CF Industries Q2 2021 Earnings Report

CF Industries EPS Results

• Actual EPS: $1.14
• Consensus EPS: $1.64
• Beat/Miss: Missed by -$0.50
• One Year Ago EPS: $0.89

CF Industries Revenue Results

• Actual Revenue: $1.59 billion
• Expected Revenue: $1.63 billion
• Beat/Miss: Missed by -$38.88 million
• YoY Revenue Growth: +31.90%

CF Industries Announcement Details

• Quarter: Q2 2021
• Date: 8/8/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, August 10, 2021
• Conference Call Time: 10:41AM ET

CF Industries (NYSE:CF) is a leading global manufacturer of hydrogen and nitrogen products for agricultural and industrial customers. The company specializes in the production of ammonia, granular urea, urea ammonium nitrate (UAN), nitric acid and ammonium nitrate, which serve as key inputs for fertilizer blends, industrial chemicals and other downstream applications.

Headquartered in Deerfield, Illinois, CF Industries operates production facilities and distribution terminals across North America and the United Kingdom. Its vertically integrated network includes ammonia plants, urea plants and nitric acid units, supported by rail, barge and pipeline infrastructure to ensure reliable delivery to farmers, fertilizer blenders and industrial users. CF Industries also provides technical support and agronomic services designed to help customers optimize nutrient application and enhance crop productivity.

Founded in 1946 as Central Farmers Fertilizer Company, CF Industries has grown through strategic expansions and investments in manufacturing technology to become one of the world’s largest ammonia producers. Under the leadership of President and Chief Executive Officer Tony Will, the company has focused on operational efficiency, environmental stewardship and cost discipline. CF Industries continues to explore opportunities to enhance its global footprint, improve energy efficiency and support sustainable agriculture through innovation in nitrogen management.

CF Industries Q2 2021 Earnings Call Transcript

Key Takeaways

• CF Industries delivered a record H1 adjusted EBITDA of $997 million, up 25% year-over-year, driven by strong nitrogen demand and expanded energy‐cost margins.
• Management expects record global nitrogen demand through 2023 as farmers replenishing coarse grain stocks and rebounding industrial activity keep supply tight and prices elevated.
• The company has petitioned for anti-dumping and countervailing duties on UAN imports from Russia and Trinidad, with an ITC preliminary vote due soon, which could restore UAN price premiums.
• 2021 capital expenditures were raised to $500 million—above prior guidance—to pull forward major maintenance work, which reduces 2021 ammonia production to 9.5 million tons and product sales to 19 million tons.
• CF is investing about $400 million in blue and green ammonia initiatives—including a $100 million green hydrogen project and $200 million in CO₂ capture—positioning its cost-advantaged network for clean‐energy growth.

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the first half and second quarter 2021 CF Industries Holdings earnings conference call. My name is Christelle. I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the presentation. To pose a question at any time, please press star one on your telephone keypad. If at any time during the call you require assistance, please press star zero and a coordinator will be happy to assist you. I will now turn the presentation over to the host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, you may proceed.

[Martin Jarosick, VP of Investor Relations at CF Industries]

Good morning, and thanks for joining the CF Industries first half 2021 earnings conference call. I'm Martin Jarosick, Vice President, Investor Relations. With me today are Tony Will, CEO, Chris Bohn, CFO, and Bert Frost, Senior Vice President, Sales, Market Development, and Supply Chain. CF Industries reported its first half 2021 results yesterday afternoon. On this call, we'll review the CF Industries results in detail, discuss our outlook, 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.

[Martin Jarosick, VP of Investor Relations at CF Industries]

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. You will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Let me introduce Tony Will, our President and CEO.

[Tony Will, President and CEO at CF Industries]

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first half of 2021 in which we generated adjusted EBITDA of approximately $1 billion. Strong nitrogen demand and lower overall production have tightened the global supply-demand balance, supporting much higher prices than in recent years. At the same time, energy spreads between North America and high-cost regions have expanded considerably, increasing margin opportunities for our cost-advantaged network. These factors help drive an increase in adjusted EBITDA of nearly 25% compared to last year, and we produced our strongest first half financial results in six years. Additionally, the business continues to generate strong free cash flow, giving us tremendous flexibility as we focus on achieving investment-grade metrics and executing our clean energy initiatives. The first half was not without its challenges, including the natural gas-driven production interruptions we described on the first quarter call.

[Tony Will, President and CEO at CF Industries]

The first half also saw a continued demonstration of the harm the UAN industry in the U.S. faces from subsidized and dumped imports from Russia and Trinidad. Until the last few years, UAN earned a substantial premium to other upgraded nitrogen products due to the higher capital investment required to produce it and the meaningful agronomic and operational benefit it offers to farmers. As you can see from our recent results, UAN now trades at a significant discount to all upgraded nitrogen products due to unfair trade practices. We have taken the necessary steps to address this situation by petitioning the Department of Commerce and the International Trade Commission to initiate antidumping and countervailing duty investigations. We look forward to the result of the ITC's preliminary vote later this week. Looking forward, we are very bullish about the next two years.

[Tony Will, President and CEO at CF Industries]

As Bert will describe in a moment, the need to replenish global coarse grain stocks, driving agricultural demand, along with the impact of increased economic activity, driving industrial demand, should support all-time record global nitrogen demand over the next two years. Forward energy curves are also very favorable over this timeframe. We expect these factors to help keep the global nitrogen supply and demand balance much tighter than we've seen in recent years, supporting an extended period of higher nitrogen pricing and higher margins for our cost-advantaged network. Longer term, we believe increased demand for ammonia and its clean energy attributes will become a significant factor in the tighter supply and demand balance, driving further value for our network. We continue to see broad interest in clean hydrogen and ammonia to help meet the world's clean energy needs.

[Tony Will, President and CEO at CF Industries]

As we continue to have discussions with market participants, our focus remains on being at the forefront of this significant opportunity. From positioning our network to be the world's leader for blue and green ammonia production, to collaborating with other global leaders where our unique capabilities can provide value. We are pleased with the progress we've made and look forward to additional developments in the coming months. With that, let me turn it over to Bert, who'll discuss the global nitrogen outlook in more detail. Chris will follow to talk about our financial position before I return for some closing comments. Bert?

