CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to CF Industries' 2022 first half and second quarter financial results. My name is Gary. 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 toward the end of the presentation. To pose a question at any time, please press star 1 on your touchtone telephone keypad. Please note, this event is being recorded. I would now like to turn the presentation over to the 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 first half 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 our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Tony Will, our president and CEO.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first half of 2022, in which we generated adjusted EBITDA of $3.6 billion. On a trailing 12-month basis, we generated adjusted EBITDA of $5.3 billion, net cash from operations of $4.4 billion, and free cash flow of $3.6 billion, all of which are new company records. To put this into context, our previous full-year adjusted EBITDA record was $3.3 billion, which was set back in 2012. We exceeded this mark through just the first six months of this year. This all-time record free cash flow is coupled with our lowest share count ever, and the benefits to our shareholders are shown on slides 14, 15, and 16 of our materials. Our performance was made possible by the outstanding execution of the CF Industries team against a backdrop of wide energy spreads between North America and high cost production in Europe and Asia. Looking ahead, in the near term, we expect global nitrogen demand to be underpinned by the ongoing need to replenish global grain stocks. Longer term, we anticipate meaningful new demand to develop from low-carbon ammonia in clean energy applications beginning in the next couple years. Over this period, we believe the global LNG market will remain structurally tight as European and Asian economies compete for scarce LNG cargoes, keeping natural gas prices high in these regions, which should support continued wide energy spreads favoring North American producers. Given this outlook, we expect to generate substantial free cash flow for an extended period. This will enable us to return significant capital to shareholders, while we also make disciplined investments to grow our low-carbon ammonia production footprint. Our Blue Ammonia Project at Donaldsonville and our partnership with Mitsui position us to supply a substantial volume of low-carbon ammonia beginning in 2025, just as significant demand emerges. Taking together our growth initiatives and shareholder return programs position us well to create meaningful shareholder value in the years to come. With that, let me turn it over to Bert, who will discuss global nitrogen market conditions in more detail.

Bert? Thanks, Tony. The first half and second quarter of 2022 saw a continued positive operating environment for CF industries. Strong global demand and high natural gas prices in Europe and Asia pushed global nitrogen prices to all-time highs. As a result, we achieved record average selling prices for all segments, even as poor weather affected the North American planting and application season. As we look ahead to the second half of the year, we believe the environment will remain favorable for our company. European and Asian producers are facing extremely high natural gas costs, creating supply uncertainty at a time of resilient agricultural-led demand. Last week, prices at the Dutch TTF natural gas hub exceeded $60 per mm BTU. This would put ammonia production costs for efficient plants in Europe above $2,000 per metric ton. At current product prices, this production is not sustainable, which is why we have seen several producers in Europe, including BASF, Yara, OCI, and Fertiberia, curtail ammonia output. Producers with the option to import ammonia may be able to run upgrades profitably. For those who cannot, the European off-season is likely to be very difficult, and we could see further curtailments and increased nitrogen imports into Europe. At the same time, government actions continue to play a role in limiting global supply. Since October of last year, Chinese government policy has materially restricted urea exports. We do expect a seasonal increase in Chinese export volume in the second half of the year but appears total exports in 2022 will be well below the level of last several years. In contrast, the supply of fertilizer from Russia outside of ammonia has returned to near normal levels as trade flows have adapted over the last several months. This environment, together with typical seasonal demand led by India and Brazil, has created substantial demand outside of North America for all nitrogen products. We evaluate these opportunities on a daily basis. For the past several weeks, the value of all major nitrogen products has been substantially at parity on a nutrient basis. This allows us to use our manufacturing system flexibility to optimize our product mix and meet global demand in the form and location that maximizes margins. As a result, we have built our largest export book ever across all our products. Given the demand outside of North America, we offered a limited UAN fill program this year. We launched it at a price point about 40% higher than last year and completed the program quickly. Between fill and our export book and our fall ammonia position, we are well positioned for the months ahead. In the coming months, we expect the highest margin opportunities to shift rapidly between regions where product is most needed. With resilient demand and constrained supply, The global nitrogen market is likely to be short fertilizer it needs if product prices do not incentivize greater production in high-cost regions. With that, let me turn the call over to Chris.

