CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to the CF Industries first quarter 2022 earnings conference call. My name is Michelle, 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 01 on your touch-tone telephone keypad. If you wish to be removed from the queue, you may press 02. I would now like to return the presentation over to our host for today, Mr. Martin Jurasek with CF Investors 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 first quarter of 2022 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 may be found in our filings with the SEC which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Tony Will, our President and CEO.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first quarter of 2022, in which we generated a quarterly record adjusted EBITDA of $1.65 billion. Our trailing 12-month net cash from operations was $3.7 billion. and free cash flow was $2.8 billion. These results reflect continuing outstanding performance by the CF Industries team against a backdrop of a very tight global nitrogen supply-demand balance and wide energy spreads between North America and marginal production in Europe. We ran our assets extremely well. Our North American manufacturing plant set first quarter production records for gross ammonia, UAN, and diesel exhaust fluid. We leveraged our extensive distribution network to serve customers in the Corn Belt and expanded our logistics capacity to serve customers on the east and west coasts. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.25 incidents per 200,000 labor hours, significantly better than industry averages. This level of exceptional execution will continue to serve our customers and shareholders well, as we expect the global nitrogen supply-demand balance to remain tight for the foreseeable future. Nitrogen demand will continue to be underpinned by the world's need to replenish global grain stocks. We believe it will take at least two years and possibly longer to accomplish this. At the same time, high energy costs in Europe and Asia are likely to lower global operating rates at certain times of the year, so we expect nitrogen supply to remain tight, with the marginal ton being very high cost. Russia's invasion of Ukraine has exacerbated both demand and supply situations, first by impairing Ukraine's grain production and exports, and second by creating uncertainty about natural gas price and availability in Europe. Taken together, these factors make it likely that global nitrogen supply-demand balance will stay tighter for longer. Given these market dynamics, coupled with our position on the low end of the cost curve, we expect to generate significant free cash flow in the coming years. This will enable us to invest in our clean energy growth initiatives while also returning substantial cash to shareholders. We are excited about growth opportunities we see in the clean energy applications of ammonia. Earlier this week, we announced in conjunction with Mitsui, a potential new blue ammonia facility in North America. We also continue to advance both our green and blue ammonia projects at our Donaldsonville, Louisiana facility. We expect to begin making green hydrogen and green ammonia in 2023. and have up to 1.7 million tons of blue ammonia production beginning in 2024. These are important steps forward in the development of this exciting new market opportunity, one where we are clearly leading the way. In a moment, Chris will provide more details on our approach to capital allocation moving forward, including our capital expenditure outlook and our return of capital program. But first, let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail. Bert?

Thanks, Tony. Farm returns in North America for all crops are forecast to be historically high, despite higher input costs, setting the stage for another strong year of farm incomes. This includes farmers who will be growing corn, wheat, cotton, and rice. As you can see on slide 9, global coarse grain stocks use ratios have not improved over the last six months, driving nitrogen-consuming crop prices toward record highs. The timeline to replenish grain stocks has been getting longer, not shorter. We believe it will take at least two more years at trend yields to fully replenish global stocks, supporting continued strong agricultural-led demand for nitrogen. We continue to expect healthy planted acres of nitrogen-consuming crops this year. Looking at new crop futures, returns for corn exceed those of soybeans. which supports our projection of 91 to 93 million acres of corn planted in the United States in 2022, if weather cooperates. During the first quarter, our team leveraged the flexibility of our network to ensure that we were able to serve customers by helping prepare for this coming demand. Our rail utilization was at its highest level in years, and we increased UAN barge capacity. We also chartered three times our typical volume of U.S. flagged Jones Act vessels to move UAN efficiently to the east and west coasts. Rail service to some of our customers has become a serious issue in the second quarter, and we continue to work through those challenges. We believe that high crop prices and strong farm income will also drive demand for nitrogen in the world's largest urea export destinations. We expect the recent urea tender by India to be the first in a regular cadence of tender activity in the coming months. We also project urea consumption in Brazil to remain strong in 2022. We do not see many catalysts in the near term to significantly increase global nitrogen supply availability. We expect China to resume urea exports in the second half of the year. However, it is unclear how large the volumes will be given the Chinese government's focus on keeping food inflation under control and balancing the environmental impact of coal-based urea production. Marginal production in Europe that cannot export to the southern hemisphere will face difficult operating decisions during the northern hemisphere off-season if natural gas costs continue to be high. We expect Russian fertilizer producers to continue to export, but at reduced rate due to sanctions, limited internal logistics and port outlets, difficulty arranging insurance, and vessel shipping. CF industries remained well positioned in this environment, even as natural gas costs in North America have increased. Natural gas forward curves suggest continued favorable energy spreads for North American producers compared to marginal production in Europe, as you can see on slide 12. We continue to work with customers on their requirements for the spring fertilizer application season as weather has largely delayed planting so far. Farmers have proven that they are able to plant their acres in a short amount of time once that weather window opens. While most customers are prepared for first applications, we will leverage our expertise and extensive distribution network to meet the top-dressed and side-dressed demand that will emerge after planting. With that, let me turn the call over to Chris.

