CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to CF Industries' first half and second quarter of 2026. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. We will facilitate a question and answer session toward the end of the presentation. To pose a question at any time, please press star, I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Sir, please proceed.

Good morning, and thanks for joining the CF Industries Earnings Conference Call. With me today are Chris Bohn, President and CEO, Bert Frost, Executive Vice President and Chief Commercial Officer, and Andrew Scribner, Executive Vice President and Chief Financial Officer. CF Industries reported its results for the first half and second quarter of 2026 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'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now, let me introduce Chris Bohn.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first half of 2026, in which we generated adjusted EBITDA of $2.2 billion. These results reflect the CF Industries team's strong operational performance and a tight global nitrogen supply-demand balance, which was further strained by the conflict with Iran. Most importantly, our teams continue to embrace our do-it-right culture to deliver outstanding safety performance. We closed the quarter with trailing 12-month incident rate of 0.16 incidents per 200,000 hours worked, well below industry averages. that focus on safety directly supported high asset utilization in the first half. We operated our available ammonia capacity at nearly 98%, enabling us to meet demand from our domestic, retail, wholesale, and cooperative customers who supply North American farmers. In addition to our strong operating performance, we are making steady progress on our strategic initiatives. At Bluepoint, We have received all necessary permits to begin construction. Nearly all long lead items are ordered, and module fabrication is set to begin later this year. Within our existing network, we expect our Yazoo City complex to resume operations in the first half of 2027, after completing work to improve the site's long-term sustainability and operational flexibility. We also continue to be disciplined as we evaluate high return projects across our network to unlock further value. As you saw in our presentation, we have raised our mid-cycle EBITDA and free cash flow expectations. In a moment, Andrew will address more of this, but I want to address the broader market context first. Right now, we believe the market views a disproportionate amount of our EBITDA and free cash flow growth primarily through the lens of short-term geopolitical friction in the Middle East. That view misses a fundamental structural shift in our industry that has been occurring over the years and exposed through the recent global nitrogen supply chain dislocation. Higher global capital costs have structurally raised the incentive price required for new global nitrogen capacity, lifting CF industry's baseline mid-cycle earnings power while reinforcing the value of our existing manufacturing and distribution network. This is before we factor in any geopolitical premium. To be clear, our low-cost, low-risk North American asset base and not geopolitical risk is the foundation of our profitability. Our ability to operate at high utilization rates during disruptions enhances our stable mid-cycle return profile above and beyond the strong free cash flow generation already embedded in our outlook. This, in turn, augments our ability to invest in high return projects and return capital to shareholders. With that, I'll turn it over to Bert to discuss the global nitrogen market. Bert?

Thanks, Chris. The first half of 2026 saw rapidly changing global nitrogen market dynamics. Global prices rose significantly as an already tight supply-demand balance was further constrained by supply disruptions from the conflict with Iran. In regions where application seasons occur in the second half of the year, many customers deferred purchases. In North America, agricultural demand remained strong through most of the first half of 2026, led by ammonia and urea. Our team created significant value by leveraging our operational flexibility to prioritize urea production over UAN. It also enabled us to deliver our second highest DEF volumes in a first half, our highest margin product. In June, however, our customer slowed purchases of the nitrogen channel drew inventories down to a very low level. Those low inventory levels and positions ultimately drove strong participation in our UAN and ammonia fill programs in July. As a result, we built a substantial UAN order book that extends into November and expect a strong fall ammonia season. Looking at the broader market, global nitrogen fundamentals remain tight, even before factoring in geopolitical conflicts. Rising capital costs, permanent closures, and the limited pace of new capacity additions have kept supply growth constrained relative to demand. Additionally, a meaningful portion of global nitrogen capacity remains exposed to geopolitical uncertainty and this exposure has further tightened the global nitrogen supply-demand balance. We believe this will continue to affect supply availability, delivery confidence, and pricing due to higher logistics and insurance costs. Additionally, high LNG prices continue to pressure production economics for marginal nitrogen producers Thank you. Thank you. We expect the global nitrogen market to remain tight into 2027. Looking further ahead, we see continued structural tightening through the end of the decade as nitrogen capacity currently under construction falls short of historical demand growth. Finally, our low carbon sales program continues to gain momentum. Approximately 10% of our ammonia sales volumes in the first half were low carbon that earned an average premium of more than $20 per ton. With that, I'll turn it over to Andrew.