Thanks, Bert. For the first half of 2022, the company reported net earnings attributable to common stockholders of $2 billion, or $9.78 per diluted share. EBITDA was $3.5 billion, and adjusted EBITDA was $3.6 billion. Based on our long-term outlook, we expect to generate substantial free cash flow over an extended period of time. This will enable us to pursue our capital allocation priorities of investing in growth and returning capital to shareholders. We continue to make progress on the clean energy initiatives at the heart of our growth platform. We recently signed a joint development agreement with Mitsui that provides the framework for the next steps in our exploration of new blue ammonia capacity in the United States. This includes the feed study that we expect to begin in the second half of 2022 once we finalize the site and technology provider for the proposed plant. Additionally, our green and blue ammonia projects at Donaldsonville are advancing. The site where a 20 megawatt electrolyzer will be located has visible signs of progress. though the bulk of the construction will occur in 2023. Detailed engineering is underway for the dehydration and compression facilities necessary for the transportation and permanent sequestration of carbon dioxide. We expect to complete this project by the end of 2024. On an annual basis, expenditures for these clean energy initiatives represent only a modest outlay of capital compared to our expected free cash flow generation. We do expect to hold a higher level of cash on our balance sheet in the coming years as we intend to fund the Donaldsonville projects and our portion of the proposed Mitsui joint venture project from cash on hand. Given our outlook, we believe we will have ample flexibility to pursue additional growth opportunities that meet our investment criteria. We also plan on returning substantial capital to shareholders over this period. Through the first six months of the year, we are well positioned to exceed our goal of returning more than $1 billion in capital on an annual basis. This starts with our quarterly dividend, which the Board increased by 33% in April, demonstrating its confidence in our outlook and recognizing the work we've done to reduce fixed costs. We also continue to execute our current $1.5 billion share repurchase program. which we view as both a return on and return of capital. Through the first six months, we have repurchased 6.6 million shares for $590 million. As you can see in our level of repurchase activity in the second quarter, we stepped in opportunistically to repurchase shares as our stock price fell, despite positive industry fundamentals. Moving forward, we expect to maintain this approach with a ratable portion of our share repurchase program at $175 million per quarter, and opportunistic purchases layered in at attractive levels. 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 thank everyone at CF Industries for their outstanding work during the first half of the year. We ran our plant extremely well, leveraged our logistics and distribution capabilities, and made continued progress on our strategic initiatives. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.21 incidents per 200,000 labor hours, significantly better than industry averages. Our consistently strong operational performance, along with nitrogen industry conditions favorable to North American producers, have led to record financial results over the last year. In the last 12 months, we have begun investing in our clean energy growth initiatives, retired $750 million of debt and regained investment grade ratings, and returned approximately $1.4 billion to shareholders. This includes $1.1 billion to repurchase more than 15 million shares, representing 7% of shares outstanding at the start of the period. We are well positioned to build on our track record of shareholder value creation going forward as we focus on our mission to provide clean energy to feed and fuel the world sustainably. With that, operator, we will now open the call to your questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. As a courtesy to others on the call, we ask that you limit yourself to one question. Should you have additional questions, we ask that you reenter the queue and we will answer additional questions as time allows. The first question is from Joel Jackson with BMO. Please go ahead. Hi, good morning, everyone.

Morning, Joel.

Can we talk about the gas price differentials in Europe? I mean, obviously, well, it would seem to me if there was enough demand right now to get into the European supply, you know, we'd have a lot higher nitrogen prices. So can you talk about what's been going on there? What are the marginal costs around the industry as just a seasonal thing? And as demand picks up later in the year, we'll get into where European gas costs are, or do you think about differently than the way I'm laying it out?

I mean, I think as Bird mentioned in his prepared remarks, nitrogen prices have to rise given where the cost of marginal production is. And it's not just in Europe, it's in Asia as well. If you think about it, I think India has announced that they're not getting as much LNG import from Russia as they were expecting. They've curtailed some of their urea production. They're competing with Europe on LNG cargoes. And you're looking at a situation with $60 at TTF. Plus, as Bert said, it's $2,000 ammonia. That's not where the market's trading right now. So in our view... This is actually pretty constructive about the go forward. It means that the amount of production in those high-cost regions is going to be somewhat limited. The challenge there, of course, is it means the world's going to be incredibly tight availability of product as we get into both the winter and then into the spring next year, particularly if the situation in Europe's not resolved in the coming months because that just further pressures the whole system with winter coming.