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Thanks, Tony. The global nitrogen supply and demand balance remains far tighter than we have seen in recent years, underpinned by strong agricultural and industrial demand, plus higher energy prices in Europe and Asia. This has created a highly favorable pricing environment that has persisted into the second half of this year. Based on the agricultural and energy outlook we see today, we believe a positive pricing environment for fertilizer will remain in place at least into 2023. Strong global nitrogen demand is being led by the world's need to replenish coarse grain stocks. The global coarse grain stocks-to-use ratio was the lowest since 2012 entering this year's spring planting season.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Commodity prices have risen significantly in response, and farmers are incentivized to maximize yield with fertilizer applications. Given this, we expect to see sustained demand in the second half, led by India and Brazil. We expect similar strength from North America and Europe leading into the 2022 application season. We had a positive start to meeting this demand a few weeks ago when we launched our UAN Fill program. We have built a solid order book for the third quarter at a NOLA-equivalent price of $285 per ton, though prices remain at a significant discount to urea for the reasons Tony mentioned. Further out, we expect that high demand for coarse grains, especially from China, will contribute to persistent low global stocks into next year. As a result, we believe that stocks will still need to be replenished at least into 2023, supporting continued strong nitrogen demand.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Increased economic activity is also driving higher global industrial demand for nitrogen. In North America, we are seeing diesel exhaust fluid sales rise above pre-pandemic levels. Our first half DEF sales were a company record, and we expect overall demand will continue to grow. We have also seen higher demand for ammonia and nitric acid from our industrial customers. Globally, industrial-related demand in China and from phosphate producers has also increased. While we expect demand to remain strong for some time, we believe that global fertilizer inventory in the channel today is low and will need to be rebuilt. So far in 2021, high energy costs in Europe and Asia have lowered operating rates and reduced supply availability, particularly for ammonia and urea, further supporting global pricing.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

As you can see on slide nine, energy costs in these regions have increased to over $14 per MMBtu, and Eastern European producers have become the global marginal producer for the time being. The higher energy costs have steepened the global nitrogen cost curve substantially, increasing margin opportunities for low-cost producers such as CF. Forward curves suggest CF will benefit from favorable energy differentials for the foreseeable future. As a result, we believe we have a tremendous opportunity ahead of us as we leverage our manufacturing, distribution, and logistics capabilities to deliver for our customers. With that, let me turn the call over to Chris.

[Chris Bohn, SVP and CFO at CF Industries]

Thanks, Bert. For the first half of 2021, the company reported net earnings attributable to common stockholders of $397 million, or $1.83 per diluted share. EBITDA was $994 million, and adjusted EBITDA was $997 million. The trailing 12 months net cash provided by operating activities was approximately $1.2 billion, and free cash flow was $700 million. Based on the outlook Tony and Bert have shared, we are well positioned to build on these results and continue to generate significant free cash flow. I want to provide additional context to two items we covered in our press release. First, we raised our estimate for capital expenditures for 2021 from around $450 million to approximately $500 million. The increase is driven primarily by our decision to pull a significant maintenance event scheduled for next year into this year.

[Chris Bohn, SVP and CFO at CF Industries]

We believe that performing this activity in 2021 is best for the asset and reduces the risk of an unplanned outage during the 2022 spring application season. Going forward, we expect capital expenditures to return to the range of $450 million per year. With this additional maintenance project, the high level of previously planned maintenance, and the additional maintenance from severe weather in February, we estimate that gross ammonia production and sales volume will be around 9.5 million tons and 19 million product tons, respectively. Both at the low end of our forecast earlier this year. Looking into 2022, we have a more typical maintenance schedule and would expect to return to approximately 10 million tons of ammonia production and sales volume of 19.5 million-20 million product tons.

[Chris Bohn, SVP and CFO at CF Industries]

Second, we are taking additional steps in line with our focus on achieving investment-grade ratings and positioning the company to execute our clean energy initiatives. We have announced that we will redeem $250 million of our senior notes due June 2023, which will reduce our gross debt to $3.5 billion. We expect to lower our gross debt to $3 billion by or before the maturity of the 2023 notes. We will also continue to return cash to our shareholders through quarterly dividend and opportunistic share repurchases at attractive levels. With that, Tony Will provide some closing remarks before we open the call to Q&A.

[Tony Will, President and CEO at CF Industries]

Thanks, Chris. Before we move on to your questions, I want to recognize everyone at CF for their strong work during the first half. They successfully managed many challenges in the first six months of the year, setting us up well for the second half. Most importantly, we did this safely with our recordable incident rate at the end of June at just 0.28 incidents per 200,000 labor hours, significantly better than industry averages. As we look ahead, we expect strong agricultural and industrial demand to create all-time record global nitrogen demand. Forward curves show very favorable energy spreads to Europe and Asia over the same time frame, which should support robust margins and cash generation. We see good progress on our clean energy initiatives. Taken together, we are well positioned to create significant shareholder value in the near and longer term.

[Tony Will, President and CEO at CF Industries]

With that Operator, we will now open the call to questions.

[Operator]

At this time, if you would like to ask an audio question, please press star one on your touch-tone phone. Once again, press star one to ask an audio question. Your first question comes from the line of Joel Jackson with BMO Capital Markets.

[Joel Jackson, Analyst at BMO Capital Markets]

Hi, good morning, everyone.

[Chris Bohn, SVP and CFO at CF Industries]

Morning, Joel.

[Joel Jackson, Analyst at BMO Capital Markets]

It's very rare where your second half EBITDA is higher than your first half EBITDA. I think it's been a decade. Is that a situation you're expecting this year? Maybe as you answer that, maybe you could talk about what type of pricing you think, visibility you have in the third quarter, what happens to the fourth quarter things.