Thanks, Bert, and good morning, everyone. For the first half of 2026, the company reported net earnings attributable to common stockholders of $1.3 billion, or $8.71 per diluted share. EBITDA and adjusted EBITDA were both $2.2 billion. For the second quarter of 2026, the company reported net earnings attributable to common stockholders of $727 million, or $4.73 per diluted share. EBITDA and Justice EBITDA were both $1.2 billion. We continue to efficiently convert EBITDA into free cash flow. Our trailing 12-month net cash from operations was approximately $3 billion, and free cash flow was approximately $1.8 billion. As you can see on slide 10, our EBITDA to free cash conversion is consistently high, producing predictable and stable free cash flow. Over the last 12 months, we have returned nearly $1.3 billion of free cash flow to shareholders. This includes repurchasing 10.6 million shares for $958 million and $314 million in dividend payments. In July, the Board increased our quarterly dividend by 20% to $0.60 per share. As we have reduced the number of shares outstanding over time, we are able to reward the remaining shareholders with a higher dividend. For context, since the start of 2021, shares outstanding have decreased 29%, and over that time, our dividend has doubled. Looking ahead, we continue to project approximately $1.3 billion of capital expenditures in 2026, of which CF Industries' portion is approximately $950 million. With construction at Bluepoint expected to begin in August, the pace of capital expenditures will accelerate. We continue to focus on mitigating our cost exposure through fixed-fee contracts. As we have advanced Bluepoint activities and evaluated additional projects, it has become clear that the cost of building new nitrogen capacity and regions with low-cost natural gas has increased, narrowing the construction cost advantage those regions have historically enjoyed. As you can see on slide 9, these higher costs mean that the urea price required to bring new capacity online has gone up as well. Based on our analysis, this supports a baseline mid-cycle EBITDA for CF Industries of approximately $2.9 billion and pre-cash flow of $1.7 billion. You can also see that decarbonization Bluepoint, and other margin-enhancing projects provide upside to our baseline. By 2030, we expect these strategic initiatives that are in flight to raise our mid-cycle EBITDA to approximately $3.3 billion. And, as Chris noted, this is before any geopolitical premium for higher freight and insurance costs and constrained global supply. These near-term dynamics provide fuel for growth and a greater ability to return capital to shareholders. With that, I will hand it back to Chris before we open the Q&A.

Thanks, Andrew. I want to thank CF Industries employees for their commitment and dedication during the first half of 2026. The team continues to deliver safety and operational excellence while skillfully navigating our ever-changing global marketplace. As you can see on slide 12, CF Industries has a long track record of driving value for long-term shareholders by increasing production capacity and decreasing the number of shares outstanding. This has increased investor participation in our underlying assets by more than 40% since 2020. We expect to build on this track record in the near and long term. We have a premium grade asset base, proven operational capabilities, financial strength, and substantial high return strategic opportunities. The global nitrogen fertilizer supply demand balance remains tight, and rising capital costs across the globe have structurally elevated our baseline mid-cycle earnings. Against that backdrop, we believe CF Industries stands apart. As our mid-cycle EBITDA expectations continue to strengthen and our free cash flow generation remains highly predictable and durable, we are well positioned to continue to create value for long-term shareholders. With that, operator, we'll open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone song. The first question comes from Ben Isaacson of Scotiabank. Go ahead, please.

Thank you very much, and good morning. My question is on your new mid-cycle price of $410 a short-term. for CF. Can you talk about how much of that change is related to capital cost inflation versus how much is related to any structural or sticky changes that you see as a result of the conflict in the Middle East? Thank you.

Yeah, thanks, Ben. Maybe for starters, I'd just take a step back and just say, as I look back at Our performance since the beginning of 2020, we've averaged over and above that $1.7 billion free cash flow that we have as the mid-cycle by quite some amount. So it's not as if the empirical data and how we've performed and really how we've set up the company by increasing our production capacity and also lowering our fixed charges to get our free cash flow conversion where it is. hasn't been successful, and sometimes we don't always feel like that's being recognized, but we have been performing at that. What I would say is, you know, construction costs, the gap between the U.S. and the rest of the world has closed. You're seeing labor, procurement timing, different things with being able to use module yards, where that difference between a U.S. project and a global project has changed drastically, I think. And then, to your point, There are certain costs associated with these geopolitical events that are going to remain structural. So if you look at freight, for instance, freight we have basically from the Middle East to the Gulf now is about $70, where a year ago it was $35. Do we expect that to snap back to $35 and not have any type of structural piece to that? Probably not. But is that $5 to $10 there? Is there a few dollars in insurance costs, different vessel and a risk premium based on where those assets and really the supply offtake is happening. So I think as we look at it really from a NOAA price, we're saying we've moved from 355 milliliter urea on a short ton to 385. Of that $30, there's probably $10 that may be associated with structural changes that don't go away as a result of these geopolitical events. and then the remaining amount probably exists due to higher capital costs and really a closing of that gap between U.S. construction and outside the U.S. Yeah, and maybe let me add a little color.

Hi Ben, this is Andrew as well. As you look at that price going from $355 to $385, the underlying assumptions that we have is this is for a 1.3 to 1.4 million ton capacity site with a capex estimate of about $2.6 to $2.8 billion. If we assume 350 natural gas and a 10% to 12% financial return, that's how you get to the 385 price. You then use our economics and it gets to our EBITDA of $2.9 billion. One piece that I want to call out of what's in there and what's not in there is we also gave some color context around $400 million over time by 2030 that will get you to $3.3 billion. Out of that $400 million, $300 of that is blue point, and $100 is additional value. carbon capture benefits will get out of Dville and Yazoo City. The way to think about that, what's not in there, and I'll do this illustratively, you likely saw that we're pursuing a feed study for DEF. Because that has not been officially greenlit yet, that is not in that $400 million. If we get to that point through an investment decision, it will go in there. Likewise, in that $2.9 billion, as we're starting to realize the benefits of Dville on carbon capture, that's actually shifted left into that $2.9 billion. So it's really a function of the capital costs, and as Chris mentioned, there's probably some context around a little bit of geopolitical premium there, but it's really the capital costs and sort of realizing the benefits on carbon capture. So hopefully that helps.