Thanks, Bert. For the first quarter of 2022, the company reported net earnings attributable to common stockholders of $883 million or $4.21 per diluted share. EBITDA was $1.68 billion and adjusted EBITDA was $1.65 billion. The trailing 12-month net cash from operations was $3.7 billion and free cash flow was $2.8 billion. Given the substantial free cash flow we are generating today and our confidence in the company's long-term free cash flow outlook, I want to walk you through our expectations for capital allocation moving forward. First, we reached our long-term gross debt target of $3 billion in April after we repaid the final $500 million of our 2023 notes. This level of debt and the work we've done over the years on lowering fixed charges provides us with financial flexibility now and through the cycle. We expect capital expenditures to remain in a range of $500 to $550 million per year. This estimate includes planned maintenance activity as well as our investments in clean energy initiatives that are in progress. We continue to advance the green ammonia project at the Donaldsonville complex and have placed orders for all major equipment. The construction of the CO2 compression and dehydration facility at Donaldsonville is expected to be complete in 2024, enabling us to be first to market with a significant volume of blue ammonia once sequestration is initiated. While we leveraged our existing network to create decarbonized ammonia capacity, we're excited to pursue organic growth in blue ammonia capacity through our joint venture with Mitsui. We believe the investment related to this effort in the next two years will be measured, with a feed study beginning shortly and FID in 2023. The nearly 50-50 joint venture will support our ongoing commitment to discipline investments in the emerging clean energy market and provide supply of low carbon ammonia to support the global transition to clean energy. Given these relatively modest calls on capital, we expect to have ample capital to return to shareholders through our quarterly dividend and share repurchases. The Board's decision to increase the dividend by 33% was driven by two main factors, the more positive outlook for cash generation across the cycle, and the significant reduction in fixed charges we have achieved through debt reduction, share repurchases, and other initiatives to eliminate frictional costs in the business. We also continue to view share repurchases as an important way to provide shareholders a return on and a return of capital. During the first quarter, we repurchased approximately 1.3 million shares for $100 million. This represented the routable portion of our share repurchase program for the quarter. Based on our free cash flow generation outlook, we expect to increase the routable portion of our share repurchase program to $175 million per quarter. Along with the higher quarterly dividend, this positions us to return greater than $1 billion to shareholders on an annualized basis. We are also prepared to opportunistically repurchase additional shares at attractive levels as we have in the past. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to recognize the entire team here at CF Industries for their outstanding work during the quarter. Our focus continues to be on operating safely and leveraging our manufacturing and distribution network to serve customers, a role that is even more critically important today than ever. The North American agriculture sector, including CF Industries, is poised for strong results over the next several years as we collectively work to replenish global grain stocks. The geopolitical issues in Europe, particularly Russia's invasion of Ukraine, only increases the importance of the role North American farmers play, as well as the rest of the supply chain, in providing food for the world. The last year has underscored the critically important role of ammonia to the world, both for fertilizer and industrial applications. It has also confirmed our belief that new demand for ammonia in clean energy applications will grow significantly in the coming years. CF Industries will be a leader in supplying blue and green ammonia to meet this emerging demand, and we are excited about our progress in this area. We have tremendous opportunities before us, and we intend to capitalize on them to create meaningful shareholder value in both the near and longer term. With that, operator, we will now open the call to your questions.

Thank you, sir. We will begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, you may press 02. If you're using your speakerphone, you may need to pick up on your handset first before pressing the numbers. Once again, to ask a question, please press 01 at this time. We do have several questions in the queue, sir. The first question comes from Adam Samuelson with Goldman Sachs. Your line is open. Please proceed.

Yes, thanks. Good morning, everyone.

Morning, Adam.

So I was hoping to maybe dig in a little bit more on the decision to pursue the Blue Ammonia Project with Mitsui. Maybe understanding that you have to still go through the full feed study and FID next year, can you provide some rough parameters around capital costs that you've thought about to even announce this, how you maybe have ranked, why the Blue Ammonia Project with Mitsui at the U.S. Gulf as a green field and the first one you would have done, or green lit in about a decade, would have... been the highest priority kind of opportunity to use the capital versus other things you could have done in the portfolio. And yeah, maybe I'll leave it there.