[Tony Will, President and CEO at CF Industries]

We're really pleased with how the year is shaping up. Obviously, we were disappointed with where UAN values were as a result of Russian and Trinidadian dumped imports in the first half of the year. As you look at our balance sheet at the end of the second quarter, you see that our customer advances had basically, all of that had moved through the system. When we launched Fill at $285 NOLA for UAN, that's a substantial uptick and that's really the price environment that we're looking at in the third quarter and for the order book going forward. Subsequently, we've been able to get a little bit of further appreciation off of the $285 number. We're really pleased with how the order book is set up right now and what the back half of the year looks like.

[Tony Will, President and CEO at CF Industries]

We've seen strong interest in ammonia for the fall already. Urea continues to trade in a reasonable spot. As I said, UAN looks very good. We're really excited about the second half. We think that it's not just the second half, but it sets up well for both 2022 and 2023.

[Joel Jackson, Analyst at BMO Capital Markets]

Okay. Thank you for that. Just on maybe following up on free cash flow, do you think that this year you'll end up with more free cash flow than last year? Obviously, prices are higher. I think you had some working capital outflow in the second quarter. Does that reverse in the second half?

[Chris Bohn, SVP and CFO at CF Industries]

Yeah. Good morning, Joel. From a free cash flow standpoint, as we talked about in the prepared remarks, we expect to continue to see significant strength. As you mentioned, in this particular quarter, we had a few working capital, both with accounts receivable and then as we talked about the bleed through the customer advances, that was about $500 billion between those two. As Tony just got done mentioning, we're seeing pricing strength due to the energy differential spreads that we're seeing globally for the second half of the year. We still do have, as we mentioned, our product tons will be on the lower end, probably around 19 million product tons. Outside of that, we see a really strong second half of the year from a free cash flow standpoint.

[Tony Will, President and CEO at CF Industries]

Overall for the year, as Chris mentioned in his remarks, we are seeing higher CapEx this year, principally due to all of the major turnaround events that we've done. That's a little bit of a hit relative to where we were last year. We're really, again, really excited about where we sit and what the forward picture looks like.

[Operator]

Your next question comes from the line of Adam Samuelson with Goldman Sachs.

[Adam Samuelson, Analyst at Goldman Sachs]

Yes, thanks. Good morning, everyone.

[Chris Bohn, SVP and CFO at CF Industries]

Morning, Adam.

[Adam Samuelson, Analyst at Goldman Sachs]

Morning. I guess, first question on the balance sheet and capital allocation. Was hoping to just make sure to clarify just the value you see in having the investment grade rating. I guess I'm still trying to get my head around the idea of repaying early debt at sub 3.5% when your stock trades at what I think would be north of 10% free cash flow yield. Just where you see the value of the investment grade credit rating over the longer to medium term as you think about the green investments that you're contemplating.

[Tony Will, President and CEO at CF Industries]

Yeah. I'll take a first cut at this, Adam, and then I'll turn it over to Chris for probably more insightful comments. There are some real frictional costs that we face in the business from not having investment grade that has to do with lines of credit and some other embedded derivatives with our CHS venture. Those frictional costs go away if we go ahead and regain investment grade. I also believe that there is a signal to the equity holders about the stability and strength of the company with an investment grade rating. We think both of those things are important. That's really our focus on why to get back to investment grade.

[Chris Bohn, SVP and CFO at CF Industries]

I would add to that as we look at some of our growth plans going forward with having sort of the senior secured notes, which are the 2026, does limit a little bit of some of the asset moves we can do within our structuring to get the most efficient, whether it be from a tax basis or others in an asset. By getting investment grade, that senior secured drops off of that allows us a little bit more activity. I think, really where your question's going is with return to capital and different things like that. I think what we see over the next several years here with free cash flow generation is we're really going to be able to

[Chris Bohn, SVP and CFO at CF Industries]

Reduce our debt to that gross target of $3 billion, invest in our clean energy initiatives, specifically those that we've announced already, and then additionally, return cash to shareholders. I think what we're seeing over the next couple of years will allow us to do all three of those.

[Tony Will, President and CEO at CF Industries]

The investments that we're looking at right now, both from a green and from a blue perspective, are not huge dollars and are managed easily with our cash flow. The issue, as you mentioned on the yield, while the yield's low, we've been building some cash on the balance sheet, which is terrific, but for which we're not really earning any kind of return. Even though it's taken out something that looks nominally like a fairly low interest rate, it's still better than what we're generating on the cash.

[Tony Will, President and CEO at CF Industries]

while you're certainly correct that the equity trades at a higher effective sort of overall cost to the business from a cash flow yield perspective, I think that by getting rid of some of this residual just sort of cost and drag on the business, having the flexibility that Chris talked about in terms of internal structuring of assets to optimize the tax consideration, all of those things are pretty important things for us to be able to do, and we want to do that first.

[Adam Samuelson, Analyst at Goldman Sachs]

Okay, that's really helpful. Then if I could just have a quick follow-up. Just in the second quarter, you had about $100 million year-over-year of incremental costs in the business related to kind of maintenance and the fixed cost absorption with higher turnarounds. I'm just trying to get a sense how we should think about the second half in that light. Seems like the turnaround maintenance activity is going to be heavy again in the second half. Just thinking about the P&L impact of that-

[Tony Will, President and CEO at CF Industries]

Yeah.

[Adam Samuelson, Analyst at Goldman Sachs]

for the balance of the year.

[Tony Will, President and CEO at CF Industries]

Two big pieces I would put in on the cost side, and I want to compare it to a year ago. Based on the amount of turnaround activity and other maintenance work that was going on, we ended up with almost $60 million of sort of incremental maintenance and fixed cost write-off associated with the plants in Q2 versus last year. Then on top of that, we ended up with about $100 million that hit the cost of goods sold line through the first half of the year that's based on purchased product for resale. Part of it was based on the commitments we had made to customers with the plant outages and the turnarounds. We needed to cover those positions and make sure we could provide reliable supply on our commitments.

