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Edited Transcript of CF earnings conference call or presentation 2-Aug-18 1:00pm GMT

Q2 2018 CF Industries Holdings Inc Earnings Call

DEERFIELD Aug 13, 2018 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, August 2, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bert A. Frost

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

* Dennis P. Kelleher

CF Industries Holdings, Inc. - Senior VP & CFO

* Martin A. Jarosick

CF Industries Holdings, Inc. - VP of IR

* W. Anthony Will

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

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* Charles Nathan Neivert

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

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior 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

* K. Tong

Stephens Inc., Research Division - Research Associate

* Michael Leith Piken

Cleveland Research Company - Equity Analyst

* Oliver S. Rowe

Scotiabank Global Banking and Markets, Research Division - Associate

* P.J. Juvekar

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

* Robin Fiedler

BMO Capital Markets Equity Research - Associate

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Half and Second Quarter 2018 CF Industries Holdings Earnings Conference Call. My name is Howard. I will be your coordinator for today. (Operator Instructions)

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

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

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Good morning, and thanks for joining the CF Industries 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 2018 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 will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

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

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

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Thanks, Martin, and good morning, everyone. Last night, we posted our financial results for the second quarter and first half of 2018, in which we generated adjusted EBITDA of $468 million and $764 million, respectively. This compares to adjusted EBITDA of $303 million and $575 million for the same periods in 2017. These results reflect both higher global nitrogen prices as well as lower North American natural gas costs.

Our results were also enabled by our unmatched network of plants, terminals and logistics capabilities, which allowed us to effectively move our products in the weather-shortened application period this year. We were able to ship a company record 5.5 million product tons in the second quarter, with almost 4 million tons of that in May and June alone.

As we look ahead to the rest of 2018, we are optimistic. Increased energy costs, particularly for producers in Europe and China have raised and flattened the upper half of the global cost curve, necessitating higher nitrogen prices. Longer term, we expect the global nitrogen supply and demand balance to continue to tighten through at least 2022.

Over the next several years, demand growth should outpace net global capacity additions, as shown on Slide 10. Because it takes roughly 4 years to construct an ammonia-urea complex, it is unlikely that additional plants will come online during this time period, beyond what is already visibly under construction for that.

At the same time, announced closures will offset much of the new capacity if it does come online. In fact, in 2018, the 4.3 million metric tons of nameplate urea capacity coming online is more than offset by the approximately 7 million tons of urea capacity expected to close permanently in Brazil, China and Kuwait. As a result, global nitrogen price recovery is underway. Because we are one of the world's largest producers of nitrogen products and enjoy among the very lowest energy costs, this price recovery should benefit CF Industries disproportionally in the years ahead.

Our outlook for both the second half of 2018 and the longer term is increasingly positive. For these reasons, our board has authorized a $500 million share repurchase program, while we also reaffirm our commitment to repay the remaining notes due in May 2020, on or before their maturity date.

Now let me turn it over to Bert, who will talk about the stronger market environment in more detail, then Dennis will discuss our financial position, before I offer some closing remarks. Bert?

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

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Thanks, Tony. When we spoke in May, we were confident that fertilizer demand delayed by unfavorable weather would fully materialize by the end of the first half. Once farmers got into their fields in May, this is exactly what happened. The technology that farmers use today enables them to catch up on plantings, if there is a late start to the season. Our system is perfectly positioned to support a situation such as this.

We are able to shift production to the most profitable product, store significant amount of product for months and move tons through our network, including exports, to maximize our overall margin. As a result, we were ready this spring when farmers planted 89 million acres of corn in a short amount of time and required fertilizer in a very tight window. We waited for demand to emerge and sold our production and inventories into favorable market conditions.

Prices in North America rose from the lows of early May and our terminals were often the last source of prompt product in many areas. This allowed us to capture solid prices through the end of the spring season and the end of the quarter with low inventories for our system, as we always plan to do.

Entering the third quarter, we are very pleased with our position in the strongest global nitrogen market in the last few years. Energy costs in other region have increased significantly. In Europe, the price of natural gas per MMBtu at the Dutch TTF natural gas hub was 53% higher in June 2018 compared to June 2017, leading to the idling of several plants. The Dutch TTF forward curve suggests continued increases in the price of natural gas in Europe into 2019, which will continue to support global nitrogen prices. The same case holds for Asian LNG.