Yeah. Adam, so One of the reasons why it's going to be a green field instead of a brown field is we do want a little bit of geographic separation from the Donaldsonville facility for reasons like we had last year with Hurricane Ida when it came through and basically took the entire facility out for three weeks. I think the combination of having a a geographically separate location to produce blue ammonia, combined with the blue and green ammonia projects at Donaldsonville, give us some continuity of supply, regardless of weather events like that, such that we can enter into very reliable long-term supply agreements for production of low and zero carbon ammonia with counterparties. And that's really the reason why I put it at a different location than Deville. In terms of why blue ammonia, as opposed to a full-blown fertilizer plant with upgrades and everything, it really speaks to both ours as well as Mitsui's conviction that this is an area of not only emerging demand, but very strong demand as we get out into the future. And so we believe the world is going to need this. We think that, particularly given that the U.S. does not have a structured regulatory cost of carbon today, but most of the rest of the world or much of the rest of the world does, that an export-oriented facility where we can move those tons into the international marketplace and really leverage the skill set and capabilities that Mitsui brings as a partner is critically important and will serve us really well. And I think from an overall kind of, you know, you had mentioned economics or capital. The reason we're going through the feed stage is to really get a much better handle on what the cost of the project is going to be. But, you know, just based on our recent experience, both at Donaldsonville and Port Neal, adjusting for inflation that's taken place, It wouldn't surprise me if we, for a greenfield facility, were in the neighborhood of $2 billion plus or minus for this. But remember, it's basically a 50-50 investment for both of us, and it's paced out over five years. So think about that from our perspective as, you know, even though the money doesn't go out the door radically like that, but you're talking about $200 million a year in terms of capital over the next five years. That's a relatively, I mean, it's a significant amount of money, but given the fact that we generated $2.8 billion of free cash flow in the last 12 months, it's imminently affordable and, you know, not a crazy amount, and I feel really good about it. the prospects for that plant having a fantastic return profile for shareholders.

Okay. That's really helpful, Collier. I'll pass it on. Thank you. Thanks.

Thank you. The next question in the queue is from PJ Jivakar with Citigroup. Your line is open. PJ, we cannot hear a response.

Hey, sorry about that. Good morning, Tony, Bert, and Chris. Another quick question on this blue ammonia facility with Mitsui. On top of your blue ammonia at DeVille and Yazoo City, is the demand for blue ammonia in your mind going up? Or do you think the current 45Qs can cover these incremental costs and you can make it financially attractive? And can you give some details on this incremental costs? Because Others in the chemical industry don't agree that you can really cover the incremental cost with 45Q credits. Thank you.

Yeah, PJ, I think the big difference between ammonia production and most of the rest of the industrial emitters is that as a byproduct of the ammonia production process, we capture extract two-thirds of the co2 from the process anyway it's the process waste stream that comes from ammonia production using a steam methane reformer and so we've already captured that in some instances we use that co2 for urea production and you know and others we end up venting the excess co2 that we don't need But the most capital-intensive and costly aspect of CO2 sequestration is the capturing of CO2 to begin with. And because that's already baked into how an ammonia plant operates, the incremental cost that we're looking at is really just the dehydration and compression of the CO2 stream so that it's suitable for injection into geological sequestration wells. And so for us, as we announced at Donaldsonville, we're looking at roughly $200 million for dehydration and compression. And it's probably going to be in the neighborhood of $5 to $10 per ton of CO2 of incremental utility costs down there. And then there's going to be some transport and some injection costs as well. But that still leaves plenty of money available within the current framework of the 45Q tax credit. to earn a very favorable return on the incremental capital that we need to put in place, which is only $200 million. And for a greenfield facility or a brand new facility, it's basically the same plant, whether you're doing conventional or blue, we're just adding the additional dehydration compression. So again, call it another roughly $200 million And again, on that kind of basis, the 45Q tax credit provides a very attractive return profile for us. So that's why ammonia production is pretty unique in the industrial landscape in terms of most likely able to take advantage of the 45Q credit. I think if you were doing flue gas capture or other things, you're talking about probably $120 to $150 a ton that you'd need the credit to get to in order to justify it based on today's technologies. Now, I do think that there will likely be ongoing improvements and developments to reduce the capital and operating costs going forward on flue gas, but where we are today, you need a much higher 45Q tax credit. Fortunately, you know, we're not encumbered by that given that we already capture so much CO2.

Great. Thank you for the detailed explanation, Tony. I'll pass it along.

Thank you, sir. The next question comes from Chris Parkinson from Mizzou Securities. Your line is open. And the next question comes from Josh Spector with UBS. Your line is open. Please proceed.

Yeah, hi. Thanks for taking my question. I'm just curious about some of your assumptions around China urea exports in the second half. I mean, you seem convinced that there'll be at least some that hits the market. I don't know from your thinking, what are some of the gating factors that drives whether material comes out of China or not, given the moves that they've made over the past six months?

Yeah, this is Bert. Good morning. And I think some of those gating factors are real and pronounced today with what's going on with inflation and the government's desire to control that internally and not really looking externally for how that is impacted. And there was an announcement today or information in the trade publications about a continued enforcement of those export bans, possibly through or into 2023. So it's not clear how many tons will come out, when they'll come out, The previous position was in June that the export ban would be lifted. And so what we have seen is a very tight control of product, both NNP coming out of China. And China represents about 10% of the global trade, so a significant portion taken off the market. What we've seen internally to China is the prices controlled almost half of what has been traded on the international market. So, again, a reflection of controlling costs to the farmers and keeping that product in China. So we've been open that economically and from incentives as a marginal producer that they should be exporting, again, on an economic basis. But on a governmental action basis, that probably will not happen. So let's just say we had probably expected three to four million tons. It could be half or less than that looking at it today.

