CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to the four-year and fourth quarter 2021 CF Industry Holdings Earnings Conference Call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are in a 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 Father 1 on your touch telephone keypad. and overseer host for today, Mr. Martin Jarosik with CF Investor Relations. Sir, please proceed.

Good morning, and thanks for joining the CF Industries Earnings Conference Call. 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 results for the full year and fourth quarter in 2021 yesterday afternoon. On this call, we'll review the results, 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 can 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 Wild, our president and CEO.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for 2021 in which we generated adjusted EBITDA of $2.7 billion, net cash from operations of $2.9 billion, and a company record free cash flow of nearly $2.2 billion. These results were made possible by the exceptional performance of the CF Industries team. We managed through two severe weather events in North America, completed the highest level of maintenance activity in our company's history, navigated runaway gas costs in the UK, and adeptly responded to a rapidly changing marketplace for our product. Consistent with our do it right culture, we did all of this safely. Our year-end recordable incident rate was 0.32 incidents per 200,000 labor hours, outstanding by any measure, but truly remarkable given the challenges of the year. Several of the factors that drove these terrific results in 2021 are expected to persist into the foreseeable future, namely strong demand, high energy spread differentials, and outstanding execution by our team. Let's start with the robust demand component. Significantly improving grain prices drove strong agricultural demand, while global economic recovery led to high industrial use as well. With December corn trading at $5.90 this year and $5.56 for next year, we see strong ag demand for at least the next two years. On the economy-driven industrial demand side, the last two months have seen inflation at 7% year-over-year, and that doesn't appear to be slowing down. So the combination of strong ag and industrial demand suggests overall global demand for nitrogen will continue at a torrid pace. Energy spread differentials between North America and high-cost Europe and Asia production indicate exceeded $20 per MMBTU for most of the fourth quarter, which provided the opportunity for us to achieve record margins for our products. As we look forward, the energy spreads continue in the $18 to $20 range for the balance of this year and remain well above $10 for 23 and 24. Those energy differentials provide an extremely attractive environment for North American producers and give us a lot of confidence about our continuing cash generation potential. On top of this backdrop of very strong demand and high energy spreads, we're a set of factors that negatively impacted global supply in 21. Turnarounds and maintenance activity originally scheduled for 2020 was deferred into 21 because of the COVID pandemic and a desire to keep employees safe by limiting contractors coming on site. The catch-up in maintenance activities last year took an unusual amount of production out of the global supply. Two significant weather events in North America, winter storm Uri and Hurricane Ida, further reduced production. The natural gas price spike in Europe and Asia exceeding $30 per mm BTU for weeks at a time, caused plants to curtail or shut down in those regions, further reducing supply. And adding to these pressures, several important producing countries, in an effort to ensure nitrogen availability and affordability in their home markets, enacted export limitations or outright bans, including China, Russia, Egypt, and Turkey. The result was significantly constrained supply at the exact time demand was surging, which led to the predictable outcome of rapidly increasing nitrogen prices. These dynamics came to a head in the second half of the year, and in particular during the fourth quarter of 21, when global nitrogen prices reached record highs. This provided the market opportunity for the company to deliver an all-time record quarter, both in terms of EBITDA and free cash flow. This enabled us to return $800 million in capital to shareholders through share repurchases and dividends, repay $500 million of long-term debt and return to investment-grade credit ratings, while adding roughly $1 billion of cash to the balance sheet. As I said earlier, we believe the market dynamics of last year have plenty of runway ahead. To this environment, we bring unique capabilities honed over the past decade. Our investments in people, safety, and growth have built the industry's highest-performing manufacturing network, as shown on slide 6 of our materials. Slide 10 underscores how this advantage is amplified by the low-cost position that North American natural gas provides us. As a result, we are able to capture the significant margin opportunities in front of us. Now let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail.