That's great. Thank you.

The next question comes from Joel Jackson of BMO Capital Markets. Go ahead, please.

Hi, good morning. It seems like looking at yourself and your peers' results, ignoring some of the lower volumes in Yazoo City, there's a bit of a buyer's holiday in nitrogen Q2. And we all know what happened with commodity prices, nitrogen prices across the quarter. The war started and prices came down. I wonder if you could talk about that. What does that set up for the second half of the year coming out of the last five, six months of volatility?

Yeah, interesting. Thank you for having me. and the Northern Hemisphere was completing the application season. We did see some movement in North America, as I mentioned in my comments, with movements amongst products with additional urea. So we pivoted and produced more urea as well as DEF and that limited a little bit to what our UAN availability was. But I think overall prices did impact some places where you could defer demand. and we saw that happen. We see a little bit, I would say, as the data is coming in with a possible small cut in consumption in North America but not as big as relative to the other nutrients. Then the second half, we're bullish on the second half. When you look at what we've put together with our UAN fill program, the team did a great job of working with our customers, organizing that and getting it executed well. The average price on that is probably close to $300. and our program extends into Q4. And so good solid demand, good movement, we're already seeing that and I mentioned in my prepared remarks about the fall ammonia season with a very good uptake for that and we're just now positioning product in our terminals to serve that demand in November. And so when we look at where we are in the ag cycle, where we are with pricing and the customer uptake, on the retail wholesale side for us, which we know has been pushed down into the farmer. We see good positive traction through 2027.

Okay, the next question comes from Lucas Beaumont of UBS. Go ahead, please.

Thanks. Good morning. Yeah, I kind of just wanted to sort of follow up on the outlook there. I mean, I guess just given kind of the soft demand here in the second quarter, like a more compressed kind of timeframe for deliveries in the second half, we've got this still impacted global supply issues and like now increasing cost curve support as well. from European Gas. So I guess just how do you kind of see the setup there for pricing as we move into the fall and the spring? You know, is there a point here where the market's going to kind of rapidly tighten and expose low inventory levels as demand backs up? And I guess when do you think that would sort of be timing-wise? And is that setting us up for like much higher in-season U.S. premiums again coming up? Thanks.

Good morning, Lucas, and I think this is Bert. Regarding the soft Q2 demand and the deferrals that I mentioned in the southern hemisphere, we do believe that's going to catch up, and you're seeing that in India with the most recent tender. We anticipate India to be an import demand of 9 to 10 million tons, which is over what they were last year. We're seeing positive movement in South America. and I expect to see some grain movements, some grain pricing movements, which will incentivize additional consumption. But you're right, the compressed deliveries, it's going to be a poor lineup for some of these folks. But the values have come back down to attractive levels and I think lower pricing will incent demand. But you're right, the EU gas structure is at a disadvantage with Thank you for joining us. and many more. And I think, you know, Bert

talked about just what's happening in Europe as we see those prices come down, but not the feedstock costs of that come down. You'll probably see more constraints on that as we've seen over the years where we're seeing curtailments and shutdowns occur. But on top of that is probably the one area we don't know is really what happens in the Gulf area. As Bert mentioned, that's a significant amount of volume that still needs to supply the world here. And if you're seeing curtailments, in Europe, and still some on and off, again, stuff in the Gulf area. That's really what's going to determine pricing from that. Volume-wise, as he mentioned, I think we feel very strong about what we're seeing.

Great, thanks. And then it's just on Yazoo City. So, I mean, the repairs have sort of been pushed back a little bit into the first half of 2017. So I was just wondering kind of what the sort of swing factors there are in terms of sort of hitting the timeline. Anything to share sort of on the business interruption insurance sort of there in terms of like the income and cost coverage? And just will you, are you looking to do anything different at the site sort of with the rebuild that could sort of deliver benefits to you after it's finished? Thanks.

Okay, I'll take, this is Chris, I'll take some of the first parts of that question and then turn the insurance discussion over to Andrew here. but I think the biggest part is we've gotten more information. When we put out that we thought it would be late 2026, that was preliminary information on what needed to be done with the particular site and what the procurement timelines would be. As we've seen with a lot of projects globally here, you are seeing procurement timelines extend some and that was primarily for electrical gear and that's why We've moved it into the first half of next year from a timing standpoint just as we've gained more information and better insight into that. Related to the site itself, we are changing how that site's going to be configured. We will no longer be purling ammonium nitrate down there. We'll be doing ammonium nitrate solution along with ammonia and DEF down there. and really what we're building out in that particular location is probably increased flexibility both from an operational and a logistics standpoint where we'll have a broader customer base that we can start to supply throughout the years here. So I think we're excited about what the opportunities and what we're changing at that particular site to make it a more sustainable site long term. So I'll turn it over to Andrew now to talk through some of the insurance side of it.