Chinese producers are facing higher energy costs as well, with the price per metric ton of anthracite coal 32% higher in May 2018 compared to May 2017. Additionally, the enforcement of environmental regulation continues to reduce production. As a result, Chinese urea exports declined dramatically. China exported 710,000 metric tons of urea from January through June 2018, a 74% decrease from the same period in the prior year. This supported urea barge prices at New Orleans at levels well above the unsustainable lows they've reached during the second and third quarters last year. Through the first month of the third quarter, the price of urea at New Orleans has averaged almost $80 per ton higher than July 2017.

Additionally, global demand should maintain a higher floor for global nitrogen prices. We expect strong demand in Brazil through the end of the year as that country makes up for lower imports in the first half of the year, and the closure of the 2 Petrobras nitrogen plants. Providing further support, India closed their urea tender yesterday.

We believe our positive outlook for nitrogen is shared by many of our customers as reflected in the solid order book we have for fall ammonia applications and shipments for UAN and urea. Our successful ammonia and UAN fill program saw the return of some forward buying. All of these indicators point to the most positive nitrogen environment we have operated in for several years.

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

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

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Thank, Bert. In the second quarter of 2018, the company reported net earnings per diluted share of $0.63, EBITDA of $407 million and adjusted EBITDA of $468 million. These results reflect our strong operational performance, higher global nitrogen prices and lower natural gas costs compared to the prior period.

These factors, along with lower interest payments due to our repayment last year of $1.1 billion in debt and our now full ownership of the Verdigris nitrogen complex, drove substantial cash generation in the quarter. Our cash and cash equivalents balance was $728 million as of June 30. Toward the end of July, our cash and cash equivalents balance was around $900 million, as strong demand and higher prices continued into the third quarter.

As the cyclical nitrogen recovery continues, we expect that our cash generation will increase. As we have previously stated, we expect to repay the remaining $500 million of public senior notes on or before the May 2020 maturity date.

In addition, and in line with our long-standing capital allocation philosophy, we're able to begin distributing excess capital to shareholders through the $500 million share repurchase program our Board of Directors has authorized. This will support our goal of increasing shareholder participation in our underlying business as measured by tons of nitrogen capacity per 1,000 shares.

Looking ahead to the end of the year, we continue to expect our capital expenditures to be approximately $400 million to $450 million for new activities. Capital expenditures through the second quarter of 2018 were $145 million.

As we have said previously, we had a higher number of plant turnarounds in 2018 compared to 2017. The majority of our turnaround activity will take place in the third and fourth quarters.

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

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

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Thanks, Dennis. Before we move on to your questions, I want to recognize all of our employees for their outstanding work through the first 6 months of the year. They continue to execute our business exceptionally well. Most importantly, we are operating safely and efficiently. Our 12-month recordable incident rate continues to be well below 0.7, which is also well below industry averages. What's particularly impressive though, is that our employees don't just avoid injuries, they actively work to prevent them through great safety innovations.

We highlight the best of these each year through our Stephen R. Wilson Excellence in Safety Award, and the finalist videos are posted on YouTube. This year our winning facility is the Woodward nitrogen complex. They designed a custom-built fan brake and lockout system to improve the way we stop and control driveshafts for the large fans in our cooling towers. We believe this will improve safety not just at our facilities, where we have more than 100 such fans, but across our industry and other industries as well.

I encourage you to look at the finalist videos as they truly demonstrate the passion our employees have for safety and improvement in the way we work.

CF is well positioned for both the near term and longer term. We continue to operate exceptionally well. We have a cost-advantaged platform and industry fundamentals should continue to strengthen over the next several years. Because of our focused portfolio and our scale, we expect to benefit disproportionately.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of 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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I guess, all my questions centers on the outlook for the industry and the cost curve. Clearly, you're seeing the energy prices rise in Europe and China. I'm just trying to think about some of the changes you've made to announced closures on the urea side. I think you've forecasted about 1.9 million more closures in China this year on the urea side. And also want to think about ammonia, and what that does in Europe to ammonia prices? And how to think about the merchant ammonia market for the balance of the year?

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

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Okay, looking at our outlook, we are pretty clear in terms of what's happening around the world at different supply points with cost of production, whether that be European gas costs being in the $7 to $8 range, coal costs increasing year-on-year as well as the limitations on pollution. We're seeing that today, there was an announcement that came out that China is estimated to be operating at 51%. At that level of operation, that barely supplies the Chinese markets. So the millions of tons that we have seen come out of China over the last several years is likely to continue to decrease to the levels of maybe even less than 1 million tons. And then the other announcements that Tony discussed, Kuwait and Brazil and so all those on the net positive -- or on the net supply and demand position of nitrogen is positive for the market.