Hey, Joel, this is Bert. When you look at what's going on globally, it's not just the gas. It's what the gas is changing and forcing, and that's a change in trade flows, a change in movements, and probably even a change in the type of fertilizer you'll be using because of an inability possibly to get ammonium nitrate, for example. Europe today represents 15 million tons of ammonia, probably 9 million tons of urea. 4 million tons of UAN and probably 9 or 10 million tons of ammonium nitrate. That is a substantial amount of nitrogen that's constrained. And so you're going to see the North African tons move that direction. But even from other places, they have to be supplying Europe. And so, like Tony said, either prices have to move up or you're going to see Europe become much more of an import-dependent market than it already is. both bode well for prices.

Yeah, and I think on that point exactly, on ammonia into urea production, you're talking about just the gas component of urea being over $1,400 a short ton at $60 gas. So that's not where the market's trading. The market's got to move up substantially on And given our position as a North American producer, we're expecting to benefit from that.

Our next question is from Adam Samuelson with Goldman Sachs.

Please go ahead.

Yes, thanks. Good morning, everyone.

Morning, Adam.

Morning. So maybe following up on that kind of line of questioning, and you alluded in the prepared remarks to having a record – export book. Tony Byrd, I'd love to hear you kind of just talk about some of the opportunities and challenges around increasing that and specifically thinking about UAN and what had been tariffs in Europe, but also would seem like nitrate producers in Europe are under a lot of stress at current prices. So could you help us think about how you can grow your export business and actually serve some of these deficit markets that might be emerging?

Yeah, you bet. And I'll start and then I'll give the mic over to Bert here in just a second. But as Bert said in his remarks, the way product pricing sits kind of in the moment, we're kind of margin indifferent between the type of product that is being produced, which is unusual that ammonia pricing and margins are so high on a nutrient basis. That's pretty unprecedented. But it also means that there's no reason for us to make UAN and sell it at fill pricing into tanks or inventory at this point when the world is going so short ammonia. So Yeah, we do have record exports. We are exporting some UAN. We had a very limited UAN fill program specifically because our focus is on ammonia and exports right now. And I think that's going to bode really well for us, not only in the near term based on what demand and margin opportunities look like, but also when it becomes spring time in the Northern Hemisphere next year because all of those skill tons are not going to be sitting in the system and the channel in the U.S. So we're very constructive about what the forward looks like.

Yeah, good point, Tony, and that's exactly right. We saw these dynamics building in Q2 and now into Q3, and it's really a testament to the flexibility that's been built into our system. We can shift production mix on a On a production shift, so that'd be in an eight-hour period, the loadout in Donaldsonville is substantial, and we're even able to bring interior tons to Donaldsonville to load, whether that be through a midstream operation or off of our own dock. And so the level of exports is over, I think, 30 vessels today in our export lineup. And you're right, we saw these opportunities. It was based on the economics of the decision of not only the operating economics, but the global economics predicated on freight and margin return to CF industries. And so we have shifted that production mix and will continue to do so. I do see a tariff cut coming in Europe. They've already announced they're working on urea and ammonia, and we would expect that UAN would be in the same position just because of the needs of the tons and the requirements of Europe to meet their agricultural fertilizer needs. So how do we grow and serve those markets? Every day we're focused on that. and communicating with our customers, our global customer base, and leveraging our system to do that.

The next question is from Joshua Spector with UBS. Please go ahead.

Good morning. This is Lucas Beaumont. I'm for Josh. So I just wanted to follow on from your comments on nutrients and pricing there and sort of translate that into your volume outlook. so your gross ammonia production guide for the second half seems to imply that volumes might be down sort of flat to down slightly on the first half you've also got your 3q turnaround activity coming but probably less than last year so could you please just discuss your updated volume outlook for us in the second half and whether you expect to see product time shipments above the first half levels and how you see the product mix evolving between ammonia urea and uan thanks

