CF Industries Holdings, Inc.

Q1 2021 Earnings Conference Call

5/6/2021

spk09: Good day, ladies and gentlemen, and welcome to the first quarter 2021 CF Industries Holdings Earnings Conference Call. My name is Faith. I will be your coordinator for today. At this time, all participants are in the listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. To pose a question at any time, please press star 1 on your touchtone telephone keypad. If at any time during this call you require assistance, please press star 0 and a coordinator will be happy to assist you. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosik with CF Investor Relations. Sir, please proceed.
spk07: Good morning, and thanks for joining the CF Industries First Quarter 2021 Earnings Conference Call. I'm Martin Jarosik, Vice President, Investor Relations. With me today are Tony Will, CEO, Chris Bone, CFO, and Bert Frost, Senior Vice President of Sales, Market Development, and Supply Chain. CF Industries reported its first quarter 2021 results yesterday afternoon. On this call, we'll review these 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 your 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.
spk08: Tony Will Thanks, Spartan, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first quarter of 2021, in which we generated adjusted EBITDA of $398 million. These results are really the story of nitrogen prices that increased throughout the quarter, somewhat offset due to lower production and corresponding sales volumes. There were a lot of other things happening during the quarter, such as winter weather driving up LNG demand and corresponding gas prices, and one very large winter storm event in the U.S. But if you take all of these impacts together, they roughly offset each other. Let me provide a bit of color on our response to these events but I'd like to refer you to slide six and seven in our posted materials. Back in February, leading into President's Day weekend, an extreme winter storm hit the U.S. Gas suppliers into several of our locations curtailed gas deliveries, and we were informed that we would likely face force majeure hard shutdowns. Our team mobilized quickly, discussed various options, and decided on the following course of action. Given we were facing the loss of gas delivery into our plants and would be shut down anyway, we opted to effectively sell the gas we had contracted for back to our suppliers by net settling our gas delivery contracts at prevailing market prices. We also reduced operating rates to minimum levels at some plants that were still receiving gas and sold the excess gas above those minimum levels back to suppliers. The result was a gain on sale of gas of $112 million. Slide 6 provides some details of how we mitigate gas price risk and how the February storm affected gas prices. However, there were pretty significant impacts to our operations as a result of the shutdowns and freeze-offs. We experienced some prolonged outages and increased maintenance expense, including fixed cost write-offs as a result of the abrupt disruption and extreme cold. And, of course, gas price rose for that portion of our gas that was not hedged. Because we lost a fair bit of production, we chose to go into the market and purchase urea barges so that we could meet existing customer commitments, which also cost us a small amount. The net result of all of this is shown on slide seven of our materials. Net-net, our sale of gas mitigated our increased costs, so we came out of it basically even. Now, we did lose production and the corresponding positive margins we would have received, so the full picture was a net loss for us, but at least we recovered our out-of-pocket costs. Hopefully that provides some context for the big, unusual moving pieces. Even with all the challenges we faced in the quarter, we feel very positive about where we are at at this point of the year. We had solid results, and BERT is now going to take you through the two main factors of why we are so bullish. First, coarse grain stocks-to-use ratios are extremely low, meaning we expect grain prices to remain strong through several growing cycles and farmers are incented to maximize yield, driving increased demand for nitrogen. Second, global energy spreads have continued to widen, such that production costs for Eastern European plants are actually higher than China now. meaning the nitrogen cost curve is not only steeper, but substantially wider for fourth quartile producers. Therefore, nitrogen pricing is expected to remain quite strong. With that, let me turn it over to Bert.