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

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The increase in the closures in China is based on additional announcements that have come out since then. So we're just compiling public announcements made by companies and roll those together.

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

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And so your last point on ammonia, as you've seen the market move, whether that be Tampa, Black Sea or Baltic on the values of FOB ammonia have increased month on month and we expect those to continue to roll up or increase as a result of some of these plants that are now offline and -- or buying or importing ammonia to run their upgrades, just on a competitive position and CF has done that ourselves at our U.K. facility, bringing in extra ammonia at a cost lower than we can produce in the U.K.

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

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As Bert said, at $7 to $8 gas, if you're a European producer, you're talking about something well north of $250, probably closer to $300 of cash cost and so it's a tough market out there.

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

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And the only thing -- this is Dennis, sorry. If you think about our outlook, our outlook is, as Tony stated, is for tightening market and also a higher cost curve, as we go into sort of the period sort of now to say the early 2020. And the reason for that is not just the forward curve on the various hydrocarbon inputs that are part of the cost curve, but also some leading indicators. If you haven't read it, I encourage you to read the IEA July 17, 2018 report and what it shows is that if you think about it from an upstream perspective, exploration spending is down significantly, has been for a number of years now. And it's at the lowest point as a percentage of the majors total investment. Greenfield investment in oil and gas is also down. We do see increased spending in shale in North America, primarily in the Permian and that is subject to, obviously, as you know, to steep decline rates. We've also seen onshore brownfield investment increase, but that's mostly by NOCs, national oil companies, and a lot of that is rate acceleration, which means the barrel produced today can't be produced later. Liquefaction investment is down from a high in '14 about $35 billion to $15 billion in 2018 and it's going down and IEA believes that LNG will tighten significantly between now and 2023. And in addition to that, coal mining and washing is down 13% year-on-year '17 to '16, and in China it's down 15%. So as we think about the various elements of the cost curve and we look at these things as leading indicators, that gives us confidence that the sort of the forward pricing terms that we're looking at, while there will still be volatility around those things, our sense is that they will be around a higher structural mean.

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

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Other than in North America, where of course the forward curve is very attractive for us.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [9]

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Yes.

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

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So again, it's really -- it's both the S&D balance in nitrogen and also the global cost position where we sit that give us a lot of confidence about the future.

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Operator [11]

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Next question or comment comes from the line of Chris Parkinson from Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [12]

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So just given the final ramp of some of the UAN capacity in the U.S., can you just talk a little more about how you're projecting the balance for the U.S. UAN market, given the current production mixes as well as your long-term expectations? And then also just any quick update on your international product development efforts, especially in LATAM?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [13]

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Well, looking at UAN capacity, we have seen the plants that were constructed over the last 4, 5 years, ours included, come online and operate fully in 2018. And so as we've talked about 2018, it's been a year of transition. These plants figuring out their new logistical limitations, constraints and opportunities, and I think the balance in the United States, what we've seen is imports have come down from the over 3 million tons and we think that will level off, probably into the 1.5 million ton range or need to. And you've seen CF expand into different markets, out of the need to balance our production going into more the East Coast of the United States, West Coast of the United States as well as, like you mentioned, the international development. And we've been very successful in moving our UAN to South America, Australia, Europe and even Ukraine. And these are markets we have enjoyed developing, and developing not only the relationships, but the supply opportunity for us. And so, as Tony mentioned with our low-cost gas structure, we believe, and obviously the opportunity we have on freight coming out of NOLA, which has been an advantage, it positions us very well. And so in South America, we have been developing. We're the larger supplier in Argentina. We've been spending considerable time in Brazil, Chile, Colombia and Mexico for those markets to help grow, and we believe they will continue to grow, especially Brazil.

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

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And we see what? A couple hundred thousand tons more likely growth next year, in terms of Latin America consumption.

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

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I would say that's conservative.

