as sustainable and if you look at the forward curve, in fact, it rises quite significantly above that.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

And our next question comes from the line of Mark Connelly of Stephens.

--------------------------------------------------------------------------------

Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Tony, a couple of quarters back, you commented about non-U. S. producers making some suboptimal decisions about where they were shipping and international parity. And clearly, since that time, the opportunities into the U.S. haven't been that good. But as things normalize, do you think we're going to continue to see producers favor the U.S. over markets where they might have better economics?

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. Mark, I think in a lot of cases, the U.S. acts as a little bit of a clearing house for some of the tons where there is timing differences between when there's enough inventory for exporters to send it out and where the demand regions actually need to consume it.

So I think that during those shoulder periods, NOLA will probably trade at a bit of a discount to international parity just because there's not that much demand in some of those regions. And then I think there's other times of the year where NOLA's going to trade at parity if not a bit of a premium if there's high demand periods like we saw earlier this year.

I also think the trade flows are realigning a bit better than where we were a couple of years ago. I think there were an awful lot of traders and importers in the U.S. that really lost a lot of money over the last couple of years. And I think you've seen a number of the big names dramatically scale back trading operations and some of that activity in response to that. And I think there's just more discipline because the people in the channel that are taking inventory positions, it's not to their benefit to see prices fall after they've already committed. So I think people are being a little bit more responsible about the volume of tons they're bringing in. And the inland price, back to the earlier comment from Don, it wouldn't surprise me to see a little bit of our a gapping out between inland price and NOLA price just if you end up with NOLA being kind of, again the liquidity clearing house for the world during periods of time.

I don't think you'll see that price necessarily reflected back inland because you don't have the bad behavior that existed before. So I think there's a lot more rationality taking place and that's a good thing.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And our next question comes from the line of Stephen Byrne of Bank of America.

--------------------------------------------------------------------------------

Luke Emerson Washer, BofA Merrill Lynch, Research Division - Research Analyst [27]

--------------------------------------------------------------------------------

This is actually Luke Washer on for Steve. I wanted to touch on the farmer in North America. Did you see a shift in ammonia applications to side-dress this half? And did growers -- do you think growers applied more than normal perhaps due to wet weather in anticipation for some that would be lost? And just general commentary on if you saw any changes in the farmer behavior compared to last year would be appreciated as well.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So regarding North America, yes, we did see a shift to side-dress, and we had ammonia going out into July for side-dress. So the change in behavior was a behavior driven by economics as well as weather and decision-making. There comes a point in time where you have to plant and get your seed in the ground no matter what crop you're planting. And when I states as well as, I guess, even northern corn states are trying to put the seeds in the ground in mid to late June, you better have the nitrogen there and ready to go.

What happened was, they came to the point where you couldn't do a preplant application wait and then plant. They had to get the seeds. So we saw a lot of movement late in June and early July of ammonia as side-dress and once you had emergence. And so did they apply more? No, I don't think so and we can see this from some of our own crop inspections and work with other people and just information on how much N was applied on average in some of the places that we watch. And you're see that hold to historical averages.

The interesting thing for me is going to be yield. That USDA is still projecting a high acre number as well as a much higher yield number than we think is possible. And I still think they're 166, and I think you'll be lucky to be at 160. And it's going to significantly impact the stocks-to-use ratio coming into this harvest season. And so...

--------------------------------------------------------------------------------

Luke Emerson Washer, BofA Merrill Lynch, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

And also harvest today is where -- I mean they're at, what, 91.5 million. Where do you think that's...

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [30]

--------------------------------------------------------------------------------

Our internal number is probably 84 million, 85 million. And so that's what's really still to play. And again, getting back to the nitrogen, what was applied and was taken up by the crop will be represented in yield. And so we'll see. But I don't think more of [oversupply] this year than any other year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I mean the other, I think, point to highlight is, the side-dress of ammonia extending out is not unprecedented. Before we've had kind of late wet springs and you see ammonia application on the side-dress that -- through the I states in particular, that has moved out through June and into July. And as Bert said, if you look at the total amount of nutrient tons that went down, it's more reflective of the kind of numbers that we're thinking about from acreage, not in "overapplication" of nitrogen in any way.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

And our next question comes from the line of Ben Isaacson of the Scotiabank.