spk13: Thanks, Tony. As we look at the first quarter and into the foreseeable future, we believe that the positive conditions in the global nitrogen market are likely to prove resilient for some time. Since late 2020, global commodity crop prices have been rising steadily. driving strong nitrogen demand. Global urea prices rose alongside this demand, and prices for other nitrogen products followed. Our team did a good job of capturing these opportunities in the first quarter, especially as they dealt with the impact of the severe winter weather on our production volumes. I will note, however, that our UAN segment results do not fully reflect the positive environment at hand. We continue to face challenges there from subsidized Russian UAN imports that have depressed prices in North America. Coming out of the first quarter, the spring application season in North America has progressed very well. Nitrogen prices have remained high, demand is strong, and supply is tighter than the market expected. As we look further out, positive agricultural fundamentals are setting up an extended period of strong margins across the entire value chain. Strong global demand for all major commodity crops has resulted in low stocks-to-use ratios and higher commodity crop prices. Given where those ratios are, as well as the continued robust demand for commodity crops, we do not believe stocks will be replenished in just one growing season. In fact, if you look back to the last time we had stocks with use ratios this low, it took several growing seasons to recover, as you can see on slide 9. As global stocks recover slowly, commodity crop prices should remain higher for some time, supporting strong financial conditions for all aspects of the channel. from producers to wholesalers to retailers to farmers to grain originators to grain processors and protein. We believe this will underpin heightened demand for nitrogen into next year and likely beyond. CF is well positioned for this opportunity due to an increasingly favorable global energy pricing environment. As you can see on slide 10, energy costs in Europe and Asia have both dramatically increased from the lows of last year and returned to sizable differentials compared to Henry Hub prices. This has steepened the global cost curve significantly. Additionally, with European natural gas at around $9 per mm BTU today, and the outlook from the forward curves, we expect that Eastern European producers will act as a marginal producer in the near term. These conditions have created a very positive environment for the company. A steeper global cost curve increases margin opportunities for low-cost producers, such as CF. We also expect their traditional nitrogen price reset in the third quarter will be at levels well above the last few years. We are operating in the most favorable environment we've seen in many years, and we believe this will have a relatively long tail. We expect that the need to rebuild global stocks will persist at least through next year, resulting in strong economics across the agricultural value chain and robust global nitrogen demand. At the same time, Forward curves suggest CF will benefit from favorable energy differentials for the foreseeable future. As a result, we believe this will have a tremendous opportunity ahead of us as we leverage our manufacturing, distribution, and logistics capabilities to deliver for our customers. With that, let me turn the call over to Chris.
spk12: Thanks, Bert. For the first quarter of 2021, the company reported net earnings attributable to common stockholders of $151 million, or $0.70 per diluted share. EBITDA and adjusted EBITDA were $398 million. The trailing 12 months net cash provided by operating activities was approximately $1.5 billion, and pre-cash flow was approximately $1.1 billion. These results reflect generally higher year-over-year prices, partially offset by lower year-over-year volumes and higher realized natural gas prices. They also reflect how we offset the challenges we faced in the first quarter through management actions. As Bert described, the nitrogen pricing outlook through the rest of the year is very favorable in comparison to last year. Partially offsetting this benefit will be a number of factors. We expect gross ammonia production to be around 9.5 to 10 million tons, compared to 10.4 million tons last year. This reflects the impact of the planned turnaround activities and the production we lost due to the weather. This level of production, along with lower inventories to start the year, will likely result in the company selling between 19 and 19.5 million product tons this year, compared to over 20 million product tons last year. We also expect our natural gas costs will be higher compared to last year. Based on forward we would expect our average MMBTU price at the end of the year to be similar to 2018 or 2019. Finally, we anticipate that our capital expenditures for this year will be in the range of $450 million. This will be much closer to our capital expenditures in 2018 and 2019, reflecting a return to normal level of planned maintenance and turnaround activities. That said, the positive nitrogen industry conditions we have described should support expanded margins for the company compared to 2020, driving significant free cash flow this year. We will continue to invest in growth in line with our clean energy strategy. The recent announcement of our partnership with ThyssenKrupp on our Donaldsonville green ammonia project was an important step forward in our efforts. The cost of this project fits within our typical annual capital expenditure budget. We also continue to advance discussions with other potential partners for green and blue ammonia, validating the broad opportunities we believe will be available in the future. In March, we repaid the $250 million remaining on our senior secured notes that were due in December. As we remain focused on investment grade and positioning the company to execute our clean energy growth strategy, we'll continue to evaluate opportunities to further reduce growth debt over time. We will continue to return cash to our shareholders through our quarterly dividend and opportunistic share repurchases at attractive levels. With that, Tony will provide some closing remarks before we open the call to Q&A.
spk08: Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF for their fantastic efforts during the quarter, especially at a time when many of our employees were still working remotely. I am particularly proud of our teamwork and collaboration critical thinking, and data-driven decision making, and our agility at recognizing and capitalizing on disruptions in the market. We are very optimistic about where the company is positioned. We believe our first half results will be strong, and our outlook for the remainder of this year and into next year is very positive. Nitrogen industry dynamics for producers in North America are the most favorable we've seen in years. This, along with the progress we are making on our clean energy growth strategy, positions us well to create shareholder value in the near and longer term. With that, operator, we will now open the call to your questions.