Thank you. It's very helpful.

Thank you. And the next question is from Chris Parkinson with Mizuhu Securities. Please proceed.

Great. Can you hopefully hear me? Yes, sir. All right. Just checking. All right. You know, Tony and Chris, you're poising to generate a lot of free cash over the next two, three years. I mean, we could all go back and forth about spreads, but I think the conclusion there is pretty clear. You know, when you think about all the opportunities you have with both, you know, some of these smaller, high-return, low-risk brownfields, you know, what you're looking at with SUI, obviously share buybacks, which Chris hit on. You know, how should we think about, let's say, over a rolling two- to three-year period, You know, the balance of capital allocation at, you know, versus projects versus return to shareholders, you know, versus the last three to five. It seems like you're still juggling a lot of opportunities. So, I'd really appreciate some, you know, intermediate to long-term color. Thank you.

Yeah, Chris. Thanks. This is Chris speaking here. As Tony outlined and I did in our remarks, we have a number of projects that are laid out for the blue ammonia that'll be happening over the next couple years. That'll take a couple hundred million dollars, but as you point out, the amount of free cash flow that we have will be able to do everything from the share repurchases to the increased dividend that we just announced and also these projects. I think the one thing is we're just talking about the projects that we've laid out here. We consistently look at other organic and inorganic projects. Over this past 12-month period, we've had almost $3 billion of free cash flow generation. And as Bert mentioned, some of the outlook that we see, that'll be even greater. So I think it provides us a lot of opportunities to do a lot of different things. One is to do the growth plans that we talked about here. And then two is to also move into some of the share repurchase and return of capital that we talked about. not only the ratable portion, which is going to be $700 million this year, but also the opportunistic piece. And given the volatility in our share price, I think we're looking at, you know, potential opportunities not only this year, but in the coming years where we can get in and get quite a bit of shares out at a favorable return for shareholders.

And, Chris, I would just add and, you know, agree with everything Chris Bone said, but We are now at our desired level of long-term debt of $3 billion. We think we're well into the investment grade ratings, even though we haven't been moved there yet. But if you just look at the strength of the business and how we're performing and the relatively – small amount of debt that we're carrying, you know, we feel very comfortable with that. And so, as Chris said, even if we're ultimately decide to move forward on this new Blue Ammonia project, it adds roughly, as I said, kind of 200 million plus or minus per year to a range that's, you know, 5 to 550 of capital per year. We don't really have additional debt reductions, so call it 7 to 750 of of capital going out the door that we've earmarked already. And as Chris pointed out, in the last 12 months, we did $2.8 billion of free cash flow. So that still leaves a very healthy amount for return of capital to shareholders. And I think based on how the business is performing, we can do all of the above.

Got it. And just as a quick follow-up, There's obviously a lot of different dynamics going on with the UAN market. I mean, some of the major producers in, you know, obviously Central and Eastern Europe are now completely cut offline. You've got obviously a lot of other, you know, trade considerations as well, which have evolved over the last year. And I think a lot of us couldn't help it this year, you know, mix this quarter. You know, Tony and Burgess, how are you thinking about, you know, not just this season, but also the intermediate term outlook, you know, for UAN versus Urea on end unit spreads? and just how that's evolving. It seems like it's pretty favorable, but any additional thoughts would be greatly appreciated. Thank you.

Yeah, I'll give you my just quick two cents, and then I'll turn it over to Bert. But I think one of the things that we're seeing is a return to appropriate valuation for UAN where it belongs compared to urea. It is a more costly product to make than urea, given that there is significantly more capital involved in the production process. It also offers farmers a tremendous product with great efficacy from an agronomic standpoint, but also gives them some efficiencies in terms of application of other chemicals, whether it's fungicides or herbicides or insecticides or whatever can be mixed in with the UAN. And so it provides benefits to the grower. It's higher cost to the producer. Therefore, it ought to trade, generally speaking, at a premium to urea on a per unit of nitrogen basis. And that's where it is again, and I think largely because of the fact that the Commerce Department and the International Trade Commission put in the duties on product that was being dumped illegally by the Russians and the Trinidadians. And so, you know, our expectation, and I think generally speaking, is UAN should trade at this level premium to urea. In terms of kind of our plans going forward, I'll turn it over to Bert.