--------------------------------------------------------------------------------

Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [33]

--------------------------------------------------------------------------------

Can you hear now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Benjamin Isaacson, Scotiabank Global Banking and Markets, Research Division - MD and Head of Commodity Research [35]

--------------------------------------------------------------------------------

Just a quick question on ammonium nitrate. I noticed your volumes were down year-over-year and everything else was so strong. Was that deliberate? And maybe you can just talk a little bit about how that market is doing right now.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

When you look at ammonium nitrate for CF, we produce in the U.K. as well as at Yazoo City. And so as we talk about flexibility, this is now on the North American side, Yazoo City, Mississippi. The flexibility we have at that specific site is we make agricultural-grade ammonium nitrate, industrial-grade ammonium nitrate, nitric acid, UAN, ammonia and DEF. So that's a very versatile plant for us. And so during this period, we saw some opportunities in some of the other products that we were able to segment and move tons to that direction. The other side is the U.K. assets. We have 2 plants there that are -- that make ammonium nitrate and NPKs. And in that side of the business, we focused less on exports and decided to produce at a different mix. We also make ammonia at that location -- make and sell ammonia at those locations.

And so that was a little bit of the balance change, but not -- I don't think it was a big shift.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, and I actually think first half volume was up, not down. So...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Q2 was down.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So it was Q2 that was down, but overall, it was -- first half was up. And again, we really think about this business in halves, not in quarters. Because I think there's pretty good shipment in Q1.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

When in the U.K., their ag season started [really]

early, so...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Think about halves, not quarters.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from the line of P.J. Juvekar of Citi.

--------------------------------------------------------------------------------

P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [43]

--------------------------------------------------------------------------------

Dennis, first of all, congratulations on your retirement.

--------------------------------------------------------------------------------

Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [44]

--------------------------------------------------------------------------------

Well, thanks.

--------------------------------------------------------------------------------

P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [45]

--------------------------------------------------------------------------------

I have a comment and a question. My comment is, first of all, kudos to you guys for executing in this difficult environment. I mean how did your urea volumes go up? If you have 10 million [prevent] plant acres and supposedly it was so wet that farmers couldn't get the tractors out, all the urea volumes you've sold, do you think all of that was applied on the ground? Or do you think some of it is sitting in some of the bins at distributors?

And then secondly for Tony, with your strong free cash flow, any thoughts on M&A possibilities?

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [46]

--------------------------------------------------------------------------------

So first of all, thanks for the comment. I think the whole team did an outstanding job this spring. And we do well when things are good, but really when it's challenged -- when there are challenges out there, it's when the flexibility of the network really -- and the capability of the people really shine. Bert, do you want to handle the urea, did it go down or inventory question?

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [47]

--------------------------------------------------------------------------------

So in looking at the whole system, obviously, we're up quarter-on-quarter 6 months on 6 months and feel very good about that. Again, it goes back to a lot of the discussion that we had in the prepared remarks and as well as some of this Q&A, the whole issue of preparation.

And when it became apparent to us that the ammonia season would be challenged, we called in extra railcars. We'd already gone to maximum urea. But an interesting side note that we didn't realize was how do you move all that urea just from the plant to the logistical asset, barges, railcars.

And I give the team a lot of credit with coming up creative ways working with ARTCO, our barge, to fleet as well as power enough barges and get extra barging capacity. So we started working on this in April. And with a flooded river or at least the high river at that point slowing barge movement, we focused on getting those barges up into places where we could unload them and not send them up to St. Louis where they -- we thought they would be embargoed and they ended up being so.