Thanks, Tony. We believe industry fundamentals point to a continued tight global nitrogen supply and demand balance and an extended period of positive operating conditions for low-cost producers like CF Industries. Global nitrogen demand remains robust, underpinned by the need to replenish global grain stocks. As you can see on slide 9, global coarse grain stocks to use ratios remain low, supporting high crop prices and another strong year for farm incomes. High demand for coarse grains leads to high demand for our products, as farmers are incentivized to apply fertilizer to maximize yield. This helped drive our strongest fall ammonia application season since 2012. And our expectations for a high level of coarse grains plantings this year, we project that 91 to 93 million acres of corn will be planted in the United States, along with strong wheat, cotton, and canola plantings across North America. We believe it will take at least two more growing seasons at trend yields to fully replenish global stocks, supporting continued strong agricultural demand. At the same time, increased economic activity is driving industrial demand for ammonia, urea, and diesel exhaust fluid. We had record DEF sales volumes in 2021 and expect continued growth for this important emissions control product. Against this demand outlook, we believe global nitrogen inventory today is low. This reflects the impact of both strong demand and lower global production in 2021. Looking ahead, we expect global supply to remain challenged by high natural gas prices in Europe and Asia, along with coal costs and tightening environmental regulations in China. This should continue to affect the profitability of producers in these areas and lead to lower operating rates. Additionally, Natural gas forward curves suggest continued favorable energy spreads for North American producers compared to marginal producers in Europe, as you can see on slide 10. We are well positioned for the spring fertilizer application season ahead. We are pleased with our order book, which we began to build at peak prices in the fourth quarter. Our manufacturing network is operating at a high level, and we look forward to leveraging our logistics and distribution capabilities to meet demand as fertilizer applications and planting begins in North America in a few weeks. With that, let me turn the call over to Chris.

Thanks, Bert. For 2021, the company reported net earnings attributable to common stockholders of $917 million, or $4.24 per diluted share. EBITDA was approximately $2.2 billion, and adjusted EBITDA was just over $2.7 billion. Net earnings and EBITDA reflect pre-tax non-cash impairment charges of $521 million related to our UK operations. For the fourth quarter of 2021, net earnings attributable to common stockholders were $705 million, and EBITDA was $1.2 billion, and adjusted EBITDA was $1.26 billion. Adjusted EBITDA and free cash flow in the quarter were both company records. These financial results allowed us to opportunistically accelerate capital return to shareholders at the end of 2021. In the fourth quarter, we repurchased 7.5 million shares for $490 million, effectively completing the $1 billion share repurchase program that expired at the end of 2021. Since 2019, we have repurchased nearly 19 million shares. We continue to view share repurchases as an important tool for return on and return of capital. As you can see on slides 13 and 14, over the last decade, we have invested in the business to grow free cash flow, while at the same time lowering the outstanding share count. As a result, shareholders have accrued more of the asset base, doubling their free cash flow participation on a per share basis compared to our prior free cash flow record back in 2011. We believe our new $1.5 billion share repurchase program provides us a strong platform to build on this performance. At the same time, we remain focused on disciplined investments in clean energy that offer returns above our cost of capital. We have begun construction on the green ammonia project at Donaldsonville with completion expected in 2023. This year we'll begin work on the installation of dehydration and compression equipment at Donaldsonville to enable production of blue ammonia. We believe these projects are well-timed to accelerate the growth of a global market for blue and green ammonia. We also continue to have productive discussions with leading companies who share our belief in ammonia's clean energy attributes and its role in decarbonizing economies around the world. Our estimated CapEx spending for 2022 of $500 to $550 million includes expenditures for the Donaldsonville blue and green ammonia projects. And through 2025, we have committed $385 million in capital to these projects and installation of dehydration and compression equipment at Yazoo City. We also remain committed to reducing the gross debt on the company from $3.5 billion to $3 billion by the middle of 2023. We start 2022 with a strong balance sheet, positive multi-year industry outlook, and stable maintenance CapEx plans for the next few years. We also expect gross ammonia production in the years ahead to return to typical levels of 9.5 to 10 million tons, supporting higher sales volumes compared to 2021. As a result, we expect to have significant excess free cash flow to deploy in the years ahead. With that, Tony will provide some closing remarks before we open up the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for an outstanding 2021. Our performance would not be possible without their commitment and dedication. Our results last year highlight the success we have had investing in the business to grow capacity and cash generation, while at the same time lowering our share count. We are currently at an all-time low for shares outstanding, in fact almost 20% below our IPO level. With a record year for free cash flow, coupled with our lowest share count, our cash flow per share is truly spectacular. Despite that, our equity appears undervalued given our free cash flow yields, I'd encourage you to look through our materials on slides 13, 14, and 15 to see exactly what I'm talking about. But what is really exciting and has all of us very bullish is the party is just beginning. We have reduced our fixed charges and debt levels in our, again, investment grade. We have only modest capital requirements over the next couple years, which includes our investments in clean energy and decarbonization. Futures for grain prices and energy spread suggest we have a long runway ahead with significant margin in cash generation opportunity, and we are sitting at our lowest share count ever. In short, things are pretty good, and we are just getting started. With that, operator, we will now open the call to your questions.

Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press Father and One on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of P.J. Jubical with Citi. Your line is open.

Yes, hi, good morning.

Morning, P.J.