Yeah, normally the bulk of our turnaround activity is Q3 and to some extent into Q4, just given that that's seasonally in the northern hemisphere that tends to be the weakest point of the year, both from a pricing and a volume perspective. And so this year is no different. You know, our expectation around gross ammonia production, which from our perspective is really the critical driver on the rest of it. We make decisions about which products to upgrade based on instantaneous margin opportunities. But the one thing that, you know, if you're not making ammonia, then you don't have those other options. So our focus is really on running the ammonia assets at maximum capacity and on stream factor. And we're still in the kind of nine and a half to 10 range on that for the full year. Again, as you point out with a little heavier turnaround activity here in Q3, but Ashraf has the plants running really well and safety is terrific. And relative to product mix, that's really a function of where margins are. And right now we're favoring ammonia and we're favoring exports because that provides both the best instantaneous option for monetizing the product and also just sets us up really well for come springtime.

The next question is from Steven Byrne with Bank of America Securities. Please go ahead.

Yeah, thank you. I was wondering if you had a view on how much nitrogen consumption was globally in the first six months of this year relative to historical levels? And two follow-ons to that, one being, what do you think that the impact might be on global crop production in 2022? And then secondly, do you expect a tighter market this fall, particularly in the U.S., as you are you know, you have a strong export book.

Well, good morning, Steve. This is Bert, and I'm going to start with the third one first. In the tighter market, yes. With what's going on globally in Europe, as we just explained, and what we believe are low inventories coming out of, especially at the retail level, coming out of our spring in North America, coupled with delayed purchasing in other places, such as India, with their most recent tender at just 600,000 tons, And then the announcement yesterday that they are gas constrained and Gazprom is not shipping the LNG that was purchased or expected and having to cut production there 10% of urea, that's going to create an additional import demand to meet their needs. And so we're seeing, again, because of high prices in Q2, some delays that will be materialized in Q3. But the balance or the negative balance of that is, lack of gas, lack of production in not only Europe but other constrained areas. So when you look at the market, we see a tight market through and well into next year. When you look at consumption relative to historical, you know, we had a little bit lower acres in the United States than expected and a late planting. So I think that had an impact in North America. But when you look at, again, how that's going to balance for the year, For CF, we have a great book and are eagerly looking to the back half of the year to supply that.

And I would just add to that, Steve, that I think your point is a really good one, which is globally there's no doubt that nitrogen consumption was down in the last 12 months because there was constrained supply. For periods of the year, you had Russia, Egypt, Turkey, China, all with export restrictions. and you had significant curtailments in Europe and Asia. And so the world just had less nutrients to go down, and I think from that perspective, we're not anticipating that there is any kind of substantial makeup relative to global stocks to use on coarse grains, which is why we see this persisting demand on the ag side for longer. And I think... It's really going to be an interesting proof point when all the harvest information is tallied globally around where yields come in. But our expectation is we're going to be in a deficit situation for quite a while, and that just provides a longer runway relative to ag demand.

Thank you.

The next question is from PJ Juvicar with Citigroup. Please go ahead.

Yes. Hi. Good morning. Hey, Tony. Do you have thoughts on expanding your existing capacity given the U.S. Gulf Coast advantage, especially as you do your blue ammonia projects in Donaldsonville and Yazoo City? While you go in there, can you expand those plants? And this is secondly on green hydrogen with Mitsui. As you do the feed study, what are the key variables on the feed in terms of, for example, securing green electricity or the right electrolyzer technology? Can you just talk about some of the key pinch points on the feed, and what do you expect on green hydrogen?