spk09: Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a courtesy to others on the call, we ask that you limit yourself to one question. Should you have additional questions, we ask that you re-enter the queue, and we will answer additional questions as time allows. Your next question is from Joel Jackson from BMO. Your line is open.
spk03: Good morning, everyone. Tony, I know you don't really give guidance, It would seem like Q2 is setting up extremely well when you think about order book lags and where nitrogen prices have trended across the quarter, Q1 into Q2. Can you give us a little bit of color on how good Q2 could look versus Q1? Could we see 50% higher earnings in Q2 versus Q1? Any color you can add would be really helpful to understand how well stronger prices are falling into your P&L.
spk08: Yeah, Joel, as you mentioned, I'm not going to give real firm guidance, but just a little bit of color here. Gas prices behaving itself in North America, so our cost structure is kind of where we expect it to be, and gas prices internationally have really blown out. So the TTF price in Europe, the JKM price in Asia – It's very high, so to bid production into the marketplace in those regions requires strong nitrogen pricing, and that not only sets up really well for Q2, but I would anticipate that that's going to be – and Bert's going to get into this, I'm sure, later – that's going to mean that the reset in terms of what our fill program is, our expectation is that'll be quite a bit higher than it's been in recent years. I don't think this ends at Q2. I think we've got a really strong rest of the year in front of us. And, in fact, based on, you know, as Bert talked about, the stocks-to-use ratio and it taking more than one growing season to recover, we think this is at least into 2022, if not beyond. So we're really excited about it.
spk09: Your next question is from John Roberts from USB. Your line is open.
spk11: Thanks. Could you discuss the UAN results? It looked like there was something unusual that happened there.
spk13: No, I think it's a reflection of several things like I articulated in the prepared remarks. We have had an influx of low-cost subsidized Russian UAN consistently, and that's pressured obviously all of the importing regions, which is East Coast, Gulf Coast, and West Coast. And then I think you have to remember we're coming out of a pandemic. And when we were in 2020, it was a risk-off market for globally. And so you saw low prices in different regions and an inability or not a desire to maybe to purchase at first. And so we You know, we had a low-priced environment in Q3, Q4, and into Q1. And in our situation, I think, as well as others, you know, you have logistical assets that move as well as plant production, even with the disruptions that you have to keep moving. And so we always have a forward book on. The prices started moving up for UAN mid-Q1. And so you're not going to have an immediate price realization anyway. And so we expect to see more of that in Q2. And then, as Tony mentioned, the reset will be at a different level than it has been, and we expect that to be very positive. So more things or better things to come, we think. And, you know, we're watching all the variables and keeping our focus on that.
spk12: This is Chris, John. The other thing I would add is in the UAN, segment there. It's a little misleading, the gross margin there, because the items that Tony spoke about, the natural gas settlement was booked all to ammonia, where those higher maintenance costs and fixed cost write-offs were against all the product lines. So if you adjust sort of that out, you're closer to something that's more similar to what it was last year during Q1.
spk11: That's helpful. And then could you discuss the competition between the industrial markets and the agricultural markets for ammonia because you've got industrial recovering here at the same time?
spk13: Yeah, so I think industrial caught up. We had lost our spring program in December, and then prices moved up also in Q1. And so we have a fairly attractive Q2 application season, not only volumetrically, but you're right, prices improved. And I think that's going to reflect well for the fall. Fall application takes place in November, and we would project today, based on corn prices and availability, that that price will be very attractive. On the industrial side, that's a reflection of globally, and really for all the products, urea, UAN, ammonium nitrate, and ammonia, we have a very tight market. And as Tony articulated, driven by energy cost differentials, high-cost producers, it has been attractive to import and buy and decrease or even stop that production of ammonia. That quickly tightened up the global ammonia market in the Baltics, blacks, as well as in Tampa. And you've seen prices move up to above $500. It's been many, many years since we've been at that level. You have healthy margins on the phosphate side, so the phosphate producers are trying to acquire enough ammonia for their operations. And then you've got a recovery economically, which has driven the industrial demand for synthetic fibers in different areas along the Gulf Coast as well as globally. You're going to see a tight ammonia market through this year and probably into next. And I think you're right. The competition for that time, there's a portion of our book that's consistent with industrial demand. and then we normally get a better margin uplift from ag, but we'll be watching that and moving appropriately or as necessary to capture that opportunity.