But another side note is, we had record truck shipments. So another issue to work with our customers and truck providers, we had urea during the peak of demand. We know some of urea -- our urea went 1,200 miles to meet spot demand. That just means trucks are driving a long distance. We designed the Port Neal facility to load up to 10,000 tons a day by truck and that happened.

So when you take all of these individual movements in the totality as well as building inventory from Q1 to Q2 on purpose, that set us up to be in place and back to how we executed and achieved some of these record-high prices and premiums because we were a supplier that had product and could deliver on time.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And -- but I think, P.J., your question about did it go to ground versus is it sitting in a shed someplace, our experience with UAN, which is the vast majority of product that we shipped out in July was for prompt delivery and application, which is why we didn't launch the UAN fill program until just earlier this week because we were still seeing demand at spring pricing level, indicates that people weren't stuffing this product into bins and tanks because typically, there is a price reset when you leave the application season and moving to the shoulder season.

So all the stuff that we were selling through June and even into July was at spring pricing indicating to us that all of it was going to ground. There was no one that was going to put that stuff into a warehouse because that's a long hold period for relatively firm pricing.

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [49]

--------------------------------------------------------------------------------

Our channel checks for urea and UAN, ours as well as our customers' is low. And we believe that, that's representative, like you just said, Tony, on all this immediate demand. But you just talked about for UAN, it was the same issue for urea. We do think, based on knowledge of barge and barge loadings and -- that there is a high level of P&K in the market but not of urea or UAN, especially on the river.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And P.J., on your second question around free cash flow and how we think about that. We have a very, very high conversion rate of EBITDA into free cash on this asset base, and so it puts a high bar out there for us in the way of acquisitions. Because our focus really is cash flow per share. That's what we want to drive accretion on.

And so are we interested in growth? Absolutely. Are we interested in M&A? Sure. Does it have to be accretive on a cash flow per share since basis after we're all said and done? It absolutely does. So we're looking at things, but if it doesn't pass that test, then we're not going to execute it. And by the way, we've got great other options, which is share price that yields a free cash flow yield that is still 2 to 3x better than anybody else in the space. So I think we've got a long way to go in terms of our own share price, and we don't feel like there's a gun at our head that we have to go and do something that is dilutive.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And our next question comes from the line Duffy Fischer of Barclays.

--------------------------------------------------------------------------------

Sean Matthew Gilmartin, Barclays Bank PLC, Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

This is Sean Gilmartin on for Duffy. Just real quickly, could you maybe give us you take on how we should start thinking about your overall volumes in the back half here in 2019, kind of, given the late start in planting and maybe the potential for a late harvest?

And I know you mentioned kind of your 2019 view on corn acres. And I know Nutrien kind of pegged next year's corn acres around 95 million. Curious, if you had a view there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I mean I think on the, Duffy, (sic) [Sean] on the tonnage, if you just look back the last couple of years, we're sort of between 19 million and 20 million product tons given sort of what the maintenance schedule looks like in the particular product mix. That's not a bad estimate because we basically are -- as long as the plants aren't down for maintenance, they're running 24/7 and over the course of a year, we ship what we make.

So just like the first half of each of the last 3 years where we've been in 9.8 million, the back half has been relatively consistent as well. So I think that's a pretty good guide for what the volumes are going to look like second half.

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [54]

--------------------------------------------------------------------------------

I'm pleased with our order book. I think we're in good position with our products. We are in good position when managing inventories and the production rates. We talked about ammonia being a little high, but we have so many option at our disposal that I agree you, Tony that, that will manage the market demands.

However, I think your point on a late harvest is interesting. I was just in Canada last week and then driving to Michigan and Ohio and did some walks and runs as I'd go through cornfields, and I was shocked at what I saw with knee high to waist high and fields in need of nitrogen and not that many heat degree days left. So the likelihood of having that driven by a frost date, and if we were to have an early frost, you're not going to see maturities and so that product can be cut for silage or just will be a low yielding.