Quick question. Post-winter, if European gas prices were to come down, then how do you see global nitrogen and urea prices would react? And what are you assuming for European gas prices as 2022 progresses?

I mean, I think our best information is where the forward markets are trading. So you look at TTF for Europe or NBP for the UK. You look at JKM for Asia. And I said in my opening remarks, the differentials between Henry Hub and those locations are are 18 to 20 bucks of spread value. That provides a huge margin opportunity for our low-cost North American production base. And speculating on what happens if this happens is, I mean, obviously if energy spreads come down, then we'd expect there to be compression in pricing. But clearly the way the market is betting on energy spreads, that's not expected to happen.

Yeah, I would say looking at the forward curves of what Tony mentioned on gas and the efficiencies from most of the European producers, they're still going to be troubled at that $750 to $850 a metric ton cash or full cost range. That's an incredible margin opportunity for a North American producer when you have a substantial portion of the global ammonia capacity challenged. And so that, therefore, should then pass on to urea and UAN. And so I think the projections that are out there for the correction in the second half of the year will be higher than what is at least thought of today and a very acceptable range for CF.

And, you know, the other thing I think, PJ, is global economic recovery is continuing at a pretty strong pace in the aftermath of the pandemic. And against that backdrop, Europe is not generating new sources of energy supply. So as long as economic activity remains high and there's no supply, it's not clear what's going to drive a drop in energy prices or gas prices in Europe.

Great, great. Thanks. That's really good color. And then secondly, as you build your green ammonia plant by next year, can you discuss your technological progress that you made in design and engineering of your electrolyzers? And any new update on cost of green ammonia given your renewable electricity prices? Thank you.

Yeah, so, you know, we're not actually designing the electrolyzers. We're licensing the intellectual property and, you know, and the design. from our IP providers to do that. We are going with a conventional alkaline water approach because it's been proven and tested and has good reliability record. But the cost of green ammonia remains, particularly in North America, where we've got access to low-cost gas and have options for sequestering the CO2 coming off of the ammonia plant, the cost of producing green ammonia is four to five times that of producing conventional ammonia. In energy-starved regions like Europe, I think green ammonia has a real future. In natural gas-rich, low-cost regions like North America, I think it's got some potential, but I think it's longer term because in the near term, I think blue is really going to dominate.

Thank you. Our next question comes from the line of Steve Byrne with Bank of America. Your line is open.

Yes, thank you. For your fourth quarter volumes, when would you say you really had the majority of that volume booked? How far back did that happen? And going forward, how much of your first and second quarter volumes would you say are already booked?

So looking at the fourth quarter, we launched fill for UAN at $285 for NOLA and took a substantial book for that. And then we launched the second round of UAN orders in the $420 or $30 range, if I remember correctly. And so if you look back at the Q3 average and the Q4 average of around $400, that was a blend of Q3 and Q4 orders. Looking into Q1, we were taking orders in Q4 for our forward book at the prices you're seeing in the publications today at very attractive levels. Now, when you look at that from a, I'm going to take it back to a farmer basis or to a retail basis, that inventory is being built in the interior at those tranche levels. So some of the discussion that's going on in the farm centers around cost, they're taking the absolute peak costs of that UAN and not the blended costs that the retailer is sitting on that's available to the farmer at very attractive levels at $6.40 spot corn or $6 forward corn. Ammonia, we began selling at around $600 and ended up selling probably at the peak of some incremental volume at $1,200, and so you saw the blended cost there. Urea, I think our average price for the quarter was $650, and that was built in Q3 and then early into Q4, so the majority of urea that we booked will be shipping out in Q1 at very attractive prices. You've seen that built over time. Q2 ammonia has been sold at that $1,200 to $1,400 level, and so you can then model out that kind of structure.

Thank you, Bert. And then, Chris, maybe a little bit on capital deployment. Should we assume you're going to continue this half a billion dollar a quarter share repo, and if not, What else are you guys looking at? And wanted to specifically hear your view on whether there are any underperforming assets out there that might be stranded that you might be interested in acquiring, or are you looking at some brownfield expansions?