spk09: Your next question is from Adam Samuelson from Goldman Sachs. Your line is open.
spk16: Yeah, thanks. Good morning, everyone. So maybe, Bert, to your point on the cost curve, it has deepened pretty materially. I'm trying to think, one, With $9 Eastern European gas, how do you think about that kind of helping set a floor price at NOLA? It's below where it is now, but it's well above where it's been the last couple of years, I'd imagine. And against that, how do I think about the ammonia and UAN kind of end values? It seems like those spreads versus the urea end value have returned to more normal levels here in the last couple of months. where they've been pretty depressed for the last couple of years, and I'm just trying to think about how you think about that going forward.
spk13: Yeah, so your question on setting a floor at NOLA, I would kind of take it to a global. It sets a global floor, and you're going to see that in the, we've already seen it, the India tender that was open this morning or yesterday, and the prices that reflect probably an AG number of 320 to 330 a metric ton FOB, and you have significant amount of demand that needs to be covered without heavy inventories globally. So coupled with expensive or high-cost producers now having an inability to export or participate in the export market, low inventory levels globally, a need for Brazil and India to consistently be in the market and purchase from this point forward, and then you'll get into, you know, our season will pick up later on in the year, you have a very good platform for a very healthy floor level, probably higher than what people are anticipating. And then if you're an end user in this kind of, whether that's industrial or ag, in this economic market, you're going to be making sure that you have sufficient supply on hand, so that will be the pull on demand. At $7 corn, $7 wheat, $7, 88 on cotton. I mean, just go product by product. There will be that healthy incremental demand that will soak up supply. So, we would say today looking for the floors that they will be positive. And you're right, the ammonia and UAN values are pulling closer to urea. And I think we'll see an interesting dynamic play out this year in the farm sector. with how much of ammonia is actually put down and then the move to upgraded products. And then, especially on the pivot runs and rice run, which extend this tail, that's why I talked about in my prepared remarks the extended tail. You know, we have a cool weather right now, so emergence is okay. Planting is going very well. But when you're fertilizing for yield at $7 corn and the opportunity is out there, you're going to see that incremental demand. That'll probably be in Urea and UAN. And then looking to next year at $6 corn, and even into 2023, we've got a very positive price environment that's going to, again, be the demand pull that we haven't seen in years for the nitrogen products.
spk09: Your next question is from Ben Isaacson from Scotiabank. Your line is open.
spk06: Thank you very much, and good morning, everyone. Quick question on UAN again. You keep talking about subsidized Russian UAN imports. You saw what Mosaic did on the phosphate side. Can you talk about whether that's something you guys are exploring or will explore in terms of potential countervailing duties?
spk13: Good morning, Ben. In reference to the comments, it's just a fact. And so I just wanted to lay out there that that's a situation that has taken place. And you're right. From the mosaic situation, that was subsidized gas. And so I just think it was more we've had several questions reflecting the poor UAN performance. And when you peel back the onion and look at that, there's a direct correlation to the incoming product and the resulting nature that drove down prices. So it's just more to inform you.
spk08: And, you know, I'd say, Ben, the other thing I'd tack on here, which is the ammonia that goes into MAP and DAP is a relatively small percentage of the aggregate total cost of production. You know, the gas that goes into producing UAN is, you know, 70% or 80% of the cost of production. So when, you know, when the FTC found that, you know, that there was subsidized gas and therefore duties that the Russians need to pay. You know, if that's true on MAP and DAP, it should be doubly true in UAN. So I'd say it's something we're continuing to take a hard look at.
spk09: Your next question is from Vincent Andrews from Morgan Stanley. Your line is open.
spk05: Hi, this is Stephen. I'm Kirk Vincent. Thanks for taking my question. I just wanted to ask a question on the carbon capture initiative and whether or not there was kind of any more color to provide around substance and timing in regard to those discussions and anything of that nature would be much appreciated.
spk12: Yeah, I think it is something, as we talked about, that we continue to have conversations with quite a few different people who are looking to partner on that. And it's really because of, I would say, the ability or actually what we're doing today by capturing our CO2, where a lot of industrial organizations today do not have that capture. So we have a net position where we're already removing the CO2 from our ammonia streams and capturing that. So it puts us ahead of a lot of other parties from that. But we're being diligent as we look at what opportunity we would want to join. There is no known right now at this particular time Class VI permits that have sequestration points, but there is obviously a tax credit also for EOR. So I would say right now we continue to explore those opportunities, and we're talking to several parties on that.