Yeah, Chris, looking at what is going on in the UAN market, we're at the precipice of planting and applications, which are late in North America. But product continues to flow and move to the interior, and as Tony said, it is trading at a premium to urea. And we have... benefited or moved to a higher production and remained that way through first quarter of favoring UAN over urea. And as long as that spread maintains, we will continue to do that. The outlook is favorable. The demand is there with 91 to 93 million acres of corn and what is taking place with restrictions of feed grains coming out of Russia and Ukraine, the world will rely on Argentina, Brazil, and the United States, and to a lesser degree, India and Australia, to supply the wheat and some of the corn out of South America especially, and that will take a lot of nitrogen. And we're seeing growth in UAN in those markets and continued demand in North America. Europe is constrained. With the gas spreads taking place today at $30 TTF against $7 to $8 in North America, it is difficult to produce and participate in the global market from Europe as they have in the past. So we expect trade flows to change, especially as a result of Russia, and then UAN from the United States to possibly go where it's most urgently needed in a food-constrained world.

That's great detail. Thank you so much.

Thank you. And the next question in the queue comes from Michael Paykin. One moment, sir.

touch a little bit on kind of what's happening from a logistical standpoint with the delayed spring and, you know, some of the issues on the rail lines. I mean, do you guys have sufficient urea ammonia with your in-market storage up in the Midwest? And, you know, I guess, you know, how is the delayed planting season, you know, potentially playing a role into your outlook for the spring? Thanks.

Hey, good morning, Michael Burt. And you're right. Logistical issues have been front and center and, When we went public a week or so ago with some of the delays from the Union Pacific and some other rail carriers, we have been working with our rail providers to have good solutions in place, whether that be service and rail cars, and that is a work in progress today. And so we've been communicating with our customers on any potential delays or movements. But because of that, we've geared up with additional UAN barge capacity as well as I mentioned in my prepared remarks, vessels to go to the east and west coast to just expand our capability to fully supply North America with needed UAN. And we've ramped up production, as we talked about in previous quarters. What I think is taking place, then it gets to the delays because of weather. And we have had cool, wet weather, which has delayed access to the fields, and that impacts ammonia. And so the conversations with customers today are very real of, do you have enough in place? And if you're asking us to move it, don't rely necessarily on the railroads today, but what we can do with our distribution network. And I do think ammonia will be challenged. We still have a good portion of our ammonia to be applied to the ground, but I think you're going to quickly go to putting the seed in the ground, especially as we get closer to the middle of May, and potential yield impacts of late planting. So yes, we have sufficient storage. Yes, we have sufficient product. We are running our plants at 100% capacity and working very long hours to make sure that we supply our customers with the nitrogen nutrients that they need.

Okay, we'll go with the next question. The next question in the queue comes from Steve Byrne. Your line is open. Please proceed.

Yes, I wanted to ask a little bit about this project with Mitsui. Do you think that they will be able to secure long-term contracts with the Japanese utilities either at a fixed price or maybe a fixed tolling fee with gas pass-through so that this project could ultimately give you a fixed return? And on the capital, is this a POX or autothermal unit so that you can capture all the CO2?

Good morning, Steve. I'd say we're still in final short-stroke review and negotiations with the various technology providers, so we haven't announced the vendor and the particular approach that we're taking yet. I think that we're taking all those things into consideration as we make those final determinations. But I couldn't be happier in terms of the partner we have here. I think there's no better partner to have out there than Mitsui. with their capabilities and access and knowledge of the region and their contacts. I think we're, you know, we are in a very, very strong position and we're really pleased about it. We're discussing a number of different alternatives, but the one that you talked about certainly is not out of the question in terms of more of a, you know, gas plus arrangement that earns a fair rate of return on the capital being deployed for us. But there's, you know, there's a number of different things that we're taking into consideration and more to come. So stay tuned.

And then maybe a question about your use of free cash flow, the outlook relative to what you have as a commitment for share repos. leaves a pretty big opportunity and gap. Would you say that you're just keeping your options open and thus could engage in a much more aggressive share repo? Or do you want to keep your powder dry in case you want to go more aggressive on capacity expansions and or do you see any M&A opportunities down the road?

Yeah, the good news here, Steve, is I think we're generating so much cash, it's all of the above. But we're focused right now on the first $1.5 billion of repurchase authorization that the board's put there. Given that our debt is now where we want it to be and we're generating – With so much cash, our expectation is we'll get through that in pretty short order here, and then don't be surprised if we put another one in on the heels of it.

Yeah, I'm with Tony on that one, Steve. I think there's enough to do a lot of different things, both organically and inorganically, but from a share repurchase standpoint, as I mentioned earlier, just the volatility that we see in our shares that really aren't backed by the fundamentals. We've seen that all the way back to December where we stepped in pretty heavy and bought $500 million worth of shares within like a 20-day trading period. So I wouldn't be surprised to see that type of activity when we see disconnects along the way. But even doing that, as Tony mentioned, these next few years with what we see from a free cash flow generation and really with where CapEx is in a pretty manageable band, we should have plenty of opportunity to do some share repurchases and return to capital.

Thank you.

Thank you. The next question in the queue comes from Andrew Wang with RBC Capital. Please proceed.