So the latest harvest, it depends on dry down and then how much people want to spend on propane. And so the 2020 acres, we're bullish. I think 95 million is a low end. And I want to give a higher end. But when you look at stocks-to-use ratio, where we are, we're back to 2013-type levels where corn was up to $7. Now corn today is trading in the $4.10 range.

So what could corn go to? I think it's going to go up, but it's going to be -- I think people are waiting to see on these harvest results, acreage results. But it's a positive economic proposition for a farmer today to focus on corn for 2020 and those acres will be available. And especially the acres that weren't planted on the preventive plant or the silage acres, those will be planted early. So you're going to see ammonia going down just, I think, just as we do normally. And if we have a late harvest or dry down, then we'd have ammonia generally always applied in December. That could happen again.

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [55]

--------------------------------------------------------------------------------

I mean I think it's also fair to say that we're probably more bearish on both yield and acres than USDA or in fact than a lot of people are. So to us, that's acres next year. Both corn price where it goes off the board this year after harvest and acres next year are going to be, in our opinion, stronger than where the market's pegging it today.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

And our next question comes from the line of Andrew Wong of RBC Capital Markets.

--------------------------------------------------------------------------------

Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [57]

--------------------------------------------------------------------------------

So I guess just following on to that, sounds like from your commentary, you expect pretty strong nitrogen demand in North America over the next several years, not just next year. And again, it's pretty clear, next year's going to be a really big corn acreage year. But I'm curious about your thoughts on how the crop balance sheet and the pricing changes over the next several years given your confidence on providing some of that guidance so far out?

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [58]

--------------------------------------------------------------------------------

Yes. I mean I think when you look at stocks to use down in the mid-single digits, which is where we believe there -- it's going to end this year, that you need 95-plus million acres just to get back to where you began this year, which is also a relative low. And so we had this year, at least initial intentions, being in sort of 92 million, 93 million acres. And I would expect if next year's 95 million, you're probably back in the 92 million to 93 million the year after because I just think the price signals are there.

I also think we expect ongoing and continued weakness in beans and whether that's because African swine fever culling of the hog population or ongoing kind of trade concerns or just other related issues and also bumper yields and other growing regions on the bean side. I think you end up with very, very strong incentives on certainly a midterm basis -- short and midterm basis for farmers to grow corn.

And so we're -- that really is a backdrop against our bullish view of corn and also nitrogen demand in North America. Bert, you got...

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [59]

--------------------------------------------------------------------------------

No, I agree. I think your numbers are spot on and we're going to see a positive market.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

And our next question comes from the line of John Roberts of UBS.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [61]

--------------------------------------------------------------------------------

Congrats to Dennis as well and also to Christopher.

--------------------------------------------------------------------------------

Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [62]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [63]

--------------------------------------------------------------------------------

I wanted to go back to your earlier comment that prices are not high enough for expansions. Was that directed just toward greenfields since Nutrien announced some small expansions recently. And I would guess your new plants have some pretty low-cost incremental debottleneck opportunities.

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [64]

--------------------------------------------------------------------------------

Yes I mean, clearly what I was talking about, John, with respect to expansions are putting in a whole new ammonia/urea complex, not incremental debottlenecks. Because I think generally speaking, once you've got infrastructure in place, the debottleneck is going to have much favorable economics to building a whole new plant. And it was really, whether it's a greenfield or a brownfield, building a new ammonia plant and then upgrade the facility. But we're certainly evaluating similarly debottleneck opportunities and additional flexibility.

I think this year, in particular, highlights the value of product flexibility and the more leverage Bert can pull in order to manage what the product slate mix look like, the better off our returns are. And given our strong cash flow and ability to invest some of that into some high-return projects that add flexibility to the network, but are still fairly low cost in terms of the scale of a new plant is a great return.