spk08: And I'd say not just at Donaldsonville, but there's opportunities in a number of places across our network, including both of our plants in the U.K.
spk09: Your next question is from Steve Byrne from Bank of America. Your line is open.
spk02: Hi. Good morning. This is Luke Washer for Steve. So you guided ammonia shipments this year to 19.5 to 20 million tons. And I guess just thinking about the outages that you had in 1Q, how are your ammonia plants running right now as you enter into 2Q? And how does that set up the cadence of your shipments over the course of a year?
spk08: So it wasn't ammonia shipments that we were talking about between 19 and 19.5 million. It was total product shipments. Ammonia production is kind of 9.5 to 10 million tons. We tend not to break out sort of current operating status of our plants. That's one of, you know, across the entirety of the network. It's just one of those things that we, you know, believe is kind of competitively sensitive. So we tend not to provide a real-time update on all of that. But I think our – You know, I think our guidance reflects both the increased level of turnarounds that we had this year versus last year and, you know, and the fact that we did have the big winter storm event that did have some knock-on kind of outages associated with it. So when we look at those two things together, you know, we feel pretty comfortable about the guidance that Chris provided, both in terms of ammonia production for the year and an aggregate sales volume in terms of product tons for the year.
spk09: Your next question is from Michael Paiken from Cleveland Research. Your line is open.
spk04: Yeah, just wanted to get in a little bit more in terms of your thoughts. I know you mentioned that you expect higher seasonal lows. How are you thinking about summer fill for UAN and just in terms of balancing the desire to keep imports out versus the more favorable supply-demand backdrop. And I guess in phosphate, there's already been some fill, a little bit of sales done. When are you sort of expecting to come out with a fill price? Thanks.
spk13: Yeah, when you look at summer fill, we've had different programs for different years depending on, when demand materializes, what our situation and what kind of the opportunity is for inventory. And we believe this year, because of the tail that's needed for applications, that you're going to have a later season than normal. The latest we've gone is August. The earliest we've gone is June. So I would tend to be on the latter side of that spread. for moving or announcing the fill program. Inventories are gonna be low for all products. And just looking at the imports to date and the production to date, feathering in what was lost in the winter storm in February amongst the different producers. And again, we're projecting 91, 92 million acres. When you look at it today and talking with some of the different participants in the grain markets, you're probably going to be leaning, or at least me personally, leaning more towards 94 million acres. And then, as I talked about earlier, additional applications for yield, you're going to have a very robust demand coming, probably starting, it already has started, and pulling contracts early. So I don't see big inventories, and you're going to need to fill those inventories because on the back of this year and the back of this yield, if it's even average or good, we're going to have to repeat that in 2022. And so when you're looking at the fill programs as well as the fall application of ammonia, I'm not going to give a price today. We've had several customers asking us for that. But we expect it to be at a higher level. One, because it's worth it. Nitrogen is what's going to give you yield. It's at a good value. And as I said earlier, everyone in the value chain, even at whatever levels we come out with, is at a healthy profitability level and balance sheet position. So this is a very good time for our industry, and we're going to be excited to launch our fill program and work with our customers to make it a success for them as well as us.
spk07: Faith, do you want to go to the next question?
spk09: Yes, sir. Your next question is from Andrew Wong from RBC Capital Markets. Your line is open.
spk15: Hey, good morning. Thanks for taking my question. Just following on an earlier question about just the coming quarters, I know it's hard to give us guidance, but can you just help us maybe qualitatively understand how much volume was sold forward into Q2 and Q3 and how we should think about realized prices versus some of the pretty high prices we're seeing in the The nitrogen prices have kind of moved up pretty quickly and pretty sharply, so that can kind of throw the expectations on realized prices off sometimes. Thank you.
spk13: Yeah, so qualitatively, I think I mentioned on the last review, we're in a very, very good environment. So that's kind of the statement I'm giving you, the guidelines. Quantitatively, we don't have anything sold for Q3 yet. And we'll be looking at that and assessing it as we move forward. For Q2, as I said earlier, we always have a book going into the quarter. And we have been active every day in the market. If you do your channel checks, you know, we're selling. We still have product to sell for Q2. So there are, you know, different products move at different times. And, you know, ammonia is generally first. And so those programs are part of our program was sold in December and part of it was left open for this period. and then you move into urea and UAN for wheat, and then as you move further north, and we're just starting those applications in the north as well as Canada, that's for ammonia, and it'll move then to urea and UAN. The bulk of the UAN market will be in the latter part of May and early June, and we think we're well positioned for that also, and have tons available for the pivot run, which is your irrigated runs as well as the rice runs. More to come, but we like where we are.