[Tony Will, President and CEO at CF Industries]

We went out and purchased both urea and ammonia to cover some of those requirements. In an average, or in an otherwise kind of normalized year, you wouldn't see that $100 million hit the COGS line in that kind of way. Those are sort of two big pieces that I'm thinking we won't have to the same magnitude second half. You're certainly right that there's ongoing pretty significant turnaround activity in the second half of the year, and that may very likely lead to some ongoing fixed cost write-off.

[Chris Bohn, SVP and CFO at CF Industries]

Yeah, I would say, Adam, probably the best way to look at that is just at the total gross ammonia production we talked about at 9.5 million tons, and then the product tons at 19 million tons. If you look at that is what we're going to produce in the second half of the year, I think that gives you a pretty good indication of the additional work. As Tony mentioned, we did have some additional drag here in the first half of the year that we don't expect in the second half.

[Operator]

Your next question comes from the line of P.J. Juvekar with Citi.

[P.J. Juvekar, Analyst at Citi]

Yes. Hi, good morning. You're purchasing 100% of your energy in the U.K., that would be renewable energy, which is a great step. What is the cost of renewable energy in the U.K., and how does that compare to your prior electricity contracts?

[Tony Will, President and CEO at CF Industries]

Hey, P.J., good morning. The incremental cost to us is pretty de minimis, actually. As we're looking at it's somewhere in the neighborhood of like GBP 60,000-GBP 100,000 just to move to renewable versus what we're paying today. The incremental cost will not be noticeable at all in the system, which is why it's so easy. The GBP 60,000-GBP 100,000 is per year, which is why it was very easy to go ahead and move to the 100% renewable on this and reduce our Scope 2 emissions. We're looking at similar opportunities in the U.S. where we can get some incremental renewable energy into the system without significant cost to the overall operations. We're trying to do this where it makes good sense.

[Tony Will, President and CEO at CF Industries]

We provide a really good base load for some people because of the consistency of draw that we have off the network, and so we're able to negotiate pretty good rates on that.

[P.J. Juvekar, Analyst at Citi]

Great. Thank you. today's miss, if you want to call that, came from higher maintenance activity, which you kind of outlined just now, and also higher natural gas costs. How much higher were gas costs compared to your forecast? I know it can change any time, but based on your hedges and all that, and forward curve, what sort of natural gas cost do you expect for you in second half? Thank you.

[Tony Will, President and CEO at CF Industries]

Yes. P.J., on the cost of gas, what I'd say is more important than the absolute cost that we face is what the energy spread differential is. While last year, you saw very low gas costs both in the U.S. and also in the U.K., you also saw global energy costs that were dramatically reduced, partly COVID driven. As a result, although our costs were low, our margin opportunity was also compressed because you saw really high operating rates. Right now, what you see is energy cost differentials between the U.S. and Europe and Asia is like $10 or $11 per MMBtu. You see a huge margin differential between what the high-cost producers are running at and what our network runs at.

[Tony Will, President and CEO at CF Industries]

As we think about it, despite the fact that our costs are going up, our margins are expanding much more rapidly than what our costs are going up. This is a great environment for us. In fact, I think, and this is a chart that we'll likely be producing in the future. We've looked at this analysis that the higher the gas cost is in Henry Hub, because the U.S. is such an important contributor into the LNG market, particularly on more of a spot basis, what you tend to see is higher energy differentials in LNG import regions. as a result of that, there's typically margin expansion when our cost structures is a little bit higher. This is a good thing for us instead of a headwind for us.

[Tony Will, President and CEO at CF Industries]

As we look forward, we tend to just believe in the forward energy, where the forward curve trades on the NYMEX and some of the other major pricing indices, feeling like we don't have a lot of additional insight over where the market puts forward.

[Chris Bohn, SVP and CFO at CF Industries]

Yeah. P.J., I agree with everything Tony just said, and maybe instead of looking at the overall COGS in total, it's the controllable COGS side that was really hit by maintenance because as Tony mentioned, when we see expanded gas, sometimes that helps us even more from a pricing. The controllable cost per ton, which generally runs in the mid-80s, and is significantly higher than that over this first half of the year, we expect that to get back closer to the mid-80s when next year, as we mentioned, we'll be back to normalized operating rates of around 20 million product tons.

[Tony Will, President and CEO at CF Industries]

To add to that what Chris just said, in a normal year, we do about four major turnarounds, which would be an ammonia plant plus some associated upgrades. Because of COVID last year and us trying to protect our employees and minimize the number of contractors we had on site, we reduced it to just two major turnarounds last year, which is one of the reasons we set an all-time ammonia production record last year because we had fewer turnaround activities. This year we've got seven instead of four, so the two that we were supposed to do last year that we moved forward, the four that were already scheduled for this year. As Chris mentioned earlier, we're bringing one of them from next year backwards into this year to make sure that we've got reliable operation on that asset.

[Tony Will, President and CEO at CF Industries]

In addition to it being seven instead of four, two of the turnarounds were our major expansion plants. Our two biggest plants in the network, both the Donaldsonville 6 and Port Neal 2 ammonia plants. Those tend to be a little longer and a little more expensive than the rest of the network or the average size plants. This is the first time they've undergone a major turnaround. Our expectation as a result of this is that we're well-positioned to be looking at potentially able to set an all-time production record next year for ammonia. That's one of the reasons why we wanted to make sure that we got Port Neal 2 done this year because our view is as good as the pricing opportunity is right now.

[Tony Will, President and CEO at CF Industries]

We think next year looks very strong as well, and we want to make sure we can run flat out. What we're really doing is setting up for the future here, and I feel very good about where we're positioned.

[Operator]

Your next question comes from the line of John Roberts with UBS.

[Lucas Beaumont, Analyst at UBS]

Good morning. This is Lucas Beaumont on for John. I just wanted to follow up on your discussion there on the gas cost, if I can. I take your point that the differentials are super high right now between Europe and Asia and North America. Just looking at where Chinese coal is, that's probably quite a bit more of a normal kind of historical spread. Just as we look forward then, I was just wondering what gives you confidence that the European and Asian spreads are going to sort of persist as opposed to come back to a more normal level and Chinese coal shifts back into being the marginal cost producer?