Yeah, you bet. So, PJ, just to correct a couple of things there. The green ammonia project that we have is at Donaldsonville, and that's a 20-megawatt electrolyzer that's in process, and we expect that to be online in 2023, 2024 timeframe. And that'll be producing about 20,000 tons of green ammonia per year. So it's a little bit of a modest first step in that direction, but we're We want to get comfortable and competent on the technology and the process and also really testing the market to see what the demand and the price premium is for green ammonia. The Mitsui agreement that we have is really about a brand-new blue ammonia project, so carbon capture and sequestration. And we're in the process of finalizing site selection and trying to get appropriate incentive packages worked out with state and local authorities to make that happen. And we're anticipating that would be about a 1.3, 1.4 million ton a year ammonia plant that incorporates carbon capture and sequestration to produce blue ammonia. And, yeah, I mean, we're really excited about the – competitive position that North American natural gas affords and the ability, both from a regulatory regime, but also a geological perspective to be able to do carbon capture and sequestration here. We think it's, you know, it's great to be able to participate and take advantage of the natural advantages that we have here in in the U.S. And that analysis is going to be very site-specific about what is required for that ammonia plant and also to get a pretty tight estimate on cost. And then we'll use that information in a thoughtful, disciplined way around making the investment decision or not. But our expectation is, particularly given where the cost of hydrocarbons are in the rest of the world and how chronically short Europe is and what the cost of building out and replacing existing capacity with green is, that that project, at least initially, has terrific economics associated with it. And we just need to prove it out before we go ahead and green light it and move forward. But our expectation is, yeah, we are absolutely going to be participating in that demand growth in this space, and what we like is being able to participate in the clean energy aspects of low-carbon ammonia. So that probably is not going to be an upgrade plant for fertilizer consumption. It's really going to be a clean energy plant. Relative to de-bottlenecking the existing system, We've done a lot of that over the years, and we've kind of hit sort of natural breakpoints on a number of our plants in terms of it really makes more sense to invest in new capacity at this point than it does to continue to try to squeeze more out of what's already there, because you end up hitting limits on heat exchangers and other things that then you end up with reliability problems. We're very proud of the reliability and the on-stream factor of our network. We're running it really well, very safely, and it's kind of finely tuned right now. So I think you're more likely to see us do new plants than you are de-bottleneck existing.

And, PJ, this is Chris. The only thing I would add to what Tony said is with the Inflation Reduction Act that is being proposed in Congress right now, Everything he said about the low-carbon projects and the advantage of North American producers, specifically U.S., just becomes even greater with, you know, potential for an increase in the 45Q from $50 to $85. And then additionally on the green side, potentially some hydrogen tax credits. So those are also things that we'll continue to evaluate as we look at these projects going forward.

The next question is from Chris Parkinson with Mizuho. Please go ahead.

Great. Thank you. So you have a lot of European producers importing ammonia. You've got the Moroccans taking product from the Caribbean as far as Argentina. At the same time, you know, in the ammonia market, you've essentially cut off a lot of the Russian tons via the two pipelines which are down in Ukraine. You know, that's an interesting dynamic in the third quarter, but how sustainable is that in the fourth quarter in terms of tightness? And from your perspective, is this ultimately going to be the catalyst that basically forces the EU to go back to the Middle East, North Africa tons, and then further tighten things, not only for the West, but potentially the East? I mean, just how should we be interpreting that current dynamic and how sustainable is it in the 2023? Thank you.

Yeah, Chris, I'll start and then give it to Bert. But I think all of it is driven on gas availability and gas price in Europe and Asia. And if you're looking at $60 gas, Those urea plants and just the pure ammonia plants, they're not going to run. You can't make that math work when you can import it instead. I think it's very sustainable. Everything that we're seeing in terms of the forward gas curves in those regions suggests the situation is not going to resolve itself soon. That's one of the reasons why we believe the energy spread differential is going to remain wider for longer than and also gives us a lot of confidence around kind of what the intrinsic value of our asset base, and even though you didn't ask this question, I'm going to answer it anyway, which is why we stepped up share repurchases in the quarter, because we're taking a fundamentally different view around how much, what the demand looks like for our products, where the supply points are, what the energy spread differential and the margin opportunity is, and it makes us very bullish. So, you know, that's My point, I'll turn it over to Bert.

No, I appreciate that, and I think those are all spot on. Chris, this is Bert, and I think when you take a step back just to focus on EU, but you list out some of the areas and issues driving our markets, demand, and supply, you're going to see an additional, let's say, 3 to 4 million acres of corn in North America for next year on top of strong corn demand. Ethanol is running at 90%. China is going to be importing a significant level of corn, and Your protein sector is healthy. The dollar is very strong today, and that's going to incentivize global production of feed grains. The problem in the United States is we've got a drought that covers 30% of the corn production area, so it's a question, will we even hit the yields we want to? And then you look at what's going on globally, not just with gas but with freight costs. It's $100, $70 to $100 to move product out of Russia, and freight costs overall even coming out of the Middle East, position CF as a domestic producer in a wonderful position. And there's not a lot of new tons coming on to add capacity to the market. And you've talked about the Russian ammonia pipeline is down. Those exports are down. So you have 200,000 tons of ammonia per month not moving to the North African phosphate producers. Farm income is at its highest level probably in 10 years. So the money is there not only for the American and Canadian farmer, But for the Brazilian, and I think because of the weak currency in Argentina, even more so in Argentina, and we're in import-dependent markets. We have to attract these tons, as will now Europe, and requiring more imports. And then you throw in what Tony just talked about with a gas shortage. And there is only limited supply of LNG. Now with India being 40% to 60% dependent on imported gas and unable to get it, they're going to have to import more urea. So we're structurally, with those issues driving our market, whether that be the grains, the livestock, ethanol, energy, all require what we're producing at a very strong level. So for that reason, we're very constructive, the forward, at least 23-24.