Hi. Good morning. So has there been any change in some of the conversations you have with potential customers around the low-carbon ammonia market or maybe potential for long-term agreements? And that's what kind of gave you more confidence to kind of move forward with a pretty large project here?

I mean, we're having conversations on a daily basis with all kinds of potential customers and others that are working through technology innovations and applications. And I would say the first two that we see developing in pretty large quantities are ammonia being co-fired with coal for electricity generation, and I think both Japan and Korea are going to be the epicenters for where that begins, but it's likely to spread. And then as a marine fuel, because it's got zero carbon emissions. And so I think those are the places where we see demand developing. And the marine application is so large that it could, with pretty, I would say, realistic assumptions, double the amount of ammonia that is used in the world today. And so we're, you know, we're really focused on those two applications. Again, I think we've got the right partner with Mitsui to go after them. And, you know, our intent is to lead from the front on this.

Okay, that's great. And then maybe just more of around some of the more near-term operations kind of question. Given that we're seeing higher prices internationally, Are you considering more export sales this year? And then just also with the wet weather and the start to the planting season may be a little bit slower. Do you have any view on the inventory levels as we exit the spring season?

Yeah, so this is Bert. And when you're looking at the market, we're, as I said earlier, we're at the precipice of planting. And you'll have stages of applications, whether that be for corn, wheat, cotton, rice, canola. And as we move from south to north, the applications are already taking place in Texas, Oklahoma, and Kansas. And we'll, I'd say this next week, be going very strong in Iowa and then up in the Dakotas and Canada. And so when we're looking at where we're going to move our product, it's where it's most urgently needed and where it's highly valued. And we continue to do that to look at our opportunities and leverage each of those We're in conversations with people globally, and we have very solid, strong relationships with our customers and want to make sure they are well supplied. That's why we have inventory throughout the United States and in Canada prepared to ship. And we have the logistical assets locked up, and they're moving daily. And so when we look at the opportunities for CF, they're very positive and will continue to be, we believe, for the next, I'd say, for the next couple years. Great, thanks.

Thank you, sir. And just as a reminder, if you do have a question, please press 01 on your touch-tone phone. The last question I have in queue at this time is from Vincent Andrews. Your line is open. Please proceed.

Thank you. Tony, maybe I could just ask a few more questions on the Mitsui situation. Could you maybe tell us a little bit more about the site? And I guess what I mean by that is you threw out a $2 billion... potential total number. Could you talk a little bit about, you know, how much volume you're anticipating for the $2 billion and the site that you're looking at? Maybe you don't want to tell us too much about it, but, you know, how much expansion capabilities are there? Is this sort of, you know, the opportunity to have multiple phases over an extended period of time? And so maybe we could just start there.

Yeah, you bet, Vincent. So we are actually in some pretty advanced conversations with governments both at the state and local regional levels in a couple of different areas that will dictate where we ultimately end up. We've got sites in different states that have been identified, and this should be a competitive process like anything else is. And so we're heading down that path to get the best terms that we can because This is a significant economic boom to wherever it is that we end up putting the plant. The sites that have been identified are capable of supporting multiple units. I would say four to five units based on the original land acquisition with possible extensions beyond that if and when appropriate. and fantastic logistics in terms of deepwater dock access to make it, you know, export-oriented. And so that's really our focus in that way around the export marketplace. And, you know, I don't want to go too much more specific on location because we're coming to, again, the short straws here or strokes in terms of, um, negotiating a package deal that looks attractive.

Okay. No, I understood. But just on the, on the amount of volume you think you're going to get for 2 billion, any, any insight there?

Yeah. I mean, I, I think, um, if you think about the equivalent, um, volume, uh, you know, the, the Newport Neal, um, ammonia two plant would be the low end of it. And the, the Donaldsonville, um, Ammonia 6 new plant would, you know, would be sort of the higher level of it. That's really the state of the art in terms of volume today. But again, we haven't really finalized the technology provider and the different firms have slightly different approaches and rates and so forth. But in that range, you know, a million to a million for tons a year is kind of what we're targeting.

Okay, great. Thanks very much.

Thank you, sir. And the last question I have in the queue is from Jeffrey Zakakis from JP Morgan. Your line is open.

Thanks very much. There's so much constraint in fertilizer production and trade in all the three major nutrients. Do you think that these constraints will have any effect on global yield of the major crops over the coming year?