[Tony Will, President and CEO at CF Industries]

Yeah. I think currently Chinese coal is about $9 an MMBtu on the anthracite side. you're still looking at a $5 relative differential to Henry Hub. $5 is a great place to be, and we don't see indications that China is trying to reduce coal price. If anything, it wouldn't shock us to see further restrictions on urea exports or really trying to push that down instead of up. I think just the lack of substantial availability and also a pretty stable price outlook on that suggests to us that China, while always important, may not be the global price setter going forward. Again, Lucas, as we look at the forward curves, we tend to look at what TTF and JKM are, as well as the NYMEX on Henry Hub. if you just look at those differentials, that provides a really terrific margin opportunity for our network.

[Chris Bohn, SVP and CFO at CF Industries]

Yeah, I think to that point, the spreads right now on a TTF and JKM are $11 compared to Henry Hub. next year, the strip has them over $7 for the average of the year. significantly higher than anthracite. as Tony mentioned earlier, and Bert in his remarks, the supply side is so tight that you have to bid in those particular higher costs. right now, the marginal producer is European and other Asian producers. you're seeing that in prices. the cost curve in a demand-driven market, we're well above what cost curve economics are right now.

[Tony Will, President and CEO at CF Industries]

As I also mentioned in my remarks, we're expecting all-time record global nitrogen demand next year. As Chris said, what we're really talking about is the very highest cost production that needs to be bid in. In a demand-driven market, we're trading above where the cost curve economics are right now. Again, all of that provides a really great operating environment for us.

[Operator]

Your next question comes from the line of Steve Byrne with Bank of America.

[Steve Byrne, Analyst at Bank of America]

Yes. Thank you. Tony, you mentioned a kind of a forward book on UAN in the $285 or maybe higher in third quarter. Can you just comment on your forward book in urea and ammonia? How much of your third quarter volumes do you think you already have locked in, and roughly the price? Can you shift volumes to urea, just given it's got a higher gross margin per ton?

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Yeah. Good morning, Steve. This is Bert. I'd say very pleased with our order book going into Q3. As we exited Q2, and you can see from our information that we have worked through our order book from the first half and entered into Q3 with very little orders on the books. We built a nice ammonia book for fall, and the public pricing in there is the $600-$640 at the terminal level. Then we launched the UAN fill program at that $285 NOLA and then stair stepped it up as you go up through the Midwest. Built a healthy order book for Q3, and now have looked at Q4 pricing. For urea, the market has kind of stayed in the range of $420-$440 FOB NOLA, and then obviously stair-stepped up through the Midwest and into Canada.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

We have a healthy book on for all three products. Looking forward to, as Tony and Chris have both articulated through their comments and questions, we see just due to the structural nature of the global markets for grains and oilseeds and just some of the climactic difficulties that have taken place both in the United States, the upper Midwest, and Brazil, and just low inventories, all these things coupled together, and low inventories of fertilizer probably see a positive pricing environment for Q4 and into the next year. We're anticipating a nice year.

[Steve Byrne, Analyst at Bank of America]

Thank you, Bert. Just wanted to drill in a little bit on the blue ammonia opportunity for you. It sounds like the engineering to capture and treat that carbon is pretty well understood and underway. Is the rate limiting step to move forward in that less about demand and more about sequestration? If so, would you ever consider pursuing a Class VI injection well on your own property just to have control like at Donaldsonville?

[Tony Will, President and CEO at CF Industries]

Hi, Steve. Yeah. Currently, availability of Class VI permanent geological sequestration is potentially the limiting factor, although there are opportunities to sequester CO2 tomorrow if we had the dehydration compression in place for EOR applications. even for EOR, you are provided some level of the 45Q tax benefit from that. it's not quite the full benefit, but it's available kind of now if we're ready. that's one of the reasons we're pushing so quickly on dehydration and compression because we want to get that in place and really have that up and running, availing ourselves of the opportunity available now and be able to go immediately into injection wells when those permits are issued, and they're ready to go. Relative to us wanting to get into that's not really our area of expertise.

[Tony Will, President and CEO at CF Industries]

That's one of the areas where we look to other market participants and want to rely on their expertise and There's a lot of subsurface geology and things that we just are not set up to do. instead of trying to replicate that, we want to partner and work with other people that's their bread and butter.

[Steve Byrne, Analyst at Bank of America]

Thank you, Tony.

[Tony Will, President and CEO at CF Industries]

Although that said, I would say there are a number of people that have come to us and said the geology within just a couple of miles of Donaldsonville is well-situated for Class VI permits, and they're going after those kinds of things. What we're talking about is, generally speaking, a pretty short-haul run in order to get to them. That's very encouraging just in terms of what the overall timeframe and cost structure looks like to do injection.

[Steve Byrne, Analyst at Bank of America]

Thank you.

[Operator]

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

[Vincent Andrews, Analyst at Morgan Stanley]

Sorry. Thank you. Good morning, everyone. Tony, last October, when you brought the green and blue strategy to the investment community, obviously the free cash flow outlook was a lot different and obviously a lot lower than it is today. I think at the time, you characterized what the spending levels would be with, at least initially, was going to be within your annual CapEx budget. You mentioned a few questions ago that you weren't talking about big sums of money for the types of stuff that I think you had in the press release overnight. Maybe you could just size for us over the next few years, as we think about these efforts, is there a dollar range that you're anticipating spending within? Is there a max level that you would spend? Any sort of parameters you want to put around this for us?

[Tony Will, President and CEO at CF Industries]

Yeah. the ones that we've announced, the green hydrogen/ammonia project at Donaldsonville is in the range of $100 million. The dehydration and compression systems that we're looking at for CO2 in Donaldsonville, it's probably in the range of about $200 million, and that should be able to provide us with about 1 million tons of blue ammonia. I think we can get there in two years or by the beginning of 2024. we're also looking at potentially a similar dehydration compression unit in Yazoo City, Mississippi, which should be able to provide us another, call it 250,000 tons-300,000 tons of blue ammonia. That would probably be in the $70 million-$80 million range. the projects that we've announced so far are sub-$400 million spread over the next two to three years.