Yeah. Hi, Lucas. So I'll give a little bit of color on kind of three buckets. Accounting, I would say the insurance piece, and a little bit of how to think about capital. From an accounting standpoint, in Q4 of last year, we recorded a $25 million impairment on machinery and equipment. And then you'll see or have seen in Q2, we took another further impairment of $23 million for equipment we will no longer be able to use. Total, that's just shy of $50 million of impairments that we've taken. On the insurance recovery to date, it's been about $75 million. We had $25 million of property damage that we recorded in Q1 and received in Q2. Then we've had $50 million of business interruption insurance. When you look at it to date, it's been about a 2 to 1 ratio. Longer term, it'll probably play out more like a 3 to 1 ratio. That business interruption insurance covers us for about 18 months as you look at that. Now, you will note, I just want to make sure this is clear, we are not including in our capital guidance An assumption for Yazoo City, and there's kind of two fundamental reasons. One, we expect the insurance recovery to offset that capital build cost. And two, the timing is dynamic. When you look at the timing of the capital between the back half of this year and the first half of next year, it will be dynamic, and the insurance recovery is going to be dynamic. So when you look at that over a longer time frame, they will offset each other, but that's why we're not specifically guiding that right now.

Operator, we're ready for the next question. Yes, the next question comes from Benjamin Therer of Barclays. Go ahead, please.

Hi, all. This is Rahi on for Ben. Maybe on S&D, are you seeing any impacts on the extra Texas capacity this year, like Gulf Coast, Monia, Woodside, or is this just largely offsetting Trinidad volumes? And maybe long or medium or long term, how do you expect this to affect supply and demand once the impacts from Iran settle down? Thank you.

Yeah, when you look at the Texas plants, there has been a long lead to their full production, and I don't think they're still at full production. And so those tons have been absorbed. They've been moving around the world. They've had some contracts, and now with Yara purchasing the Gulf Coast plant, I assume a lot of that product will go to Europe, offsetting production cutbacks. But you're correct. There have been offsets throughout the world. Trinidad is one that have taken tonnage off market. On the demand side, there's also been some negative impacts with, as you've heard from the phosphate producers, with their cutbacks due to limited supply of sulfur and sulfuric acid. That has limited phosphate production, which therefore has limited their ability to consume more ammonia. So the market has come off the highs of Q2 and is today... balanced in the $600 to $700 range depending on destinations. But we see these two plants, the Gulf Coast plant and the Woodside plant, both coming up to full production. It will be absorbed into the market.

And I think longer term, you know, we've talked about this, that the global S&D is tightening, you know, independent of what was happening in the Gulf during this particular timeframe. If you look at a slate of new projects that are projected to come online between now and 2029 or 2030. There's just not enough to meet demand. And if there were some sort of resolution in the Gulf, as Bert mentioned, you're going to have other demand pieces that will grow because you can have sulfur, some more phosphate there. So we still think that there is just very much a tightening that continues to go on between now and the end of the decade in the nitrogen market here.

Thanks for the call, and just a quick follow-up for Yazoo. Can you just walk us through the thought process that you were making, AN, UAN, etc. there? Why not just do urea, given the margin structure has been superior in the last 10 years? That should be it from us. Thank you.

From a urea standpoint, you're right. Urea is really the catalyst as to why we're going to see the global nitrogen market get tighter. So there are upgrade projects that we're looking at, one of which is even for DEF. That's a urea project at Courtright. As you look at Yazoo City, the urea plant there would have to be a full-blown new urea plant, world-scale plant there. And we look at what we have opportunity-wise that Bert's commercial team has put together, both from an ANS, UAN, and DEF, that it wouldn't really make sense to put in that type of capital at that particular site.

I also think when you look at how we're configured and structured asset-wise and our distribution of those assets and the modes and how we move the product through rail, truck, barge, vessel, or whatever pipeline, Yazoo is a unique asset in that it's our main or our only ANS plant. But as we work through this new structure, we're going to be improving the loadouts, improving capabilities, and having different access to different modes. and that will give even more flexibility to Yazoo City.

Makes sense.

Thank you. The next question comes from Kristin Owen of Oppenheimer. Go ahead, please.

Hi, good morning. Thank you for the question. So I wanted to follow up on capital allocation. This is clearly an and strategy, not an or, just given the strong cash flow you've generated thus far. You raise a dividend, you're increasing the buybacks, and you're coming into peak capex period. But the one that I actually really wanted to ask about is this feed study on DEF. So can you just give us a little bit of background here, how you're thinking about the demand and economics for, say, industrial applications versus over-the-road applications? I know we've got some EPA changes coming up, so just a little bit of color on the DEF study.

Yeah, so I'll let Bert start on the market and what we see that's interesting us in the market and the different areas where it is, and then I'll speak a little bit more specific to the project itself.

Yeah, DEF has been an interesting product for us in that it's just about 15 years old in terms of how long DEF has been an active part of our portfolio, and we produce it at different plants, but the growth from basically zero is Thank you very much. Thank you for joining us. Corwright makes a lot of sense to serve the East Coast market, which is a heavy demand market.