Yeah, so I'll start with the capital deployment. So as I mentioned in the prepared remarks, you know, we look at return of and return on capital to the shareholders. And based on that, We've sort of talked about in the past few quarters having a ratable stream of share repurchases going through, and then an opportunistic stream, just given the amount of free cash flow we expect over the next several years. And really from that opportunistic side, you can see the volatility in our shares. You don't have to go back that far. You could probably go back just a couple days and see how we move, even when the fundamentals are extremely strong. So we think there'll be opportunities through the year, Steve, where we can make maybe some larger share repurchases. And based on that, we'll probably have, you know, at times higher cash balances than we have historically, periodically throughout the year, and really probably throughout the next couple of years given the free cash flow. But as you talked about, the calls on cash right now, and Tony mentioned it in his remarks too, are not all that great. We have a very ratable CapEx that's close to historic levels. And then additionally, you know, just the $500 million remaining on the 2023 notes. So, not much there where our expectation is we will have a substantial amount to deploy. Related to the growth side, you know, as always, we continue to look at assets that are available and where they're trading versus, you know, building new assets. And right now, you'd say that, you know, assets out there are trading at a discount to what new builds would be. We do fundamentally believe that ammonia demand, specifically in the back half of the decade here, is going to grow. And as a result of that, there's probably going to be some opportunities, whether inorganic or organic, over time that we'll look at and evaluate. I think that's the important part of getting our balance sheet in order over the past few years, that when those opportunities present themselves, we're prepared to hit them.

Thank you. Our next question comes from the line of Christopher Parkinson, Whitman-Zuhu. Your line is open.

Great. Thank you very much. You hit on this a little earlier. Naturally, there's an end-unit correlation between UAN and urea, but can you just quickly comment on the near-to-intermediate term respective SDs? trade flow developments, just given things are different in 2022, and then just also how investors should be modeling the relationship going forward. It seems that things are a little bit tighter in UAN these days, so any color would be helpful. Thank you.

Let me just give you some high-level thoughts, and I'll turn it over to Bert for some more specifics, Chris. You know, UAN really should be trading at a pretty significant premium to urea on a per nitrogen unit equivalent basis. There's a lot more capital intensity around producing UAN, and there's farmer efficiency and agronomic efficacy that favors UAN, particularly for certain types of crops. And therefore, both the fact that it costs more to make and that it's more valuable and easier to use suggested ought to trade at a premium. The fact that for a while there it was not trading at a premium I think is directly related to some of the unfair trade practices and dumping activity that was going on by subsidized producers in certain countries like Trinidad and Russia. And we're starting to see things get back to where they ought to be on an economic basis. But I'd also say we have a fair bit of ability to move our production slate around in order to maximize margin opportunity depending upon where the different products are trading. So given where urea is trading today versus where ammonia and UAN are trading today, we're pretty much full on UAN and dramatically reducing our urea production. And, in fact, you know, it wouldn't surprise me if you see others in the world looking at that same math doing a similar kind of thing. So these things tend to even out over time, and it's not really the instantaneous spot price that matters. It's more the longer-term kind of relationship and benefits that they offer. But I'll turn it over to Bert for some more specifics.

Good morning, Chris. What Tony articulated in terms of the structural nature of UAN and where it should be trading is 100% correct. CF invested $5 billion from 2012 to 2017 on the new assets, with the majority of that production of UAN in Donaldsonville and additional incremental capacity in Port Neal benefiting the North American farmer. And that supply has not been available due to the dumping and anti-competitive behavior of the Russian and Trinidadian supply. So that idled or available capacity is now being utilized to supply those needs. And so how has that moved our system around is we're much more active on the coasts. We've built tanks in California where we're now able to ship unit trains and almost looping those unit trains weekly. and we'll take, I would say, a very healthy share of that supply to California to supply those needs. Same thing with the East Coast and our vessel that we had built and now we've contracted another vessel to move additional tonnage around to the East Coast, all the way up into Canada. So how trade flows are moving are a direct reflection of a better position and a more even playing field, which we're now able to utilize our capacity And so that is to supply the American farmers. So we've decreased exports. We've maintained even at a discount to the world price. The Europeans today are paying a higher price for UAN due to the high gas costs and high ammonia imports. And so products should be flowing that direction based on economics. We will see how that flows. So we have prepared and we have adequately staffed. We have now 5,000 rail cars in our service, as I already told you about with the vessels. So you'll see that reflected in Q1 and Q2 with additional supply to the United States.

That's always helpful, Culler. And just as a follow-up, and Tony, you hit on some of this in your prepared remarks, but just given all the moving parts for forward feedstock costs, so when we're thinking about cost curves for 23, 24, some of your long-only investors, as well as the uncertainty in Chinese supply over the next, let's say, at least two years, depending on what happens mid-year this year. Can you just offer your updated thoughts on intermediate-term operating rates for the entire industry? We can focus on urea, I suppose. who you ultimately think a marginal cost exporter will be in 23 and 24, and just your expectations for some new capacities coming on. There are also some recent facility closures. So, if you could just give us the kind of the updated picture on the mosaic, it would greatly be appreciated. Thank you.