[Tony Will, President and CEO at CF Industries]

Based on the increased margin and cash flow that we're seeing from operations, that's easily taken care of just based on normal spending levels. Plus, with the big slug of turnaround activity that we'll have in the rearview mirror here going next year back to more normalized rates, I think we're in a good position to be able to manage all of that. The thing that's exciting, though, is as you mentioned, a couple of our announcements, both with the Singapore port, ITOCHU consortium looking at ammonia as a marine fuel, which we think there's real legs to that and probably happening sooner than we initially thought, along with our Mitsui announcement around evaluating blue ammonia opportunities, is there's very likely a chance for us to potentially accelerate some of those opportunities and help this market develop more quickly.

[Tony Will, President and CEO at CF Industries]

We're certainly interested in thinking about additional investments above and beyond. I think, again, based on our enhanced free cash flow generation right now, we're not worried about being able to fund that. We feel that we're really in a great spot given our ability to leverage our existing asset base and get to blue and green ammonia much more, both quickly and much more cheaply than other people can replicate that.

[Vincent Andrews, Analyst at Morgan Stanley]

Is it fair to say then that the probability of a very large-scale announcement with a big price tag on it over the next, say, three years is pretty low?

[Tony Will, President and CEO at CF Industries]

Look, we're excited and believe, just like Mitsui and a lot of other participants, that blue and green hydrogen, blue and green ammonia are going to be in short supply relative to the demand that's coming. I think the world is going to need more of it than what exists today. That suggests some of it's got to get built, blue in particular. If you think about who the best ammonia operators are in the world with the largest network and where there ought to be significant scale advantages, it's us. I'm not taking anything off the table. I'm also not saying there's going to be something happen. We're going to see how things develop here, but we're excited that there's already an opportunity for us to generate significant volumes at very low dollar investment.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Very clear. Thanks for the update.

[Operator]

Your next question comes from the line of Mark Connelly with Stephens.

[Mark Connelly, Analyst at Stephens]

Thanks. Tony, expectations for corn acres, obviously pretty solid next year. Assuming we continue to have the kinds of logistic challenges that we've had for the past year, is there anything materially different you would do given the flexibility in your system? I'm just curious if there's something you learned and said, "Well, if we had known this at the beginning, we would've changed this.

[Tony Will, President and CEO at CF Industries]

Yeah, I'm going to turn that over to Bert here in just a minute. I would say we continue to look opportunistically at expanding some distribution assets, and whether that means incremental UAN tanks or other points of in-market distribution where we can either lease them or buy them. just to make sure we've got that product staged in market and, again, take full advantage of supply chain disruptions. I think those kind of things are easy to do, but I'll turn it over to Bert to ask for other things.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

I agree. Spot on. I think the biggest step we've taken is this case with the International Trade Commission. We've been monitoring this for years and suffering for a number of years with the inundation of product coming in at subsidized levels, whether it be gas or freight, as well as on consignment to some of the end receivers in the United States. those two issues we brought to the front and advocated for our case, and we believe we'll have a positive outcome. With that, we've been, as Tony said, structurally moving over the last several years in anticipation of supplying a greater amount of UAN into this market. UAN is growing. It has traded at a discount to Urea over the years because of the reasons we already articulated.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Plan on growing that and supplying a higher portion of the U.S.' needs with a system that is built for the logistics on all the major railroads, on the rivers. Now with our reach in California and on the East Coast, we feel very good about our position for the future. I think another thing, as we've talked about blue and green ammonia and blue and green products, as we were able to bring those products to the market, we believe ammonia in the ag market and a blue ammonia being able to create a low carbon value chain will bring substantial value to the agricultural community as well as to CF.

[Tony Will, President and CEO at CF Industries]

I guess one other thing I would add, Mark, we weren't specific about it, although Bert touched on it, is he and his team have worked really hard to try to develop the best relationships we can on the rail side. That can be challenging with certain carriers at some times. We have very competitive rates now out to California. We've invested with some partners out there around tank space and our logistics into that region are really attractive for us. Our ability to go ahead and satisfy domestic US demand is better now than it's ever been. Again, we're really looking forward to the ITC verdict here at the end of the week.

[Mark Connelly, Analyst at Stephens]

Sure. Just switching gears to Brazil for a second. Brazil farmers clearly want to plant more corn. Last year, they didn't quite get there, but the trend is for more corn down there. If you look at this global cost curve and the import situation, if Brazil does finally start to see that corn tick higher, is that going to improve your situation in terms of competition in the Gulf? You've talked about price parity issues being out of whack every once in a while, and I'm curious if that's a partial resolution to it.

[Tony Will, President and CEO at CF Industries]

I think anytime you see international demand continue to tick up, and we're seeing record levels of demand for imports in Brazil, India this year, it's really strong. That helps take a little bit of the relief valve pressure off of the US Gulf in terms of product trying to find liquidity out there. I think that that's always a good thing. Given where soy prices are, and in fact, given what we view is going to be an increasing movement toward biodiesel and a lot of that coming from oilseeds, I think you'll see ongoing competition between the acre, whether it's soy or corn. I think all of this is good because on the one hand, what we don't want to see is a huge oversupply of corn acres driving a high stocks to use ratio, and then you end up being depressed.

[Tony Will, President and CEO at CF Industries]

I think a nice healthy balance where acres are being competed for is really good, particularly given the fact that now as economic activity is picking back up after COVID, we're seeing all-time demand into the industrial sector for nitrogen products. We don't need to see huge increases in corn acres. In fact, that would be a bad thing for us. I think nice steady as she goes with the increase in industrial demand is just what the doctor ordered here.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Yeah. In terms of what we're seeing in Brazil is exciting for urea demand or I just say overall nitrogen demand because ammonium sulfate has also increased in imports, where we're close to a little over 7 million tons of demand. The growth in corn acres was negatively impacted by the drought this year, and that's going to impact that whole region. It has, especially for shipping on the Paraná, the river there coming out of Argentina. What we're looking at is some structural changes that are taking place in Brazil with ethanol production, especially in the interior, and then confined feeding, which is also consuming more feed grains. When you look at the whole picture and what they're looking at in terms of it doesn't necessarily require more acres, but just higher yields. Higher yields are driven by more nitrogen.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

The combination of looking at what they're doing structurally in the interior and for exports, for higher end protein production, all combine for a positive nitrogen environment for Brazil.