So we're looking at that kind of stuff too. But most of that can be accomplished within the framework of our normal CapEx budget. When we say $400 million to $450 million that includes some growth capital in there. And I think that's a pretty good number for us going forward and gives us some upside in terms of both product mix, flexibility, margin and absolute tonnage.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Our next question comes from the line of Jonas Oxgaard of Bernstein.

--------------------------------------------------------------------------------

Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [66]

--------------------------------------------------------------------------------

Early on, you talked about the economics of new plants and completely agree that, right, the economics for a urea plant doesn't really make sense today. But we've also seen that LNG prices have fallen so much and urea is now the most profitable use of natural gas.

And so a 2-part question. Are you seeing any indications from places like Trinidad that they're going to allocate more natural gas towards urea over LNG, so reversing the trend for the last several years?

And second, what do you think the risk and outlook for places like Iran or Trinidad to sanction urea just to find the least bad version to get rid of -- no, to export their methane?

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [67]

--------------------------------------------------------------------------------

Yes. I mean I think Trinidad in particular has had some challenges with respect to gas availability at the low-cost that they had promised long-term contracts on. And so when most of those Caribbean-based contracts have come for renegotiation, they've been reestablished at fundamentally different kind of profit sharing as well as floor price than initially envisioned. And it's not clear to me that there's enough new gas available in terms of the supply price that they're willing to offer that would incent capacity going into Trinidad.

Again, I think that you're much more likely to see that in the places like Nigeria and Russia and so forth.

Relative to, if there is some sort of a reallocation of the hydrocarbon molecules in some of those region so that they can generate more tax revenue, I think you don't have to look very far to figure out that the returns on urea are far superior to methanol today. And if there was going to be some sort of, as you say, embargo or what not, I think you'd see some rationalization of methanol operating rates in favor of urea.

But there aren't a lot of urea plants in those regions that are sitting idle today. Everything is running full on. So it's really more of a 4-year fix because, you'd to build a new ammonia/urea complex, and that's a long time in the future to be looking at that.

You certainly could go through a methanol cycle but that reverses course in that time horizon. So I don't -- that's not one of those things that we look at and are terribly worried about.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

And our next question comes from the line of Michael Piken of Cleveland Research.

--------------------------------------------------------------------------------

Michael Leith Piken, Cleveland Research Company - Equity Analyst [69]

--------------------------------------------------------------------------------

Just wanted to touch base a little bit on Iran and your expectations for 2019 Iranian exports, I mean they are sending a lot of product into Brazil, we'd heard. So just your thoughts there on how you see the potential for exports trending not just this year but over the next couple of years.

--------------------------------------------------------------------------------

W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [70]

--------------------------------------------------------------------------------

Yes I mean, Michael, I think look, our view has always been that there's too much money at stake for those plants to run -- or not run. But they're going to run and they're going to find some way to get those tons out whether it's send them to China and reexport them, send them direct to India or Brazil and barter, do something in the way of an exchange. Our view is those plants have been running and will continue to run. And I think the only time where you may see any sort of upset in that process is if they go down for maintenance or turnaround issues and are not able to get either technical support or a catalyst or the critical vessels to bring them back online.

And so I think that's really where you might see a pressure point. But that's a little bit longer wavelength. That's not this quarter or next quarter. I wouldn't anticipate. So I think those plants have been running and they continue to run. Bert, do you...

--------------------------------------------------------------------------------

Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [71]

--------------------------------------------------------------------------------

Yes, it's just there have been nefarious behavior. You've seen these tons, as Tony mentioned, for a price people will do certain things and those prices have been below. So they are not very attractive business for the Iranians. But they have been creative in bartering, reflagging, reexporting from China and I do think their tonnage will be lower as a result if these sections continue, but they've been creative so far.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

Ladies and gentlemen, this is all the time we have for question 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 [73]

--------------------------------------------------------------------------------

Thanks, everyone, for joining us, and we look forward to seeing you at the conferences over the next few months.

--------------------------------------------------------------------------------

Operator [74]

--------------------------------------------------------------------------------

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