The one thing I would add is this isn't really our thoughts on the growth of DF in isolation. Essentially, we've worked with OEM engine manufacturers all the way down to the retail side to make certain that we're aligned as to the growth that we see going forward, and I think all parties are seeing the same thing there. As Bert mentioned, you know, Courtright provides a unique opportunity for us. Today, Courtright has a net long position in ammonia that is a little bit logistically constrained both by what rail line it's on and therefore having a lower margin ammonia that comes out of that particular plant. And because it's such a low margin ammonia that comes out of that plant, it's providing a better opportunity to put in an upgrade unit there. Real Line, it happens to be on, can feed the East Coast, the Mid-Atlantic area better than any of our other sites that are producing DEF today. So as we look at this, you know, provided what comes out of the engineering and design study from a capital cost, but we feel that this is going to be a project that is not only going to grow into a market that is an industrial, ratable market, very strong for us, but is additionally something that's going to be well above our cost of capital cost. just given the configuration of that site today.

My follow-up question is based on your expectations for mix in the back half of the year, just given what you said about the fill programs, what fall application looks like. Obviously, the economics moved around quite a bit here in Q2, but just how you're thinking about mix of product in the back half of the year would be helpful. Thank you.

Yeah, I would say we're looking at a normal slate in terms of the economics as we look product by product where the economic advantage is against our order book, which is a very positive order book. I would anticipate a normal slate for the back half. We're going to work on our inventory levels, which built up during Q2. I think that was one of the issues on the write-up was that We had a limited volume on UAN, but what we did was move more of that to UREA and DEF and Q2. And any inventory we have, we expect to disgorge in the back half of the year and run at normal rates.

Thank you for the time. The next question comes from Christopher Parkinson of Wolf.

Go ahead, please.

Great. Thanks so much for taking my question. Totally understand the second half outlook in terms of steady demand, a lot of lost tonnage out of Costco as well as some of the Iranian tonnage to see the market tight for the foreseeable future. But at the same time, I'm curious on your interpretation of the U.S. and coastal benchmarks typically trading at a discount. It seems like the international opportunities, especially in the third quarter, should have been a little bit better, should be at least improving in terms of that prospective market tightness. So I'd love to hear your perspective across both ammonia and downstream in terms of how you see those dynamics playing out just in terms of the ripple effects from lack of production in the first quarter or two. Thank you so much.

Yes, when you look at what the tonnage that was lost, urea and ammonia out of the Gulf, as well as tonnage lost due to lack of LNG to those countries or companies that rely on LNG to produce, it's substantial. And so back to how do you backfill that supply? And some of it is through, I think, the Chinese tons that everybody's expecting to come out as well as just solid operating rates. In terms of trading values and looking into what markets we would move our tons to, You mentioned that we're trading at a discount in NOLA. We are. And so you've seen us build an export book on urea that's probably higher than normal. And so when I look at where these benchmarks go and where we are in terms of pricing for the world, I think you're going to see a market that improves in terms of it's tight and will tighten as this demand that's been deferred comes back into play. Thank you for joining us.

Chris, I'd love to hear your perspective on just kind of your intermediate, longer-term outlook. It also seems like the demand side of it's been a little bit more quiet versus some positive events back in 25. I'd love to just hear your dynamics in terms of market development, your position, how you're thinking about the overall Blue Point complex and any incremental opportunities you see fit based on the fact that a lot of others have given up. Thank you so much.

I think to start with, Chris, the ones that have given up are participants that were not necessarily in the market to begin with. If we go back a few years ago, I've said this before, there was like 107 green and blue plants announced, of which I think there's four in construction today, of which ours is one of them. So there is a lot of hype about what clean energy was going to be. Our analysis never showed more than we were thinking maybe seven of that 107 would be built. So I think we've been more pragmatic in this. As you look at that clean energy market, it's really similar to the DEF market that Bert mentioned. The million tons that will be going both to Jera and Mitsui, our partners, is a million tons of incremental demand that didn't exist just a few years ago. We're continuing to see some growth opportunities in Japan and other pieces of Asia, but it's going to be at a slower pace than what I think the original hype was on that. What benefits us is whether we have a low-carbon ton or a conventional ton, we produce it the same way, we store it the same way, we transport it the same way. So all those operational efficiencies that we have as an organization to lower our costs per ton on new construction and also the distribution of it reside with us and accrue to us that others don't have. And I think that's why you're seeing us continue to be bullish on both Bluepoint and maybe even a Bluepoint 2 is because of those assets and really that ability we have to move that product and to produce that product.

Well, I would say low carbon or not, or gray or conventional, however you want to define it, we are competitive globally. And even with the premium, we're competitive globally, and we're proving that by our contracts that are in place and what we're sending to different places today. And that will only grow. And I do believe that the low carbon value, especially in Europe, is going to continue to be valued and grow, and that demand will grow as well.

The next question comes from Vincent Andrews of Morgan Stanley. Go ahead, please.