[Operator]

Your next question comes from the line of Michael Piken with Cleveland Research.

[Michael Piken, Analyst at Cleveland Research]

Yeah, good morning. Just wanted to get a sense for how your ammonia price realizations may trend. I understand that you guys have booked some product around $600, and I know Tampa's gone up, but you also have the Mosaic contract. could you talk a little bit about how the price realizations might look for ammonia in the third quarter and kind of moving forward in terms of the amount of volume you have committed at kind of cost plus?

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Yeah, you're right. We have the cost plus contract with Mosaic that is a consistent month-by-month consumption, and we like that contract. They're a very good customer and a good partner. You have the industrial contracts that many of them are based off Tampa, and Tampa's at a high price today, and we anticipate that continuing just due to the global issues we articulated in our prepared as well as Q&A remarks. Just due to the high cost structure in Asia and Europe, they're consuming all the low cost produced ammonia, which is then shipping to those regions, keeping the market tight. You look at fall ammonia demand in the United States. We're really anticipating corn acreage increasing probably over 94 million acres.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Last year we had an exceptionally good ammonia season, and we've got a lot of that booked for this fall at those prices that we articulated, which are in short ton, you have to remember. We have some very good margin opportunities going forward in the ammonia book.

[Michael Piken, Analyst at Cleveland Research]

Okay, great. you just talked about on the call, kind of being toward the lower end of the volume guidance, 19 million product tons. In terms of the split of where some of those tons might have come out versus last year, could you give us a rough breakdown of how much of it's going to be ammonia versus urea versus UAN? Thanks.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

When we look at it on an ammonia basis, it's easy to communicate that on ammonia because then you're right, the upgrades are moved around. We shift our production based on margin. Today we've got some very good margin opportunities across the board. It's a fight for the ton, and I would say at this point, with the projections for urea and UAN, that fight will continue. I would say more to come.

[Michael Piken, Analyst at Cleveland Research]

Okay. Thank you.

[Operator]

Your next question comes from the line of Andrew Wong with RBC Capital Markets.

[Andrew Wong, Analyst at RBC Capital Markets]

Hey, good morning. Just given the very strong cash flow that you'll probably be generating, and it seems like it's more than enough for your CapEx priorities and debt reduction, would you consider a bigger share repurchase program or some sort of special dividend?

[Tony Will, President and CEO at CF Industries]

Probably not a special dividend, certainly are considering what we would do in the way of a share repurchase program. As Chris has talked about in the past, I think we're much more likely to be kind of larger, bigger chunks opportunistic as opposed to a ratable program. We think that going about it that way provides even additional leverage and return opportunity for our equity holders. Certainly, that's one of the things that we're talking about.

[Operator]

Your next question comes from the line of Duffy Fischer with Barclays.

[Duffy Fischer, Analyst at Barclays]

Yeah, good morning. Just a question on the timing around the antidumping. A favorable versus unfavorable decision coming up here. What are the steps after that? If it's favorable in the near term, do you think you'll see a similar phenomena here with UAN like we saw with phosphate, where the parties this is against ostensibly just stopped delivering and fought this until some kind of conclusion? What should we expect, I guess, from this process before it's final and its impact on the market?

[Tony Will, President and CEO at CF Industries]

Good morning, Duffy. The decision I think is coming out on Friday. Our expectation is that if we get a favorable outcome, we would expect UAN to go back to the historical practice of trading at a premium to other upgraded nitrogen products. That's really where it should trade, as I mentioned in my remarks. It's both more capital intensive, and therefore you need to earn an appropriate rate of return on that incremental capital investment to incent people to make that product. And it also has significant agronomic and operational efficiencies for farmers. Because it's both good for the grower and it's higher cost to produce, it ought to carry a premium, and that's where it was, and that's really where it should be in the absence of dumped tons. That's where we think it goes to longer term.

[Tony Will, President and CEO at CF Industries]

The US domestic manufacturing capacity is sufficient to serve the US demand. There's really no need for those imported, particularly the subsidized tons to show up over here. I think we're well positioned to satisfy US demand, and what it does then is it just means we don't have to export those tons like we used to.

[Tony Will, President and CEO at CF Industries]

In terms of overall timing on kind of when imports would stop showing up. I think that's a little bit TBD. We're talking about relatively short term on that. In the event that it's not a favorable outcome, I think it's just business as usual because that's the world that we're living in currently. It's not like there's downside to what today is that we're operating with all of those dump tons coming in today, and we're finding a way to navigate it despite the fact that it's challenging. Bert, do you have other thoughts on the timing?

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

We've kind of been given some timing ideas and expectations in that the official first response is on Friday, then something by early Q4, we're expected to have a result. Final decisions could go as long as into Q1 of next year. I want to address more of the customer position. We have long-term relationships that are obviously decades long, but also kind of contractually laid out and some soft contractual commitments that we work very closely with our customers on supply. Those who have been with us or against us in this case, we've been talking to and we'll continue to work with, and that's why we did a fill program in anticipation just as a good faith that was appropriately priced based on the constraints of today, which again, are high levels of imported subsidized product.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Going forward, we will still work with our customers and be aligned with what is an appropriate price in the market and continue to communicate and support and help them grow their business, which in the long term helps the American farmer and the American economy.

[Operator]

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

[Jeff Zekauskas, Analyst at JPMorgan]

Thanks very much. My understanding is that in the third quarter and at some other times, you sell ammonia to industrial customers on a cost-plus basis. Should those legacy contracts be revisited? That is, are you giving away too much in this environment? Are you just stuck because they buy seasonally in a weak quarter for you in terms of volume?