spk09: Your next question is from Mark Connolly from Stephens Inc. Your line is open.
spk14: Hi, good morning. This is John Ryder on from Mark. So we saw a fairly normal seasonal swing to cold this winter in China. And as far as we can see, a pretty normal shift back. Where are you seeing Chinese operating rates right now? And what are you assuming in your global forecast for Chinese operating rates in the rest of 2021?
spk12: Well, I'll start, John, with coal. Chinese coal, you know, there had been a lot of discussion about Chinese coal softening, specifically anthracite, over the past year. And what you've seen is it's been relatively consistent at about $160 per metric ton. Therefore, you know, really on an energy equivalent, we've seen the 7 to 750 per MMDQ equivalent of gas on that. So from a Chinese perspective, we've continued to see them be the marginal producer. But as Bert mentioned in his remarks, what we started to see here is with the expansion of the energy differentials is that you're actually seeing Eastern European and Asian be equivalent to those marginal producers and a widening of the cost curve in that fourth quartile along with the steepening of the slope. So I'll let Bert talk maybe about what type of exports he's expecting for this year from China.
spk13: Yeah, the specifics to China, and obviously we're following it because they do represent roughly 10% of the export market and have been the marginal producer that expand and contract as pricing allows and have been active participants in the India tenders. So on a percent of capacity, We estimate, just like some of the publications, they've been in the 70, 71, 72, and that would be laying out for the year about 56 to 57 million tons of production. Exports, we're estimating around 5 million tons. But the thing we have to remember and pay attention to is consumption in China. Consumption in China over the last four years has risen from 48 million tons, we estimate, to 52 million tons. So an additional 4 million tons, what is happening? Well, guess what? They need to also fertilize for yield. And the tremendous imports that have taken place in China of corn and soybeans this year is a reflection of their inability to produce that. One, it's a shortage of water and soil. But it seems to me that they are now trying to take care of some of that, at least for the next growing season. So positive dynamics out of China that As a 5 million ton exporter, and I think the majority of that will go to India, we're expecting India this year to be a 10 million ton importer. So the swings and the ability to move the market out of China is not the same that it was, let's say, six or seven, eight years ago.
spk08: And I think to that point, Bert, we are seeing increased economic activity within China and And so that means on the industrial side, there's more usage. It goes to your point on consumption. And the other thing that we're watching very closely, and Bert mentioned this about India, is our expectation is that domestic production in India is going to be down. And therefore, based on consumption, there are going to be larger importers, which likely China is going to take a big piece of that. Again, we're very constructive, not only in terms of the overall S&D balance, but with energy differentials where they are and the costs of the high end where it is. That suggests a very favorable nitrogen pricing deck for North American producers.
spk13: One last thing you've got to remember about China. In the last three years, they've been 12 million tons go offline and closed. That's a significant move. When you're adding this year, we estimate of exportable tons, 2.5 million tons. And so the closures, which will continue, make China basically a domestic producer with a marginal ton that's coming out. That's okay.
spk09: Your next question is from Rikin Patel from Exane. Your line is open. Thank you.
spk10: Thank you for taking my questions. Just firstly, a follow-up on the market and your comments on India. I think you said production is expected to be down this year. How does that play into your expectations or views on some of the new plants that are ramping out there right now? And then secondly, just on free cash flows, in keeping with the guide for 450 million of CapEx this year, Can you just help us understand the phasing of that into Q2 and H2? And then secondly, on customer advances, I saw there was a slightly higher step up this quarter. Does that mean that we can assume a higher outflow in Q2? Thanks.