Good morning, Jeffrey. This is Bert. And you're asking the question that we've all been trying to answer and have been doing a lot of work globally to put that quantitatively together. to make decisions on movements of products and expectations for the forward curves. And when you look at what's taking place with restrictions out of the Black Sea on grains and oilseeds and even processed products, the world needs to increase the rest of the world's production and ability to ship. And that needs to happen in the northern hemisphere in the spring And I think that's going to be constrained in Europe just with some limits on nutrients. I think we're fully supplied in North America and having good weather would be very helpful to a bountiful crop. And then it moves to South America who plants in September, October, November, December, January for second crop, and then the harvest thereafter. So to us, it's a 2023 issue when these potential shortages can materialize. And it could be constrained because of lack of nutrients. With what's going on with restrictions or sanctions out of Belarus and Russia, and then you factor in 100% limitation because of the war out of Ukraine and then shipments out of the Black Sea, and then governmental restrictions from China, you've taken out of urea 25% of the urea supply. So it either needs to move things around, maybe use more ammonium sulfate, different applications, and price probably will have to impact some of that. I do think some of your third world countries that are planting non-dollar denominated exportable products probably will have yield impacts that will require food imports. That's still to happen. And so these are things that we are watching, paying very close attention to, and talking to our industry partners, whether that be grain companies, processing companies, as well as distribution companies, to make sure we're at the forefront of supplying the nutrients that we're capable of supplying on time and with a reasonable cost.

Okay. You mentioned at the start of the call that the TTF price in Europe was $30 an mm BTU. If you look at the curve, I think next year it's in the 20s. Do you have a hedging strategy in Europe for gas or do you have a philosophical view about gas? And in terms of the state of urea and ammonia shipments out of Russia today, could you describe them? You know, what's coming out of the Black Sea, what's coming out of the Baltic? So I guess there are two questions stuck in there.

So, Jeff, you know, our view is because Europe is not self-sufficient in the way of gas, you know, if you don't count Russian supply as part of native European production, then it logically, during periods of the year, is going to be in the third and fourth quartile on the cost curve. And that's why our view is that those assets will be running more intermittently, and you'll see lower operating rates as a result of it, which ends up – you know, making the supply-demand situation globally tight on an ongoing basis, and even when it runs, pretty high-cost marginal tons that are coming out of Europe. And, you know, the spread of, you know, even if the spread collapses down to $10 between North America and Europe, you know, $10 times 34 mm BTUs per ton of ammonia times 10 million tons of ammonia. You're talking about $3.4 billion just in ammonia value for us before you even get into the upgrades and the value of the logistics network. And that's only on a $10 spread. On a $20 spread, obviously, it's twice that. So the kind of energy curves that we're looking at going forward is give us a lot of confidence about the cash generation of this business. Our UK assets are pretty de minimis in terms of the contribution they make to the overall profitability of the enterprise, as well as the ammonia production volume. It's really North America that carries the freight in terms of what drives this company. We are okay running our European business, our U.K. business and assets when it's profitable to do so, and we're also okay taking those plants offline when it's not profitable to do so. And so our view is we want to be, generally speaking, more daily buyers of gas in Europe, given where they sit on the cost curve, and not try to take a long position on gas hedging there. because we think those plants ought to cycle on and cycle off, given where they sit in the global cost curve.

But to your general question on gas and hedging, and this is Bert. We are students of the market globally, just like we are with fertilizer. It's the key component of our cost, and it behooves us to be watching that diligently and buying and positioning ourselves appropriately. And today, as Tony said, that spread from North America to Europe is over $20, but even on the 23-24 forward curve, it still is $20. So that's why you're going to see European production continue to be constrained, and especially in the absence of Russian gas as we approach winter this coming fall and winter. It's, I think, going to be very challenged. Your question about Russian shipments... Yes, we are tracking what's being loaded and where it's being loaded. And I think there are several limitations. And as you take away the logistical capabilities and movements and flexibility of the Russian producers coming out of whether that be Siberia and the Perm area or where they're loading internally to move to the external market, there's a tremendous change that has taken place due to the invasion And that's the limit of ports. So you've had Black Sea ports, Mykolaiv, Odessa, and others that have been load ports, but that product has to get through there. Those are no longer available. Same thing with ports that have been like in Riga and other places in the north that are not Russian-owned or accessed. And so when you take the port capabilities down to probably 30% of the available outlets, That then has a backup process of logistics, a backup process of storage, and an inability to consistently move nitrogen, phosphate, and potash out as they did before. That will become more material as we move forward. Then you layer on on top of that insurance costs and vessel inability to get vessels or vessels not desiring to load in those ports and thereby pushing pricing up. Today it's I think like a St. Pete to Brazil is close to $200 a ton. That was less than 50 just a few months ago. And so these issues will continue to constrain Russian production on top of sanctions as we roll forward and if the sanctions do continue to be applied through 2022 and forward.

Thanks so much.

Thank you. The next question in the queue comes from Joel Jackson with BMO. Your line is preceded.

Hi, good morning. Bert, when we look at application rates for nitrogen this spring, can you talk about any trends you're seeing in anybody, any farmers maybe dialing back at the end? I mean, are you seeing any difference between maybe higher yielding acres versus lower yielding acres or anything you've seen? Please let us know.