Bert, go ahead. When you look at what's going on in the world with operating rates, the world is running roughly at 80% operating rates. But that's distributed unevenly with the United States and the capacity that we built with the great job that Ashraf does with running those plants at 110%, conversely against China at 60%. And one of the interesting facts of what's going on with the gas supply globally is this $20 gas to $25 gas in Europe is also the same structural cost for an Asian producer. And so you look at the Chinese gas importer, they're having to pay that. And India today is 50 – I'd say 60 percent of their gas supply is LNG imports, paying that same type of price. So it's natural that you've seen India tender and their run rates be below what I think a lot of people in the investment community have modeled, requiring, therefore, larger levels of imports. And so these things are constantly moving. And for the first time in history, we've had a lack of supply – as well as a high level of demand, that's what's driving global prices. And so those prices are attracting. India had paid the highest price in the world on their, not this tender, but the previous one, and a very acceptable price of around $600 done. Why? Because their production costs are so high, and they have low inventory, and they need that. That's a reflection of what's going on in the world. That's why we're so positive looking forward in the second half with low inventories and and moderating production capacities, we see good pricing going forward.

But I'd also say, back to Bert's point in terms of LNG dependency, European and certain Asian producers are going to be very comparable in terms of high-cost production and competing in terms of what that marginal ton is. I think China is very serious about their environmental controls. and also trying to manage their coal and emissions. And therefore, although we expect them to return to be a supplier on the export stage, I don't think there's – I'm not afraid of this boogeyman out there that's going to come and dump excess product into the global marketplace. And so what is really – telling for us is the forward energy curves. Look, even if they compress from today's huge differentials to $10 in 23 and 24, that's still on a basis like $350 of margin differential for a North American producer per ton of ammonia. And those are energy spreads that this industry has never really seen over a prolonged period of time. So the fact that we're talking about three or four years of these huge margin opportunities for North American production is really a unique time in this industry.

Thank you very much.

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thank you. Good morning. I was actually hoping to maybe follow up on some of the color you just provided, Tony Burt, on kind of cost curve dynamics, and if you could just help frame what proportion of separately ammonia, urea, UAN, seaborne product, and global production actually is at the high end of the cost curve, because I think there is some meaningful distinctions amongst the different products in terms of how much of the curve is actually buying that very expensive gas and just how we think about the differences in terms of the cost curve between the different products because certainly the current ammonia, urea, UAN price are not telling all the same thing as it relates to cost curves today.

Yeah, I would extract urea pricing at the Gulf out of this equation for a minute and look at UAN and ammonia pricing, and I think you do see a relatively more consistent story in that regard. I think what you see with urea, particularly during a period of time where it's not going to ground in North America, is there's a tendency by certain rogue traders to want to try to manipulate the market and either build a position or take shorts or do other things. And so there's not a lot of volume transacting at what looks like a pretty discounted price relative to the other products. And certainly we're not anxious to go out and book forward on those kind of prices because we don't think that really reflects the underlying value that nitrogen provides as you get into the growing season. And so I think the place to look at them really is more on global ammonia prices, because remember, if you're making urea, you first got to make ammonia. And if you can make ammonia and sell it at a much higher margin structure as just ammonia, then you'll do that, and pretty soon urea supply starts drying up pretty quickly. So, you know, I mentioned this in response to a question earlier, which is I wouldn't fixate on the instantaneous price on these things, but really look at the broader kind of economics that underpin it. And Europe... for a while had about 11 million tons of ammonia production offline during the third and fourth quarter of last year because of very high energy prices. When you tighten up the market by that much, it's going to have a seismic impact across all products. So our view is there is a very significant portion of the supply curve running at really high energy costs, and that's going to ultimately dominate where products should trade and the value of those products. And if there's some short-term discontinuities because of some sloppiness or some trading activity in urea, that doesn't really tell the story. Ammonia is a much clearer picture.

Yeah, and just some further commentary on the support of the end products to be able to pay for these prices. And when you look at the subsidized markets, subsidized on the outputs of Europe and India, it's an amazing opportunity because the farmers are still going to make money at these prices. When you look at a market like the United States that has subsidies of crop insurance, but the prices today relative to total inputs is going to be the second best year of profitability in the last 10 years. And even in Brazil, for the second crop, corn is profitable even at lower levels of yield. And so when you look at the cost curve dynamics on the production side as well as the demand side for the outputs, we have a very solid structural basis for the future like we've articulated.