spk08: Yeah, so I'll deal with a couple of those, and then I'll turn them over to Bert and Chris. On the India front, There's been a number of new plants that have started up over the past couple of years, Chambal and Matix and others. And what we have not seen is an aggregate increase in the amount of domestic production. So, you know, it looks like as some new production comes on, some older production is either curtailed or taken offline. And particularly with where LNG is trading right now, our expectation is, that in most cases it's going to be cheaper based on the efficiencies or the inefficiencies of some of those older plants to import globally traded urea as opposed to try to run those. There's also, as we understand it, Ben, because of the impact of COVID and what's going on over there right now, real challenges on supply chain and labor issues. And so, again, our, you know, understanding is or expectation is for the full year, we don't anticipate there to be excess production coming online on a net basis in India. I'm trying to remember the other questions. The other question was on capital expenditures and sort of the phasing. Yeah, I mean, in general, we like to do turnarounds during the portion of the year where pricing is the lowest. So that suggests kind of end of the second quarter and into the third quarter. And then we like the plants to be kind of up on line, again, fully running so that we can hit fall application of ammonia and kind of pre-stock for Q1 and Q2. So, you know, most of the time, As you get to the back end of Q2 and most of Q3, that's where the vast majority of our turnaround expenditures happen, at least at the plant level.
spk12: Yeah, I think if you look at our historical quarterly spend on CapEx and use that, as Tony mentioned, we're pretty set when we're taking plants down and doing the turnaround work. That would be a good proxy to allocate where you would see that 450 being spent this year.
spk13: If you look at India over the last six or seven years, they've basically produced between 24 and 24.5 million tons since 2015, year in, year out, even, as Tony said, with the addition of these new plants. From our channel check, they're late. When they do come up, they don't run at capacity. They don't come immediately up to 100% of capacity. This is a multi-year issue, and we're still seeing multi-year growth in imports. That may not continue at the current pace, but it's going to maintain a healthy level in the foreseeable future.
spk08: And then on the customer advance front, as Bert indicated, we have not taken a bunch of Q3 orders right now. So the customer advances that are on the books are really for Q2 deliveries. So to your point, as we go ahead and fulfill those orders, We'll get the rest of the cash in. But, you know, our expectation is the customer advance number will, you know, correspondingly get whittled down. And Bert also talked earlier about kind of thoughts on timing, which, you know, for launching Phil also corresponds to a new bank of kind of customer advances and orders that he's looking at. more likely than not toward the later end of the window as opposed to the earlier end of the window. So, you know, all of that suggests a lower customer advance number as we're kind of working our way through the quarter here.
spk09: Your next question is from Roger Spitz from Bank of America. Your line is open.
spk01: Thanks. Good morning. Regarding your comments and the prepared remarks on your focus on IG ratings, are you specifically pushing for an IG rating from the agencies? And what have they been saying to you about what it might take to get that rating? What do you need to do?
spk12: Yeah, so good morning, Roger. Thanks for the question. Related to, you know, as we are looking at getting back to investment grade, The one thing we believe right now is our metrics are in place for investment grade. If you look at what we've done just recently here taking our gross debt down to $3.75 billion and really our net debt under $3 billion, that puts us on an LTM at 2.1 times net debt to EBITDA. And with the strong outlook we see happening here in the market, not only as Tony and Bert mentioned, through 2021, but in the 2022, we see an opportunity not only to invest in sort of our growth projects, but also take down a little bit more debt and also return cash to shareholders as well. So I think we'll probably look to take down a little bit more debt, and we believe that should be able to get us to investment grade. What we're hearing from the rating agencies is really just to see how the market develops. And I think right now what we're seeing is a very strong, not only this year, but in following years.
spk08: Yeah, I think the other thing I would just add to that, Roger, is as we got into kind of the spring and into the summer of 2020 last year with, big kind of risk-off position in the equity market and some real questions in terms of what was going on in demand broadly there the rating agencies were taking a very conservative view of materials and industrials and there was a lot more downgrades or negative watches than there was anything positive and although you know our results were down a little bit sequentially in 2020 over 2019 and demand for our products remained really strong, and it was really a pricing environment. And as Chris said, based on the pricing environment that we're seeing now, and this is a prolonged period, along with continued reduction in debt, I think we have a very strong argument, even without taking down incremental debt, that we're an investment-grade company at this point. But we're continuing to have those conversations. I wouldn't say they're quick to respond, you know, and – They tend to be fairly risk-averse, so they want to see that it's there for the long run before they make a move like that and give us the bump up. But we're optimistic that that will happen here sometime soon.
spk09: Ladies and gentlemen, that is all that we have for questions for today. I would now turn the call back to Martin for closing remarks.
spk07: Thanks, everyone, for joining us today, and we look forward to speaking with you on upcoming conferences. Have a great day.
spk09: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q1CF 2021

-

-