The next question is from Jeff Zakowskis with J.P. Morgan. Please go ahead.

Thanks very much. I guess I have a couple of questions. If the production cost of ammonia in Europe remains at $2,000 a ton or $2,000 a short ton, what should be the rational price of ammonia in the United States? Second, if I may, if you produce green ammonia in do you get hydrogen credits for that because hydrogen is a part of ammonia, or don't you because it's not a separate product? And thirdly, in any blue, any production of blue ammonia or blue hydrogen, is it unlikely that that production can get a hydrogen credit because of the way gas leakage is, or the CO2 effect of gas leakage is calculated.

Yeah, so Jeff, this is Chris. I'll start with the hydrogen credit and production for ammonia. So the ammonia, the hydrogen is just an input into the ammonia production process. So it's our understanding we would be able to receive ammonia the tax credit that would, if one were to pass, related to the green ammonia with the hydrogen tax credit, which is quite substantial based on a number of criteria that we'd have to meet, but would make it definitely much more economical going forward. Related to your second question with some of the methane slip and such that may happen upstream, What we're talking about is the blue ammonia is what gets the 45Q. So we would be taking the CO2 with the dehydration and compression projects that both Tony and I spoke about, sequestering that long-term and getting that credit, which today for a Class VI permanent sequestration sits at about $50 per metric ton, but is proposed in this latest inflation reduction to go up to $85, more than enough to cover the incremental operating costs and expense that we have in there. So we're, you know, pretty bullish about the direction that the clean energy, low hydrogen, or I mean low carbon ammonia is going.

And on the first part of your question, Jeff, in terms of where should pricing be, you know, nitrogen in general is a globally traded commodity. So... The world bids in a certain amount of capacity and for the most part, you know, it's whatever that highest cost ton that gets built into production plus freight differentials that ultimately set kind of global pricing. And right now, given the level of curtailment that you see across both Europe and Asia, the global operating rate is operating at a deficit relative to what normal build is during this period of time. And so that just cascades forward. So if you, you know, if you say that the forward gas curve for TTF is right, I mean, eventually you're either going to destroy demand and ration a very scarce commodity, or pricing is going to have to rise to turn on some of those assets. And so, you know, if you're talking about marginal production cost of $2,000 plus or minus, that's, you know, that's where things could head now if You know, if we get a hopeful resolution to the conflict in Ukraine and gas starts flowing again and, you know, you see that differential easing, then that'll ripple through the price deck. But the way that it sits today, you know, it's shaping up to be a very scarce commodity as we move into the winter months. Great.

Thanks so much.

The next question is from Michael Piken with Cleveland Research. Please go ahead.

Yeah, good morning. I just wanted to talk a little bit about your expectation for UAN imports into the U.S. in light of the CBD ruling. How quickly can those imports arrive? And do you just expect that it may just be a change in trade flows if you can end up potentially getting more to Europe or to other export markets? And Where do you see your biggest growth potential in terms of UAN exports in that type of scenario? Thanks.

Hey, good morning. This is Bert. And regarding the expectation, we've been as high as, let's say, 2.5 million tons and as low in the recent times, which is last year, of 1.5. So a spread of about a million tons. And with what's going on today with the pricing that's available in Europe, the tons from Trinidad should and I think are going more to Europe And that makes sense. Our tons are being bid at a higher price than the domestic market. And so some of our tons are going to Europe as well as to South America. And I think that's, again, what Tony referenced is the balancing mechanism of a global market and a global commodity and some of the advantages that we have in terms of freight and gas costs. It makes sense for us to make those economic moves. But regarding the trade case, you know, we won round one, we won round two, and we won round three. Round four was damages. And so they found that there weren't damages. And I would argue, obviously, that my position is that there were, have been, and without that remedy, there would be future. So we'll see how this settles out. But we're positively moving forward, and that's the position.