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

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Yes. So, and it's one of the things Bert and his team have done a tremendous job of, which is really opening up different markets for us. And Chris, because of the question about what else is going on and what we do particularly in Latin America, I just want to bring up one topic that has been sort of talked about a little bit, we have not received formal notification of this yet, but there is a rumor out there that the European Commission is looking at an anti-dumping case relative to UAN imports into Europe. And from our perspective, nitrogen and UAN in particular, it's a global market. We're price-takers like everybody else, and prices are basically set by other nitrogen alternatives. But I think what this really demonstrates is how economically challenging it is for the European producers, given their cost structure. And life is tough in the fourth quartile. They already have a 6.5% protections tariff for imported products, and yet they're still really struggling economically. And this is essentially a move to try to prop up the European producer economics really at the end of the day at the expense of European farmers. And so while the commission may go and do this evaluation, I think it's politically going to be really hard for them to want to go ahead and essentially sponsor kind of increased cost to the farming community, when it's already in the area that requires a fair bit of support and subsidy. And for us, it's -- Europe is not that critical. It represents only about 1% of our EBITDA and because Bert and his team are really developing Latin America and other alternatives for us, we can easily redirect those tons some place else, regardless of what the European Commission may or may not do. Again, this is all a little preemptive, because we haven't received formal notice yet, but I just don't want people freaking out if and when it comes, because we've already got mitigation factors in place. And again, at the end of the day, all that's going to happen here is European farmers are going to have to pay more for their product.

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Operator [17]

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Our next question or comment comes from the line of Michael Piken from Cleveland Research.

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Michael Leith Piken, Cleveland Research Company - Equity Analyst [18]

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Just wanted to delve a little bit deeper into the fill program. I know you mentioned you had successful UAN and ammonia fill, and I know UAN fill came in a little bit earlier. But maybe you could talk about how your forward book looks versus last year. And kind of your strategy going forward, it seems like you might have been able to sell a little more than you did. So any commentary on the fill programs would be good.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [19]

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I think we're -- I don't think actually, I know we're pleased with our fill programs this year and how we executed and how the team performed and worked with our customers to do this in a logical and organized manner. And so each year, the fill programs are different depending on the economic, the economics of fertilizer, the economics of corn and soybeans and what's going on at the farm gate as well as global economic conditions. And the programs start as early as early June and last year, we went in late July. This year we launched on July 9, figuring that was an opportunistic time because of those factors that I earlier articulated aligned and positioned the company well with expectations with our customers. So we put a program out on UAN and it was in terms of overall volume, larger than the previous year, which you have to remember in 2017 and '16, those are both very small years for a fill program, purposely set out that way by CF, because pricing -- or nitrogen pricing during that period was very low and so it was not very attractive for us to put a big program. Roll into 2018 and as I mentioned, urea is at $80 over last year's July posted pricing and UAN in the same vein, we were able to launch at a higher level, received well by our customers. We think it's a good economic opportunity for them as well as ourselves. And so we're pleased with it. And same thing with ammonia. Ammonia was launched in mid-June for fall applications. And we thought that pricing structure was attractive, for fall there are 2 periods of application of ammonia in the United States, November generally and April. And so we wanted to have a portion of our book out for that period and there's still more to be done. And so I think we're well positioned for the latter half or back half of 2018, with ample opportunities to move our product for each of the plants, which is a logistical challenge always. And then we'll see what happens in Q4.

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Operator [20]

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

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [21]

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Just, Bert, can you comment on your overall level of export activity across not just UAN but ammonia and urea as well. And what are the prices relative to what you can realize in the NOLA area? And are you still seeing some of this index-linked imports coming into New Orleans and depressing prices?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [22]

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So the overall export program, we view it as an opportunistic leverage point for our whole complex of operation. And so as we develop relationships in different countries, we're developing relationships in United States and Canada also. The beauty of Donaldsonville is its leverage capability. It's on the pipeline, it's on the water, it's got deepwater docks, it's got rail loading, it's got truck loading. And so exports, as it's currently configured, as we're able to load close to Panamax-size vessels of dry product as well as 40,000 to almost 50,000 tons of UAN. So the total volume is roughly 1.5 million tons of UAN, it looks like for this year, probably 0.5 million tons of urea and then ammonia is also opportunistic as we roll into the fall and see how that goes, if there are better opportunities. But pricing-wise, it's similar to generally better. We were surprised when we went to EFA in June this year and what we were able to transact for what NOLA was pricing, as NOLA has been at a discount, and so if we're able to move product, we are ambivalent to where that product moves. If we can make more money doing exporting product, we will continue to do that. If North America is more attractive, you'll see it -- exports decrease, and that's kind of how we look at it. It's kind of the flywheel to our system.