Thank you, and good morning. Chris, I wanted to ask you on the dividend and maybe separately on another part of capital allocation, you know, just sort of what your thought process is. Obviously, as the share cap comes down, you can pay a higher dividend without spending more money. So is that just the plan going forward? Should we be anticipating maybe getting to more annual dividend increases versus I think the last one was maybe 23? and then separately from an M&A perspective in the U.S., obviously there's a limited number of assets but one just traded, do you still have scope from a regulatory perspective where you think if other things became available you would still look at that or should we be thinking about volume growth from here being more along the DEF or as you just mentioned Blue Point too?

Yeah, so I'll just start with the dividend part and then maybe Actually, let me start with the second question first, and then I'll go to the dividend and pass it over to Andrew as well. But on the M&A scope, so we did see the Gulf Coast ammonia plant transfer to yards in the process of that. We do believe that we still have some room from an M&A scope. I mean, I think if anything, what CF has demonstrated just based on the prior answer I had given is that assets in our hands produced more production volume. Whether we go back to what we did when we acquired Terra back in the day with the investments we made, our best practice teams, we're just looking recently at Wagaman where we've increased that consistent production there, but by over 30%. So our ability to increase volume within a market I think is a key to allowing us to continue to do particular assets Acquisition. Now as we look at those acquisitions, you know, we want to be someplace that isn't in the third quartile or someplace out that from an operation standpoint could be constrained as time goes on. We like our low cost position. We like the low cost, low risk that North America from a geopolitical standpoint brings. So that's primarily where we're going to focus going forward, both organic and inorganic there. From the dividend, before I turn it over to Andrew to get into some of the specifics, I think one of the underlying reasons is just our faith in where we see our mid-cycle and our free cash flow generation, not just this current year and next year, but over the entire cycle. We just see it stronger that we've been very focused on reducing fixed charges, of which dividends are one of them, But I think as we're seeing that free cash flow conversion and generation goes up, it just makes us more confident in increasing it as time goes on there.

Yeah, and this is Andrew. The piece that I would share is our overall strategy on capital allocation has not changed. The hierarchy of driving strategic growth, share repurchases, and dividend, when you think about the dividend, I think of it as two fundamental principles. One, We want to be competitive with the marketplace. So, you know, the increase that we did took it from a 1.8% yield to 2.1 compared to the S&P of 1.1%. The second principle, what I would share is we're conscious of what we spend in absolute. And you can look and you can probably see there's a range that we tend to target. It's not a hard and fast rule, but it's a range. And that range allows us to fuel growth into the top of our pyramid on strategic growth. So those kind of principles we apply as we look through it.

But it should also be noted As we've said in the past, we believe our shares are still incredibly undervalued, and this whole geopolitical swings that we trade off of rather than the underlying fundamentals that we see going forward, we're going to continue to be aggressive in share repurchases as our number one outlay of our capital allocation towards shareholders.

The next question comes from Andrew Wong of RBC Capital Markets.

Go ahead, please.

Hey, good morning. Thanks for taking my questions. So just kind of following up on that last thought there, Chris, and in the presentation, too, there's a couple of slides where you highlight the valuation disconnect that you see versus some of your peers. You just talked about why you think that that's the case, what's driving that disconnect, and then What can you do at CF to kind of close that gap?

Well, what I would say that we can do to close that gap is continuing just to perform as we do at the highest level. Like I said, if you look at our free cash flow over the last six years on average is significantly higher than what we're suggesting the new mid-cycle is. So this isn't just a one-year, two-year type of thing. So for us, it's to continue to move forward and perform as we do from an operational looking for margin enhancement, whether that be a DEF project, other utilization or de-bottlenecks, or whether that's organic and inorganic growth that has return profiles well above our cost of capital. One of the reasons why I personally believe we trade in this is I think people are still trading 10 years ago on CF. We've increased our production volume by almost 40%. We've reduced our share count by almost 60%. And yet people are still thinking we're this over-levered company that is doing expansion projects. We're a significantly different company today based on what our capital structure is. Our free cash flow conversion, that hasn't happened by accident. It's come through very methodical. Our SG&A and our working capital are the lowest in the industry. And by the industry, I mean basic materials. I mean chemicals, everything. And there's almost this ignoring of that just to say, well, they're a fertilizer company and we're going to place them against these three or four other peers, which I think is a complete mistake. And as long as our shares are undervalued, we'll continue to buy our shares back.

I also think there's a misunderstanding of our assets and the leverage points that we have in terms of where our plants are located, the diversity of the products that we make, the modes that we're able to ship, and then the terminals we're able to distribute as well as export to any country in the world. So we have all this flexibility on top of some of the lowest gas costs in the world. We are going to be a low-cost producer in a high-valued market with the best farmland in the world. and so when you put all those together, it's a unique mix that only we can satisfy and the rest of the world can't. None of our operating competitors can do that. That's why we think we should be valued differently.

Yeah, I mean, as you look at it, as you can see, we're $500 million into a $2 billion program and as we try to look at our intrinsic value and what it should be, I mean, we're looking at DCF analysis, comps, replacement value. Every calculation that we do suggests that there's an opportunity there and so we'll continue to be opportunistic as we go.