But our focus is less around... UAN per se, and it's more around what's the best margin opportunity once you've made ammonia, and that might be selling it as ammonia, it might be making it into your granular urea, it might be making UAN, but we're not fixated on UAN per se, and that's one of the reasons why, as Bert said, not only are we exporting, but we're heavily focused on ammonia right now because the value prop is better for us right there. So that's why, again, our focus is not on 19 or 19 and a half million product tons it's on you know nine and a half to 10 million ammonia tons because that's really where you make the value which is the conversion of methane into ammonia the next question is from ben isaacson with scotiabank please go ahead thank you very much and good morning uh one more question on the ammonia market um

You've talked about 15 million tons of capability in Europe. We're also hearing about demand destruction in various pockets of ammonia, whether it's on the nitrogen side or the industrial side or phosphate. Is it possible that when the northern hemisphere re-engages in the fall that we won't need the Europeans at all and essentially they will be temporarily kicked off the curve? And if so, what does that mean for Asia's marginal cost of ammonia production. Thank you.

Yeah. So, um, th there's no doubt that in a, um, a globally tight commodity price has got to ration demand, right? Because there's just not enough supply to go around. So, you know, temporary, whether you call it demand destruction or deferral has got to happen because there's just not enough product to go every place that it's, it's desired. And so certainly those that value it less are not going to have access to it. But that said, historically those assets have run and have run at a reasonably high on-stream factor, and the globe has needed those tons in order to be able to run the food production system as well as the industrial applications of ammonia. And without those tons showing up, you're chronically short and someone's going to go without. So think about the world as being approximately 180 million tons of ammonia production annually or consumption, and it needs that. If you've got 15 million tons, that's a huge percentage of it that's offline. And that's just Europe. That's not even including what's going on in Asia and with curtailments going on in India and so forth. So this is a big deficit that the world is facing relative to nitrogen availability as we move forward through the balance of this year and into next spring.

Yeah, this is burdened. When you look at global capacity for ammonia, it's about 235, 237 million tons, but running at 80-plus percent on-stream factor, you have about 190 million tons of supply, and trade is about 17 million tons. So then taking out that whatever number you want to put to Europe of 10 to 15 million tons of a lack of that supply, like Tony said, it just tightens it up and there's only so much available, and then it's where's the gas that's available to produce that ton. It's going to be tight.

The next question is from Andrew Wong with RBC Capital Markets. Please go ahead.

Hey, good morning. Um, so we always hear a lot about European net gas. You touched on Asian net gas a little bit. Um, can you maybe just like speak to that a little bit more? We don't get a lot of visibility into that part of the net gas market as much as Europe. Um, how much, if you added it up, like the higher cost production in Asia plus Europe, like how much does that make up of your global supply and all your cost curve? And then just maybe separately on industrial demand, what are you seeing there?

Yeah, so this is Bert. And when you look at the, you're right, this is a global gas market, just like it's a global nitrogen market. And the base points that we follow are obviously Henry Hub for North America, NBP for UK, TTF for Europe, and JKM for Asia. And those are traded points that are on the board. And so you're able to follow that by the minute what those prices are and what is happening and has happened is Asia and Europe are trading in concert. And the reason for that is they're competing for that time. And over the last several months, it's almost like the Asian buying groups have been slower and I think they were in a better position and that has pushed more LNG to Europe to fill their needed storage. and especially with the reflection of the limits on Nord Stream 1, that was a good move. So the different groups have targeted a percentage of storage that we hope that they get there, and that's just to operate and to keep homes warm in the winter. But that does have an industrial component, and I think that will limit industrial production in Europe, and there's many discussions going on with what can be cut, what levels for power, or like BASF, importing ammonia and then not needing that gas for that type of their component or their industrial footprint. But I think what's going to happen over the next several months is as we compete and get closer to winter, India is short. We've already mentioned that. So they're already asking for a 10% cut of urea production, and half of that production is using imported gas. There are other areas. China also has areas that import in Japan. But there are other countries, Malaysia, Indonesia, that have their own production and their own production of nitrogen. So this is going – it's in balance today. Price is bidding it. And we'll see where that settles out over the next several months. But there's a very limited amount of LNG that's available, whether that's from Qatar, Australia, United States, Indonesia, Malaysia. And with the Freeport explosion that took two BCF a day off the market, it's just that much tighter. So we'll see how it goes, but today it's tight.