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

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But I think, Don, that we do see less tons actually showing up in NOLA or some of the other import or on an index basis. I think a number of the mid-Eastern producers sort of recognize that they were leaving money on the table by doing that. And in fact, some of the people doing the import -- importing were not able to realize any kind of price appreciation on the capital that they were putting out for inventory, given the excess amount of tonnage that was coming through. So we are beginning to see, I'd say, more rational behavior out there on the importer side, and that's constructive. My guess is, it will take another 6 months to a year to really shake itself out. But certainly, an improving dynamic.

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Operator [24]

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Our next question or comment comes from the line of Vincent Andrews from Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [25]

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Just looking at your Slide 22 and it's a little different from the one in the last presentation just because you removed '15 and added '22, but there are obviously some other changes as well. In particular, you've already talked about your expectations for '18 closures, but it looks like, in 2019, the expectations for closures is also higher. So could you just address that, is that just public data? Or is that a forecast? And then in -- now '22 is on the slide, it wasn't on the prior slide, so any changes to sort of the cadence of capacity additions in the out-years, things delayed, et cetera?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [26]

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Yes, so what's baked into this chart is really kind of the details on a lot of that is shown on the next page on 23, which kind of gives you the kind of the new global urea plans and then on 24, it shows you kind of what has been the downside in various announcements and filings around shutdown. And so what we've got in here basically is all announced, other than there is one slug in '19 that are based on where those plants sit in the global cost curve and where pricing is. And what we look at is, the amount of volume on plants that are losing more than $25 per ton on just an energy-cost basis and those that are in places where there is pretty rigid enforcement on some of the emissions and environmental standards and that kind of was baked into what that number looks like. So there is firm announcements underlying all but that kind of 2 million tons and that 2 million is based on, again, a pretty rigorous, both economic and kind of environmental political view of what's going on in China.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [27]

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And just as a follow-up, in the second half of the year, I think we're all aware there are some truck issues in Brazil. Are you hearing any reports of sort of the uncertainty around that causing any issues in terms of getting deliveries in-country or just raising cost or changing economics? Any comments about that?

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

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We have. I was in Brazil last month and by my own kind of channel checks and conversations with the people I used to deal with, and -- it's caused a significant amount of angst, cost and disruption, both on the product moving down to port and products moving up -- or fertilizer moving up into the market. So delay again costs and restructuring and that's still to settle out on what the decision point will be on what changes within investment in logistical assets. So I do believe, though, however, that product will be delivered and it will exceed the tonnage that was shipped last year and consumed. But it's going to be hundreds of millions of dollars that will be wasted.

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Operator [29]

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Our next question or comment comes from the line of Ben Isaacson from Scotiabank.

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Oliver S. Rowe, Scotiabank Global Banking and Markets, Research Division - Associate [30]

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It's Oliver Rowe, on for Ben. So it sounds like once you pay back the next $500 million of debt, you'll be at your target leverage. Is it all buybacks from there, or do you think there is still opportunities in nitrogen, call it, consolidation that you can take advantage of?

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

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Well, I mean, as we've talked about, I do think the industry is going to continue to go through waves of consolidation. It's one of the ways to drive efficiency into the supply chain and at the end of the day, that's good for all market participants, including farmers. It's interesting that you asked that because as we look at it, we are continuing to invest in what we view as the best fleet of nitrogen assets out there, by virtue of our share repurchase program. And we think about it kind of as $1 billion of capital that's been allocated and half of that is going towards share repurchase and half of it's going towards the debt repayment. But as you say, once the 2020s are gone, we feel like we've gotten the balance sheet to a place that is efficient and sustainable. And so we'll see what comes along. But right now, our best investment is in our own shares and we're excited about it. As Dennis mentioned, we closed the month of July with about $900 million of cash on the balance sheet and we feel like we're in a really good position to be able to go out and invest in our own shares.

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

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Yes, and I think the other thing on the share repurchases to point out to people on the credit side is that the shares come with roughly about less right now of 3% yield. So all the shares that we do take out, pursuant to share repurchase program, also have the effect of reducing fixed charges and increasing our funds flow. So I think the actions that we've talked about today, obviously, reaffirming one, announcing another book. Both of those things, I think, are credit positive.