Great, I appreciate all that. And then maybe just one on costs. When I look at costs and I XO like gas and DNA, it does look like it's trended up a little bit in the past couple quarters. Can you just speak to that? Is it mostly just the Azure City or anything like maybe some extra turnarounds or anything like that? Thanks.

Yeah, let me give some color on costs in Q2. If you strip out the impact of volume and gas, our fixed costs were up about $75 million. And I'll do this kind of simply and illustratively, but I'll give you the context. So let's call that $70 million for the context that I'll share. About 10 of that was distribution and logistics, and that was probably the smaller piece of the puzzle where you saw some mode mix going from barge into rail, and then the rate on rail itself has gone up a bit. The other 60 is about a 50-50 split between higher purchased ammonia costs flowing through, and the rest is fixed cost absorption tied to Yazoo City being down. So that kind of gives you the three pieces that are coming through there from a COG standpoint.

And I would say that purchased ammonia, obviously, we have benefits of that that flow through the revenue line, and it is providing a margin, but it does provide higher cogs during that time frame. Additionally, you know, one of the turnarounds we started during that time was ammonia six. Ammonia six, obviously, it's almost like comparable with two plants, so the cost associated with that in the years in which we do ammonia six are always going to be slightly higher from a turnaround standpoint.

Perfect, thank you.

The next question comes from Matthew Doit of BOA. Go ahead, please.

Morning, everyone. I just wanted to reconfirm. For CapEx on Bluepoint, what's your mix on fixed versus non-fixed EPC work?

Yeah, go on.

Yeah.

Well, what I was going to say is essentially when we looked at the Bluepoint project, the one thing we tried to do was mitigate our overall costs related to that. We did that a couple different ways. One was through our partnerships where we partnered with Lindy and even Oxy's 1.5 on the CCS unit. but additionally even with Mitsui and Jera where they're providing some insight and administrative benefits along with as we go to the module yards in Asia. So I think that is one area where we look to lock down on some of those costs. What we have fixed is roughly probably about 50% of the CapEx related to that and that is in a couple different areas. One is in the engineering and the module yards. The other is in some of the lump sum turnkeys that we try to do on the infrastructure pieces, whether it be the tank or some of the dock and bridge work and things like that. So we feel pretty confident about how we're managing through this. As I mentioned earlier, we have our long lead items for Bluepoint purchase. So some of those things that we're seeing with extension of lead times or increases in costs related to those, We started some of those critical items, having contracts in place even pre-FID on the project itself.

Just as a quick follow-up, I mean, labor and assembly and build-out, I assume that's just like impossible to fix now in the Gulf?

I mean, the portion that will be labor in the Gulf is going to be significantly lower than what we saw when we did the expansion projects back from 2012 to 2016. That's because a lot of the work from the modular piece is going to be done overseas. So as a result of that, you're probably going to have maybe a third of what the labor component was compared to what we saw last time. And that does a couple things. One, that allows you to probably get more skilled labor in there because you have a smaller headcount that you're trying to do there, but also just limits the high-cost labor that would be in the Gulf Coast right now.

All right, I appreciate it. And if I could, Bert, I was just wondering about the underlying assumptions for 9 to 10 million tons in India this year. Because, I mean, they obviously ended last year with pretty good balances given all that buy. So I'm just kind of wondering if that 9 to 10 assumes maybe shipments from last year into this year, or that's really like a back half loaded period?

If you do it on their fertilizer year, which is April through March, They had a tender for 2.5 and a tender for 1.770. So total to date is 4.27 tons. They just announced the tender last week for an additional 1.7. And so you can do that math. That's roughly 6 million. We expect another tender by the end of this year. But they also tendered twice in the calendar year. once in January and once in February. And so if you go into their fertilizer year, that would extend into January through March. And they did almost 2.2 million tons. So when you add those all up, that gets you to 9 to 10 million tons expected. And you have to remember, they are an LNG importer, and they were running it suboptimally on their domestic operations. We estimate they lost 1.5 to 2 million tons of domestic production. So rolling all that up, and we're still not sure what can come out of the straight on the forward market. I would say 9 to 10 is a pretty good estimate today.

Thank you.

The next question comes from Mazair Mamadli of Rothschild and Company Redburn. Go ahead, please.

Thank you for taking my questions. I just wanted to ask a follow-up on the mid-cycle EBITDA targets. What is the sort of mid-to-long-term market balance is assumed in that? I'm just going to give you an example. For example, India is striving to be more self-sufficient over the medium to long term. In Eurea, you have a number of projects that are in development that should theoretically come online by the end of the decade, and that would theoretically remove demand from the global markets. Is stuff like that factored in? How should we think about it?