Sure. I mean, that's actually a global question as well as a domestic question, domestic North America question. And today, no, we're not seeing it. $8 corn, and even looking at 22 and 23 at Deese at $7.40, and Deese 23 at, I don't know, $6.40, those are incredibly attractive. And with ethanol running at its current operating rate of close to 90%, and the attractive price position for protein being beef and pork, you have a heavy demand drive domestically as well as now exports because of the issues we've articulated about Russia and Ukraine and their inability to move corn and wheat out. So no, we're not seeing a decrease in applications. However, it is late. And as I said earlier, soil temperatures and application of nitrogen is delayed as well as P and K. It is going to be a very tight logistical window. And this is where CF shines. We have all the capabilities and the positions in place that others don't. So we have a lot of customers calling and sitting down and wanting to move products promptly. And I can tell you we're busy and working long hours to make sure that happens.

Tony, Chris, maybe they could ask the question about cap allocation a little bit differently. Talk about $175 million a quarter ratable rate or $700 million this year. You talk about maybe a billion-dollar spend possibly over five years for your part of that new JV. You're going to generate so much free cash in the next bunch of years, and people have said on this call already, and this might be the best year you're ever going to have, even in everything you've just said in your other projects. You're going to have so much cash on the balance sheet that's going to build here. Why not in this peak year, or I don't want to say peak, but as good as it gets here, let's say, Why not be a little more aggressive on the buyback? What are you really saving what looks like billions of dollars for?

Well, let's not be too hasty to call this the top of the cycle. I mean, I think there's a lot of runway left and a lot of uncertainty out there. And the longer you see these kind of energy spreads and the longer you've got, which obviously is a tragic, terrible situation with conflict, but The longer that persists, the more it pressures both the demand side because of grain availability as well as the supply side in terms of gas cost and availability. I would hesitate to call this a one-year situation. I think it puts us in a very enviable position. As Chris said, We are focused on a ratable basis now between the dividend and the ratable portion of the share repurchase program, returning over a billion dollars a year to shareholders. And that still gives us a lot of capacity to go in strong when we see drops in the share price and discontinuities like that. You know, when a couple of weeks ago there was rumor of a ceasefire, we dropped $15 in one day. And then we ended up catching some of that back through the course of the day. But we have a highly volatile stock, and we want to be able to absolutely capitalize when there is. drops in the share price that are not connected to the fundamentals of the financial performance of the business. And, you know, our belief is that that is actually going to be in the best interest of our shareholders. And if that means we carry a little bit of extra cash on the balance sheet from time to time, so be it. You know, I think when they see us like we did in the fourth quarter, taking out as many shares as we did at the average price of $60-some, that's a pretty attractive move. And so the fact that we can continue to do that and return a big chunk of cash on a ratable basis just, again, proves, I think, the value of this organization and company and the asset base that we've got here.

Thank you.

Thank you. And the last question in the queue comes from PJ Jivakar. Your line is open. Please proceed.

Yes, good morning. Thank you for taking my question. So my question is on your dividend which you increased substantially 33% to $1.60 per year. I mean that's a big signal from a cyclical company because looking back you would not have earned this dividend in 2017, 2018, and 2020, in the last five years. So, I mean, to make that move, are you signaling that the nitrogen markets have stepped up permanently? That's sort of my question on capital allocation. Thank you.

Yeah, PJ. This is Chris. I would say there's two reasons. One, we do think that the nitrogen market has stepped up here. where given some of the supply constraints that we were seeing even prior to some of the geopolitical events was tightening. And those are things that, you know, Bert and Tony have been talking about for over the past year. So we've seen a fundamental shift in what our outlook is on that and seeing that for a longer bit of time than maybe even what we saw a year ago. But then additionally, I think it's all the work we've done on our fixed charges over time. You know, the mantra we've had over the last three years is really to reduce our fixed charges, both through not only the debt reduction, but even the share repurchase, where we had lower amount of aggregate dollars going out for dividends. And then additionally, the work that Ashraf and his team have done through manufacturing to get our controllable costs down. So when you work all those things together, I think it's allowed us to increase the dividend without really changing our fixed charge outlook all that greatly. And then that, coupled with where, you know, we see the nitrogen market fundamentally shifting to, made us feel very comfortable in, and I think the board as well, with their approval of it.

And I would just add one other factor, PJ, and that is, you know, where the shares are trading and should trade to, we believe, based on our financial performance and outlook, But, you know, the old dividend was not as relevant from a dividend yield perspective, and we want the dividend to be, you know, relevant and comparable to other S&P companies. And, you know, frankly, under 2% yield is, you know, it is certainly at the low end of that range. And so while, you know, while I'm not forecasting anything another increase, it wouldn't surprise me if longer term, you know, based on the factors that Chris said, you know, both lower fixed charges as well as better industry fundamentals and, you know, a high share price meeting a low dividend yield that, you know, you wouldn't see it go up again at some point. So we're very bullish looking forward and I think all of the, you know, the moves that we're making are tangible evidence of how we feel about this business and the marketplace that we're in.

Thank you.

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

Thanks, everyone, for joining us this morning, and we look forward to seeing you hopefully in person at upcoming conferences.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.