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Operator [33]

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

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [34]

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Tony, if U.S. shale gas advantage continues, why shouldn't we expect a second wave of urea or nitrogen plants similar to ethylene? I mean U.S. is still a net importer of urea and should a low-cost region be a net importer?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [35]

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Yes, I mean, I think the issue really comes down to one of what is the economics associated with the cost of building a new plant and what is your expected return profile on that incremental capital that you're putting to -- into play. And the analysis that we've done sort of suggests that $2 per MMBtu of cost advantage can cover about $250 million of CapEx. But what you see in North America is that -- because you cannot get LSTK lump-sum contracts on the construction side, typically, the cost to build the North America is well more than $250 million and in some cases, it could be $400 million to $500 million to $600 million of incremental costs. And so at some level, even if gas is almost free, it's really hard to want to build new plants here, because the labor cost is so high and so unpredictable. And so our expectation is, like you see going on, Russia, Nigeria, Iran, places that you can much better control what your capital costs are and still have access to low-cost gas, albeit, you're biting off a fair bit of political risk, are the likely places where you're going to see capacity added going forward. But also, I mean, it's great to have assets here, but it's tough to want to build new ones. I think this is the way that I would think about it.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [36]

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Okay. I'll follow up with you on that offline. Secondly, what are your expectations for Chinese exports in the second half? Do you see slightly more exports in the second half? And longer term, do you think China will become a net importer of urea?

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

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I mean, I think, for China to become a net importer is sort of in some ways more optimistic than what we are planning on. We think that China exporting somewhere in the neighborhood of 1 million to 2 million tons a year leaves them a very reliable and much healthier kind of internal industry and it also means that they're kind of self-sufficient. And so I wouldn't expect exports in the back half of the year to look dramatically different than the front half of the year. I think we're seeing kind of behavior out of China that's very consistent with a position that central government has taken with respect to closing down excess capacities on the industries, with respect to trying to put some real teeth in terms of environmental regulation and emissions reductions and trying to have a sustainable and viable kind of coal industry and power industry. And I think all of those things are -- continue to be demonstrated by the actions that they're taken, and there's nothing there that we've seen as being inconsistent.

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Operator [38]

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Our next question or comment comes from the line of Andrew Wong from RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [39]

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So as you've highlighted, energy prices definitely have supported higher cost curve and looking at what happened last year during the winter months, we saw LNG and euro nat gas prices spike up, which I think could potentially happen again this year. So we didn't see a cost curve that you publish this quarter, which is understandable, given all the moving parts. But I'm just wondering, what's your view on the cost curve range for urea prices this year? And maybe what's the normalized price range, given today's energy environment?

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

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Yes, Andrew, we typically only do kind of one cost curve a year. Because as you point out, it's very much a moment in time view forward and as currencies change as oil and energy costs change, coal costs change, it moves all over the place. And we will be forever publishing and then only to find that the day later it's out of date already. But as you said, or as we talked about, the higher energy deck, and in particular, the higher forward curve going forward, as we put forward on Slide 13 in our materials, sort of portend a much higher global cost curve. And the way we think about the curve is that on kind of energy costs that we see around the globe that somewhere in the kind of $250 million to $290 million range is pretty much what's required in order to keep the total capacity operating that the world is demanding. And so the prices that are being exhibited today in terms of what India was able to close their tender at, which was pretty close to $275 million, prices in NOLA are all consistent with that. We think the world actually is operating in a pretty rational range right now, vis a vis the cost curves.

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Operator [41]

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Our next question or comment 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 [42]

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I think the North American crop may mature a little bit early this year, which may give a little wider window for ammonia applications in the fall. Do you expect a larger-than-normal seasonal shift to ammonia this fall? And would that actually be a good mix shift for you?

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [43]

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We do expect the crop to come off. Both beans and corn are maturing early and that will give us extra time for fieldwork and position ammonia application as early as late October, if the weather and temperatures cooperate. And so on the value spread today that we project between fall and spring, and what is available, I would expect that those who are focused on those issues, which should be every farmer, would be encouraged to apply fall application ammonia. So we're positive on that.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [44]

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And the good news really, John, for us is, we're well positioned to capitalize on a fall application run. And if weather doesn't cooperate from the standpoint of making it conducive to put it down, then we're well positioned to take advantage of the increased demand come spring. So we feel pretty good about our distribution network and the optionality that we have there.

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Operator [45]

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Our next question or comment comes from the line of Stephen Byrne from Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [46]

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You have this global nitrogen demand buildup chart on Slide 12 that's very interesting. I'd like to hear your views on, what you think is going on in China that has led to kind of moderation or even a contraction in their demand? Do you think that is any acreage shifting? Or more just prudent use of nitrogen there?