Okay, that's all really helpful. And maybe just separately, thinking about the carbon capture and sequestration that you're evaluating down in Louisiana, can you just help us think about what still has to happen before that can actually move forward and how 45Q would play into that or what it would take to ensure that you're getting that 45Q credit?

We have board authorization to move forward with the dehydration and compression that are engaged in. We've done some preliminary engineering and are engaged in the detailed engineering and beginning to place orders for the larger pieces of equipment. So we expect that to be online probably in the next two and a half to three years. And, you know, even under the existing 45Q credit, it still is very attractive returns, and it's the right thing to do because we want to be able to decarbonize our network. And we also believe that there's going to be a premium on blue ammonia that we'll be able to produce. So for a lot of reasons, we're excited about that. But, you know, if – some of the proposals that have been talked about that increase the price of carbon actually get turned into policy, then, you know, those investments are going to look even more attractive. But we're full steam ahead. It's not like we're waiting on some other approval or anything else that needs to be done. We're moving forward and, you know, commencing construction.

Yeah, and we feel confident about the transport and sequestration side, whether it be EOR initially and then the Class VI. There's a lot more activity going on with Class VI, so we should expect some of those in the locations of some of our plants, specifically the Donaldsonville and Yazoo City. We're in quite a few discussions with different groups on that, so we don't view that as a risk either. And as Tony said, these projects, even at their existing going to provide very good returns to the investment.

All right, great. That's really helpful, Collier. I'll pass it on. Thank you.

Thank you. Our next question comes from the line of Joel Jackson with BMO. Your line is open.

Hi, good morning. I wanted to follow up a bit on Adam's question, the answer that Bert and Tony gave. It's such a big discrepancy between cost curve supports for urea, looking at European gas costs, and what we're seeing in NOLA. Why don't you just ship urea to Europe and take advantage of the arbitrage, or is it not that simple?

This is Bert, and that is possible. But we've made a commitment to the American farmer, and we believe that the supply and demand balance here is such that we need to supply and utilize our distribution system to and gain the end market premium as well. But there is an opportunity. We have exported. We're looking at that all the time and looking at arbitrage opportunities and timing against our commitments. And you've seen us act against or for those opportunities in the past, and we continue to evaluate them today.

But Joel, I'd say even on top of that, because vessel freights are pretty high for some of those things, you know, as we look at it, we've got terrific opportunities just to maximize UAN production and keep that here, as well as sell ammonia. Because both of those products are far superior on a margin per unit of N basis than urea is right now. So we're really dialing back our urea production. And, you know, we tend to be net back driven focused. So If that means, you know, export, then we'll do that. But to Bert's point, there's, you know, there's really good opportunities for us when you think about cost of vessel freight and demurrage and, you know, supply chain costs continue to go up for us to keep a lot of that production domestic and focus on the products that are not as manipulated as URIOs.

Tim, my second question is different. You know, Tony, Chris, CF doesn't give guidance. We all know that. But over the last handful of quarters, you started to dabble in giving guidance. You give a little bit of maybe what Q1 is going to look like, Q4 is going to look like, the current quarter, so near-term guidance. So the question is, why did you decide not to give any kind of input so far into what Q1 might look like? And then part of that, can you talk about, do you think that Q1 earnings will be similar, higher, or lower than Q4?

So let me start off with historically we had not given guidance. There was so much kind of rapidly evolving movement of price and everything that was going on last year, and we had felt like we had a pretty solid order book on both markets. forward product as well as gas prices that, you know, when we did our Q3 earnings call, which was November, we thought we were in pretty safe grounds to give full year guidance. Well, you know, four weeks later, here we are announcing a press release that we completely missed it and we were off by like 25%. So that's why we don't give guidance because The pricing environment is so volatile that within the span of four weeks, we got it really wrong. Suffice it to say that 2021 was a fantastic year for us. And if you look at where we're entering 2022 versus where we entered 2021, we're miles ahead of where we were last year. So we're pretty excited about where we sit today.

Thank you.

Thank you. Our next question comes from the line of Jeff Zekakis with J.P. Morgan. Your line is open.

Thanks very much. There are, you know, suggested tariffs that are placed that would be placed on the Russian companies. And the tariffs are different on or the proposed tariffs are different on the different Russian companies. You know, Akron has one level and Eurochem has another. Kubashev has got another. When you look at the imports of UAN into the United States from Russia, can you sort of divide up, you know, what percentage would have, you know, higher tariffs, what percentage would have lower, or how the tariff calculation would actually work on an average basis? Thanks, Bert.