One is I think if you look at the overall supply growth over the next four to five years, India does have a few projects, one of which is green, that I think you have to start to put probabilities on what is the time frame in which that's going to go. But even with all the announced projects that are happening right now, You're going to have a deficit or extreme tightness in the S&D balance as we see it going out through 2030. Now in saying that, just because India wants to become self-sufficient and other countries as well, doesn't mean that there's not a capital cost that's incurred in order to drive and build those particular plants themselves. And if you look at it from an economic standpoint, it may make more sense to continue the import or these particular projects can be delayed. So how we look at the mid-cycle is we do build in what we have in flight when we're working with engineering teams. And usually you have a very good visibility, I would say, out five years because that's about the time it takes to build a plant. And then we start to manage that as time goes on and readdressing that. But today, really, as you look at the next few years, there's some plants. There's a plant in Qatar. There's one in UAE. There's our plant. and then one in Nigeria. But outside of that I would say the others are a little bit at risk, whether that be Russian plants or some of these Indian plants that are talked about to come on before 2030.

As well as there's constrained areas around the world that we've identified in previous conferences or calls, but when you look at Europe and the gas spread and the age and the inefficiency of some of those plants and their long-term viability, as well as what's coming out of, in terms of LNG constrained areas like Bangladesh and some of the Southeast Asian plants that are also, I think, challenged. So on a going forward basis, not every plant, which we saw the Brazilian shutdown, they're talking about revamping. I don't think that's very viable long term with the gas, the way gas flows there. And then there's Trinidad that's also limited on gas. So you have new capacity coming in and old capacity, which we believe won't be operable Thank you.

And then I just wanted to sanity check something regarding 45Q. So when I look at Q1, there is 19 million of 45Q income, which if I sort of divide it by the $85 a ton CO2 price, gives me a CO2 capture of slightly more than 200,000 tons. and as far as we know, Donaldsonville is around 500,000 tons CO2 per quarter. Is that calculation missing something or is Donaldsonville CO2 still ramping up?

Well, I think there's two points there. One, the revenue through the first half of the year is about $45 million associated with the 45Q, not the number that you suggested. The second part is this year we do expect The overall CO2 to be lower throughout the Donaldsonville facility primarily because of the turnarounds that took place there. I mentioned earlier ammonia 6, which is effectively two ammonia plants with its production, went through a turnaround. It's completed that turnaround now, but that turnaround began in June and went through July as well. So as a result of that, you're going to have lower CO2 that was available in order to sequester during that time frame. but I think the numbers themselves which show through in the other operating income line are correct at 45 million and the one thing I would mention is that we are not taking it to a class six as of right now and so as that is at $60 per ton We do believe, just to maybe follow up on that, that the Class 6 approval will be happening later this year, and then that will move to the $85 a ton. Economically, we're indifferent because our transfer today is at a zero cost with Exxon, and it will move up to the contractual rate once the Class 6 is in place.

Great. That's very helpful. Thank you.

The next question comes from Edlane Rodriguez of Mizuho. Go ahead, please.

Thank you. Good morning, everyone. Chris, in terms of the valuation, should we then expect to be more aggressive on the buyback in the second half of the year because the pace seems to be a little slower in the first half? And more importantly, as you noted, late into the second quarter, We saw global Urea prices decline. But what was most surprising to me was that in the U.S., prices not only declined, but they were below last year's level. And that was despite all the supply disruption we had globally. How do we explain that?

So from the share repurchase, I'll start with that, and then I'll let Bert touch on the Urea prices. on the share repurchase, we have significant amount of cash on our balance sheet. We have a program, as Andrew mentioned, is still open with plenty of room there. And we believe that we are trading underneath our intrinsic. So checking all those boxes, we expect to be into the market. Now, having said that, when I look at how we're trading off of what happens on a tweet or basically what Pakistan is saying or something coming out of Oman or whatever, We're trading in the last six weeks between $100 and $140. So we're going to be opportunistic and grab more shares as we see some of that volatility exist, but we are committed to repurchasing shares. We have the cash flow to do it over and above what we're seeing from our strategic initiatives, and we'll continue to do that.

Regarding the Q2 price correction, you basically reverted back to where we were in the lows of Q1 and went up Thank you for joining us. The tightness, I think, will be more pronounced as we get to the back half of the year.

Thank you very much.

The next question comes from David Simmons of PNB Paribas. Go ahead, please.

Thank you. Just another one on longer-term outlook. China is still adding capacity for the rest of this decade. Is your view that they can start to export more than the 4 to 6 million tons you expect this year in the next few years? Or do you think they add capacity to replace older plants at this stage? Thanks.

I think yes and yes. I think they've proven their ability to build new plants. But the amazing thing to me about China is the growth in demand. Today they're running at about, we target them at an 82 to 83% operating rate, where we run at 98% Thank you for joining us. is exporting energy in the form of urea, but your importing energy in LNG and coal is not a value-creating game. And so what they have determined or what they, over the last several years, have communicated is the urea and the energy basis and the subsidies they've given should be benefiting the Chinese farmer and the Chinese consumer, and that has happened. So the domestic price in China is significantly lower than the global price and over the last, let's say, year or two, they've controlled it through these export quotas and allowing certain times, levels and values to be exported, which the global economy needs. So where they will be longer term, I think that where they are today in that four to six million tons probably for this year and the next and will be determined later in the future. But I don't think they have identified urea or ammonium sulfate or any of the fertilizer products as an area to focus the attention and, again, keep that for the Chinese consumer and farmer.

Got it. Thanks.

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

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

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