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

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Go ahead.

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Bert A. Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [48]

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I think you're seeing a combination of both. I think what's happening in China is, you have to remember 50% of their urea demand is used in fruits and vegetables. And it's a smaller percentage used in corn, as in United States, where obviously heavily driven by corn, then wheat, then cotton. And so in terms of demand, that's where I would expect you're seeing some drop-off.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [49]

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Yes, and I do think, Steve, that there has been a real push towards being a little more efficient and appropriate in terms of application rates in China and that's why as we look forward in terms of what the aggregate demand profile looks like, it really is at the end of the day being driven by a combination of global population increase. Protein consumption per capita is continuing to go up, particularly in parts of the developing world. And you've got global GDP that is really driving the industrial use. So we feel very comfortable in terms of the sustainable and consistent demand growth, that kind of underpins our view of what is driving the tightening on the S&D side of nitrogen. And its borne out sort of over a pretty long time horizon here that, while there is a little bit of volatility, the numbers continue just to march forward.

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Operator [50]

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Our next question or comment comes from the line of Mark Connelly from Stephens Incorporated.

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K. Tong, Stephens Inc., Research Division - Research Associate [51]

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This is Joan Tong for Mark Connelly. First question is on hedges. As you guys -- the hedges are running off. I'm just wondering, if you're considering any further changes in your hedging strategies.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [52]

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We're really pleased to be kind of spot buyers of North American natural gas. I think what's been demonstrated is the don't bet against the technology innovation of the people doing E&P and the fact that we're able to really take advantage, particularly in some of the in-market basin, SCOOP/STACK and the Permian and so forth are -- is tremendous. So we're really comfortable in North America being kind of spot buyers. I will say we do think about basis differentials off of Henry Hub, and once in a while, we'll take advantage of what we think is an appropriate basis differential, but that's not hedging the underlying molecules, that's just locking in the spread. We may think about Europe as being in a little bit different quadrant than North America because they are sort of chronically gas short and there's much more volatility to the upside there. And so we've thought about, at points in time, does it make sense to lock some of our European gas for the U.K. The problem is the forward curve is pretty unattractive right now. And so we haven't done that, but I think philosophically, we're in the same spot relative to North America, which is it's great to be a buyer of North American gas.

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Operator [53]

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

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [54]

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First, with your commitment to safety, I'm somewhat surprised to see Slide 18, that ergonomic setup does not look safe to me. But you need to give him a higher chair.

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

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We'll work on that. I think they're height adjustable, maybe just like the Sitwell, but we'll work on that.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [56]

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That said, I was wondering, we've seen the closure of the Kuwaiti plant earlier this month. We're expecting the Brazilian ones later this year. Are there possibilities of other plants outside of China closing like this? With gas availability, I would never have thought that, that would be a reason to close a urea plant in 2018, but here we are. So as a follow-up on that, is there an opportunity for you guys to go in and buy those decommissioned plants for cheap and keep them on standby in case there is another upcycle at some point in the distant future?

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

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So Jonas, there are a couple of other plants that have had some real problems, including the -- around CFT-2000 plants, which Coke has a big position in, in Trinidad. They were offline for several months because they were -- inability to get an appropriate gas contract with NGC in Trinidad. You've also seen, while it's not directly in our business, but Proman also in Trinidad is taking down one of their methanol lines. And I think any of the Trinidadian operators that have gas contracts that are expiring are facing real problems in terms of being able to secure supply at a level that allows them to even make enough cash to conduct turnaround activities. Our interest in terms of buying some of these real marginal plants that already have been capital starved in other parts of the world is pretty low. I'd rather take that cash and deploy it against share repurchases instead. But as we look around the world, there are other geographies that are really challenged and again it's because they have been kind of starving the plants of capital and running on fumes. And the profitability is really toughened on, including places like Croatia and Romania. And I think the sanctions in Iran are creating some challenges too. So Siemens has closed their offices there and moved everybody out. Their ability to get technical expertise for commissioning or maintenance activities, availability of spare parts means that over time we would expect there to be, from an operating rig perspective, some real challenges there. So I think, again, just stepping back, big picture, it really is helping to drive our optimism around kind of the intermediate term here.