[Tony Will, President and CEO at CF Industries]

Jeff, most of our industrial business, part of the reason that it tends to be lower priced is it's ratable. It doesn't tend to be seasonal. There certainly is some level of our business that is on a cost-plus basis. A lot of those contracts either come up every year or every couple of years for reevaluation. We think about what the market dynamics are from an S&D balance in terms of how much of that business we want to look at and how big the plus is in terms of the adder. Some of those contracts at various points in time were pretty attractive to us. Obviously right now, the ammonia supply agreement with Mosaic is far in their favor, but for a number of years, it was way in our favor.

[Jeff Zekauskas, Analyst at JPMorgan]

Sure.

[Tony Will, President and CEO at CF Industries]

That was a very helpful kind of contract when the rest of the business was under pressure to have enhanced margin coming out of that. Some of those end up being sort of a natural hedge for us, which isn't a bad thing at all. It's certainly one of those things that Bert and his team evaluate how much and how high. Those are the things that will come probably under a little bit of pressure more than anything else as we see ammonia applications in clean energy beginning to expand. When we're able to make the blue ammonia that we were talking about earlier and are able to service the demand that will pay appropriate premiums for it, the place that's going to come out of is the relatively lower value industrial business that we serve today.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Yeah. The reason Q3 ammonia is the lowest generally is because Q2 and Q4 are our ag ammonia movement periods, and they're obviously at higher prices. The actual price throughout the 12 months for our industrial book is fairly consistent, gas based or Tampa based. You'll see that, I think, do well just based on where the Tampa average is today.

[Jeff Zekauskas, Analyst at JPMorgan]

For my follow-up. I realize that CF has been a pretty good stock this year. If you look at it over a longer period of time, the share price has struggled. It sounds like you don't really want to buy back shares in that you want to buy them at a more attractive price. Historically, CF's really not been interested in raising the dividend. The market doesn't seem to want to pay a high multiple for your cash flow for whatever reason. What do you do? How do people make money in CF over a longer period of time? You don't want to lever up. What are the levers that are going to lead to an above average return over time? Or are those out of your hands?

[Tony Will, President and CEO at CF Industries]

Yeah. No, Jeff, I appreciate that question. I think you have to look at our return in the context of other companies within the ag space or within the nitrogen space. I'd say if you look at, I think 10-year return kind of numbers, we're at the top of the heap in terms of where our peer group has been. I think that certainly there has been some challenges in the interim during that period of time. I also think we've done some things that make the company stronger today than it's ever been in the past. If you look at how much cash flow we're generating today and how many shares there are outstanding, the ratio is better today than it was even back in the highest priced days of the stock and/or the highest EBITDA that we were generating in the company's history.

[Tony Will, President and CEO at CF Industries]

I think the sector may not be in that much favor right now in the marketplace, but I think the fundamentals of this business are better than they've ever been in the past. I would also say we've taken out, I think, over 50 million shares out of our share count through repurchases. It's probably even more than 50 million shares, and that actually has not seemed to lead to any kind of dramatic improvement. I'm not sure share repurchase is the answer. I think what really does drive value for investors in the near term, it's the fundamentals that we're looking at, which are better than anything we've seen in the last seven or eight years. In the longer term, it is the fact that ammonia and hydrogen, I think, are really the clear, clean energy sources of the future as economies decarbonize.

[Tony Will, President and CEO at CF Industries]

We're in the best position to capitalize on that. As demand starts ramping up and exceeding supply, I think what you'll see is asset values will tend toward replacement costs, which is way above where they are today. It gives us the opportunity to think about how we want to participate in that marketplace. It puts growth clearly back on the radar screen, whether that's inorganic or organic. The fact of the matter is I firmly believe that you move the clock forward several years, and ammonia is going to be in tight supply, and people are going to be racing to need to build it. When that happens, you see a dramatic uptick in terms of asset value. We're very optimistic about the return profile that we offer to our investors.

[Operator]

Your next question comes from the line of Adrien Tamagno with Berenberg.

[Adrien Tamagno, Analyst at Berenberg]

Hello, good morning. I have a question on the UAN volumes. It seems it went down much less than urea and ammonia in Q2. Can you explain why was that the case? If this product would be more subject to maintaining CF relative to others?

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Yeah. The UAN volume we did a very good job of moving that product. As Tony mentioned in one of the first questions, the pricing was lower. We had a book that carried in from Q1 and Q4 and then finished out in Q2. As we've talked about we have a competition for value in the company. After the freeze-offs in February, we stepped in and purchased a substantial amount of urea compared to our historical actions in that market to cover our customer commitments, which we value and make sure that we do cover because of our ability to produce more UAN. It's not easily available to go into the market and purchase UAN. We chose to purchase urea and some ammonia and run UAN at a very high level to meet customer commitments.

[Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries]

Across the board, on every product, we were able to deliver on time, even with the substantial disruption that took place in February and March. That's why you saw a volume uptick. We covered the volume deficit with urea, and you will see how that goes going forward.

[Operator]

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.

[Martin Jarosick, VP of Investor Relations at CF Industries]

Thanks, everyone, for joining us this morning, and we look forward to speaking with you on follow-up calls and also on upcoming conferences.

[Operator]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Bert Frost, SVP of Sales, Market Development, and Supply Chain
• Chris Bohn, SVP and CFO
• Martin Jarosick, VP of Investor Relations
• Tony Will, President and CEO

Analysts

• Adam Samuelson, Analyst at Goldman Sachs
• Adrien Tamagno, Analyst at Berenberg
• Andrew Wong, Analyst at RBC Capital Markets
• Duffy Fischer, Analyst at Barclays
• Jeff Zekauskas, Analyst at JPMorgan
• Joel Jackson, Analyst at BMO Capital Markets
• Lucas Beaumont, Analyst at UBS
• Mark Connelly, Analyst at Stephens
• Michael Piken, Analyst at Cleveland Research
• P.J. Juvekar, Analyst at Citi
• Steve Byrne, Analyst at Bank of America
• Vincent Andrews, Analyst at Morgan Stanley