Yep. And so where we are in this process, we brought the case forward in June of last year, and that was adjudicated by the International Trade Commission, and we won on all counts unanimously. Then it goes to the Commerce Department to determine the next step. And so we're still in the middle of that process where the final results will be known, we expect, at the end of Q2 or beginning of Q3. I don't have the exact date. And so... The basis of those findings, though, is that they were dumping. They were anti-competitive. We won. All good. And so, yes, there are different levels for different companies. And I would take it to a generalization of there's roughly a million tons of Russian imports into the United States and a million tons of Trinidadian imports into the United States. And UAN supply and demand, demand is a roughly – I would say for North America, so you have some Canadian production, 16 million tons. And so of those imports, you extract that out. And the United States, like I said earlier, we have the latent capacity. We're able to replace those. And so what we expect to happen is through this case that some of those tons will be redirected to other markets, and whether that be South America or Europe, and that the United States will be fully supplied by North American production.

Yeah, I think that's really the key point here, which is North American producers have the ability to satisfy all of the demand in North America, and that's really, from a logistics standpoint and everything else, the most efficient way to make that happen. And so we don't anticipate that there should be larger than any, as far as that goes, longer-term imports from Russian and Trinidadian producers because domestic producers can take care of the local market.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Michael Piken with Cleveland Research. Your line is open.

Yeah, I just wanted to talk a little bit about the pace of imports of urea into the U.S. It seems like the total amount of imports are up year-to-date, despite the fact that NOLA has been at a discount to the rest of the world. And then also, with respect to the last India tender, it looks like they took about 1.4 million tons, but it looked like there were about 3 million tons or so that people were offering. So how do you see kind of these trade flows going, and is this increase in imports a function of the shift in production toward UAN among domestic producers or any color that would be great.

So you're correct in that the imports to date on a fertilizer year, which is a July through June, so July of 21 through June of 22. So July through and our February estimates, I'll give you, let's say through January, our imports on a year-to-date basis compared to last year as well as a three-year basis are higher. and that was a reflection of higher prices for shipments that were from, let's say, North Africa or the Middle East that departed in September and October, arrived in October and November, and we're at a higher level. However, you have to remember that production was lower in North America due to the hurricane and due to some turnarounds, and we project that inventories coming into the fertilizer year from June of 21 to July of 21 We're also at historical lows. So, the estimates today are around a million tons over that estimate or over the comparative basis from the year before. But as you add back or take out inventory and take out production, you're probably less than a half a million tons. Now, you have to remember the UAN or the urea market in North America is roughly 15.5 to 16 million tons. We import about 5.5 million tons. So we still have a significant amount of imports to make up. And those India tenders have basically soaked up the latent or the available shippable capacity that might come to North America or might go to Brazil. And Europe is behind, and they need to order or put those vessels on the water to replace the production there. So we see a fairly positive trend. environment going forward, not only for North America, but for the world based on those dynamics.

Thanks. And then this is a follow-up. I just wanted to clarify, you know, in terms of your volume commentary and getting back to, you know, nine and a half to 10 million tons of gross ammonia production. And then I think, you know, later in the remarks, you mentioned that you guys could potentially produce up to 110% of nameplate capacity. I guess, I'm assuming you probably came into the year with low inventories, but if you shift more production from urea into UAN this year, what should we be thinking about in terms of the total number of product tons or a range in 2022 for that? Thanks.

Well, yeah, as you shift urea into UAN, you certainly make more UAN tons, but you also end up – you know, with less ammonia tons, but net-net product tons go up a little bit. We really think about it in terms of nutrient tons, even though we report sort of product segment lines. And the nutrient tons goes back to the ammonia production to begin with. So, you know, as you said, Michael, we're looking at kind of 9.5 to 10 million ammonia tons per The 10 is probably a little bit on the outside range just because our INSS plant in the UK continues to be down right now. 10 is probably a stretch, but somewhere in that range is very likely. Then Burt's going to manage the product upgrade slate in order to maximize netbacks for us. You know, that typically has gone anywhere from kind of 19.5 to 20 million tons and maybe a few more here and there. As you said, low inventories coming into the year. I would think, you know, we're still probably in the 19 to 20 range, depending upon what the product mix ends up looking like overall. So it's pretty much of a normal year for us.

Yeah, the only thing I would add is with the UK plants, being a little bit lower from an ammonia production. If you recall, we've mentioned before that really the profitability that comes from the UK is pretty de minimis from that level. So really the margin benefit that Tony mentioned of even with being below the 10 is still going to be comparable to what we saw historically.

Thank you.

Thank you. Our next question comes from the line of John Roberts with UVS. Your line is open.