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Dennis P. Kelleher, CF Industries Holdings, Inc. - Senior VP & CFO [58]

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Yes, I think, Jonas, what I would add to that is, as we look around the world and think about opportunities, we think strategically about the source of supply for feedstock and what we look at is, is the feedstock there. If it's not there, is the investment going into put it there, if it's missing? And if that investment is going in, what's the finding and development cost per MMBtu or the lifting costs and therefore, what does that portend for a potential gas price into a facility. So we look at all those things and I would just echo what Tony says, it's really good -- it's good to be us and good to be here.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [59]

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And the one other thing that I'll point out is if you look at on a global basis, kind of announced turnarounds, this is a record summer for the amount of global capacity that's coming offline. And I think that also really helps support our view of the second half of 2018, which is just that there's not going to be the material that's floating around out there. And we see a very constructive price environment going forward.

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Operator [60]

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

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Robin Fiedler, BMO Capital Markets Equity Research - Associate [61]

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This is Robin, on for Joel. You mentioned that you expect higher number of turnarounds this year versus last. Can you give us an idea of how many turnarounds have already occurred in the first half and maybe if you can break down split for turnarounds in Q3 and Q4?

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [62]

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Yes, we typically don't give that information. And to be honest, I'm not going to start now. We -- our operating rate in the first half of the year was consistent with our production in the first half of last year. And we did say, we're having more turnarounds and those are really second half events. At the end of the day, we expect our aggregate production to be within about a couple of percentage points of where we were last year from the total tonnage standpoint. So we're not talking about huge numbers. But we -- as we talked about in the first quarter, given the weather-delayed application that was going on and the fact that first quarter volumes were low, we pretty much sell what we make and we run the plants 24/7, 365 to the extent that we can. And that really came good in the second quarter. So that's why we think about it as the first half results as opposed to just second quarter, you've got to understand kind of what opportunity weather gave you in the first quarter versus not. And so think about the second half of the year as being we're going to, again, pretty much try to sell what we make and we'll be within a couple of percent of aggregate volumes of last year.

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Robin Fiedler, BMO Capital Markets Equity Research - Associate [63]

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All right. And then just lastly, should we expect concurrent buybacks as the 2020s are repaid? Or will you wait until after that's done?

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

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I don't know that I would necessarily think about those as being one-for-one concurrence. I think we've given ourselves some flexibility in terms of how we allocate it. But if we're -- when we pay back the 2020s, there is a make-whole associated with them, where we're effectively paying for the use of that money anyway. The difference between leaving them outstanding and paying them early is pretty trivial. So given the fact that we're effectively paying for the use of that money, I'd rather take out shares. Because taking out the shares does, as Dennis mentioned, lower our fixed charges based on the dividend yield, whereas paying the bonds early, that cash is going out the door in the form of the make whole. So no, I would not expect it to be ratable one for one.

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Operator [65]

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Our next question or comment comes from the line of Charles Neivert from Cowen.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [66]

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Just a quick question on the summer fill. The amount of tonnage you guys did into the fill programs for the fall, how much of the third quarter is sort of already taken care of? And how much do you still have to sell, so to speak, in percentage terms or tonnage terms, whatever you -- -- however you care to answer it? Sort of how much forward are you guys at this point?

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

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Yes, so we generally don't give that information out in terms of our book, and we're generally either positive or negative in terms of our communication. And so I'd just to reiterate we believe the program was very positive. It went out at the price level that we had targeted and we are able to position each plant in good shape, in terms of logistically and what they're able to: one, operate; two, move; and three, then leverage our terminals. And so for each, ammonia, urea and UAN, I think we're solid through Q3 and then we'll take a look at how we roll forward for the back half of the year and close out the year.

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W. Anthony Will, CF Industries Holdings, Inc. - President, CEO & Director [68]

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I mean, Charlie, the other thing I'd say is, obviously, if you look at what pricing is this year compared to last, it's well up and there was good appetite on the part of buyers. But Bert has been judicious in terms of the appropriate amount of books to build that gives us a lot of operating flexibility and yet leaving us enough gas in the tank to take advantage of opportunities as the balance of the year develops. So we're really comfortable with kind of how all of that's been positioned. And again, that's part of what has driven our authorization to do the share buybacks beginning now just because we were feeling really comfortable about this year and the longer term.

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Operator [69]

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

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Martin A. Jarosick, CF Industries Holdings, Inc. - VP of IR [70]

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Thanks, everyone, for joining us on the call. And if you have any additional questions, feel free to reach out to me.

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Operator [71]

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