The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you, and good morning, everyone. Bert or Tony, could you comment on sort of the psychology of the U.S. customer or North American customer base since the end of the spring season. And I guess I'm just wondering why they're not being more aggressive to rebuild inventory going into the fall and into next spring. You guys obviously have laid out some pretty significant dynamics that are going on, and we can all obviously see what's happening in the energy curve. So is it the case that the U.S. folks just financially don't want to hold that much dollar amount inventory or the credit issue or sort of what's going through their heads right now, and how do you see that evolving as we move into the fall?

Good morning, Vincent. So I'll give you sort of just a quick high-level perspective and then let Bert jump into some more of the details, given that he's more actively involved in some of those conversations. But I think there's certainly a question and a risk off from just inventory cost position when you're carrying it for a long period of time. that, you know, that does create a little bit of hesitancy. I think you also tend to, in some cases, trade last year's news. And if you looked at where we were trading last year, you know, at this time, pricing was 40% or more lower than where we are today. And so, you know, I think that there is a general expectation of, well, this year is going to end up looking something like last year or the year before. And it's not really predicated on current situation of what's going on with gas spreads globally. And, you know, they don't have an urgent immediate need for it. So the thinking is, well, let's hold off because maybe tomorrow will be cheaper than today.

I think that that last point is salient in that there isn't a need. They've had a fantastic year. Our retail, wholesale, trader checks and relationships and communications have They've all closed out on a fertilizer year, which is July through June, a very profitable year. And they don't want to start off in a negative position. So those who thought that some of the fill and fall prices were high just chose not to purchase, which is fine. We want to support that group that wants to push it to spring. But with the dynamics we've laid out today, our communication to them is that's fine, but you know, prices do move. It's a global commodity. And in a commodity market where corn and soybeans and wheat and cotton and sugar are all higher price and in high demand, there's going to be a significant level of demand in addition to the industrial need. So I think that we'll see that mindset probably improving further into this quarter and next quarter.

And Vince, I would just add that the longer you see high gas prices globally, the bigger the snap is going to be when it comes in terms of the price move. Because first of all, with North American customers showing a little bit of hesitancy and the export book that we've laid on and the lack of availability of tons elsewhere in the world, it's just going to make it you know, that much bigger of a price impact when the realization hits home.

The next question is from John Roberts with Credit Suisse. Please go ahead.

Thank you. I think you have five years left on the Mosaic ammonia contract. Do you think the changes in the ammonia market likely accelerate the renegotiation of that contract? Might we have to wait to the expiration before you get a renegotiation?

Good morning, John. This is Bert. And we have a great relationship with Mosaic. They're a very good partner. They built their harvest vessel. It radably comes in and out of our facility, loads very quickly. And we like being in partnership with some of these phosphate producers. We're also exporting to other locations for phosphate production. And so you're right. There is a time life of this contract. We look at our contracts all the time and are in conversation with our customers, and we'll see how we progress with that.

Okay, thank you.

The next question is from Ben Thurer with Barclays. Please go ahead.

Yeah, good morning, everyone. I just wanted to follow up a little bit on what you said around just rationalization and European production. I mean, you've made the announcement on the UK side. Where do you stand there in terms of the negotiation redundancy? You took, obviously, the 160-ish million in the quarter. But what are you seeing amongst competitors in terms of similar restructures going on within the European or the UK market? Thank you.

Yeah, I think most of what we've seen so far is curtailments as opposed to announcements of permanent closures. There have been a number of kind of green ammonia projects that have been announced, although those are probably at least five years away. And the cost of replacing existing conventional ammonia with green is very high. So I'm not sure how much of that capacity actually gets built But we have not seen a lot of announcements, or at least I'm not aware of a lot of them, that have talked about permanent closure of facilities. It's more been curtailments at this point.

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

Thanks everyone for joining us this morning. We look forward to our follow-up conversations and seeing you at conferences throughout the quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.