Thank you. Maybe another attempt to maybe get you to give us some guardrails on how much stock you might buy back. If your stock stays over a 10% free cash flow yield, could the slope of the share reduction kind of look like the light green line in figures 13 and 14, at least the earlier years?

Well, what I would say is, John, I don't think we're going to give an actual number as to what we're going to be repurchasing on the opportunistic side. But obviously, you've pointed out a very true point that where the pre-cash flow yield is now in a per share shows that our share price and what our outlook is, not only for the remainder of 22, but in the 23 and 24, shows that they're very undervalued. I think I'd point back to you know, really the volatility in our shares and opportunities throughout the year. So while we don't have a lot of calls on capital this year when it comes to CapEx and other things, we will be deploying that to share repurchase. The timing of that, you know, is going to be different throughout the year just based on not only the free cash flow yield and where we see that, but also on the volatility of the shares.

Yeah, and I would just amplify that. As Chris said, earlier in his remarks, there's a component of this that is going to be routable, and then there's a component that's going to be opportunistic. And I think we want to be in a position where if there is some sort of a negative movement in our share price, we're in a position to really capitalize on that for the benefit of our longer-term shareholders. And so we're going to be aggressive when the time is right. But there is a roundable portion of this that will just continue to chug along day in and day out.

And then how long do you think it's going to take before we start having more ammonia capacity announcements by the global majors like you and Nutrien and Yara? Or is this a little bit like the oil and gas industry where there doesn't seem to be supply response to the high oil prices?

Yeah, I mean, I think the important thing here is By the time you decide to announce a project, it's probably four to five years until you're actually on stream. So what's less important about that decision is where today's prices are trading. What's more important is the longer-term S&D balance and what you believe is going to happen. As Chris mentioned earlier, we firmly believe that ammonia and hydrogen are going to play a critical role in decarbonizing economies and that demand is going to well exceed supply. The question is kind of when do you begin that build process? And, you know, right now, as Chris also said, existing capacity trades at a discount to new construction. So as we think about it, you preserve the S&D balance. You get immediate cash flow. You're buying at a relative discount if you can find existing assets that you like as opposed to build new. But the world is going to need more ammonia by the time you get to the back end of this decade, and I think those announcements are coming, but I think they're going to come in a different form from how they've happened in the past. In the past, there's been fertilizer plants that have been built And I think what you're going to see is more clean energy ammonia plants being built, ones that are either purpose-built around carbon capture and sequestration for blue ammonia production or possibly green production that announcements like have happened in Australia and the Middle East and in Europe. And those tend not to be, quote-unquote, fertilizer plants. Those tend to be more energy-oriented plants, and I think that's what we'll see more of. The cost point on those is substantially less than building a fully integrated fertilizer complex. And so, you know, I think... John, it's probably not too far in the future before you'll start seeing some real interest there, and you've already seen a raft of announcements around green projects. But I also think there's only a few places in the world where you really want to go build a blue plant, and North America is one of them. We've got access to very plentiful, low-cost natural gas. We have the right regulatory and legal framework, and we've got the regulations in place in order to facilitate carbon sequestration. And so I think this really is the ideal place for blue production to really develop and become a significant part of the clean energy source for the world. Thank you.

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.

Thanks for taking my question. I'll leave it at one given the lateness of the hour. Given everything that we've discussed, is there any consideration for maybe refinancing the 2023 maturity rather than paying it down? How are you thinking about the balance sheet now given the parameters that you outlined for the earnings power over the next few years?

Yeah, I don't think there's any change to that, Vincent. Our goal is the $3 billion, and it's really looking at it over a longer wavelength and allowing us, as we said, to have a balance sheet that's strong enough where we do see opportunities that we can take advantage of those. I think historically, sometimes taking on a little too much debt when those opportunities came, we may not have been able to go in both feet. So right now, there's nothing that's changed from our balance sheet commitment to be at $3 billion and take out those 2023s rather than refinancing those.

I mean, the good news is based on what we're seeing in the marketplace looking forward is it's not impeding us from doing all the other things we want to do. We can easily take out the the $500 million of maturities coming due next year and still do all the other things. If you just look back to last year, we returned $800 million of capital to shareholders while we took $500 million of debt out and added $1 billion to the balance sheet, and that was last year. So, again, we're feeling like we've got capacity to do all of the things we're looking to do here based on the op environment in front of us.

Okay, great. Thanks very much.

Thank you. Ladies and gentlemen, that is all the time we have for questions for the day. I would now like to turn the call back over to Martin for closing remarks.

Thanks, everyone, for joining us. We look forward to continuing conversations at the conferences we have coming up in the next few weeks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.