CF Industries Holdings, Inc. (CF) Earnings Call Transcript & Summary

Okay. We'll go ahead and get started. And I think just looking at the schedule, some of the people are interested in this. So these guys will be coming from afar so there'll be some people trickling in, but we're very happy to welcome the CF team up here with us today, both Martin and Chris. So we'll run through a whole gamut of stuff. What we always do -- or what we'll do first is we'll just kind of run through the audience response questions, 6 of them, and then we'll get into the Q&A and I'll leave a couple of minutes at the end if you guys have questions.

So with that, if we could throw up the first question. Do you currently own CF? [Voting]

Okay. Question number two. What is your general bias towards the CF stock right now? [Voting]

Okay. Number three, in your opinion, through the cycle, EPS growth for CF will be above, below or in line with peers? [Voting]

Okay. Question number four. In your opinion, what should CF do with its excess cash? [Voting]

All right. Question number five. In your opinion, on what multiple of 2020 earnings should CF trade? [Voting]

Okay. And then the last one. What do you see as the most significant share price headwind facing CF? [Voting]

All right. Well, perfect. Well, again, Chris, Martin, thanks so much for taking some time with us today. Very interesting times, very interesting story. The ag space has had fairly volatile last maybe 2 years. So maybe we'll start there, talk kind of North America, which is your home territory, and then maybe talk global as that has some influence on what pricing is in the U.S. maybe over the last 2 years, just kind of the anomalies we've seen in the macro ag and then how that's actually impacted your business?

Yes. Thanks for having us here today, Duffy. Just looking at North America over the last couple of years, we've had a few major differences that have occurred both from weather, from us getting our product into the Midwest, which we were able to do in 2019 in the spring as we saw significant amount of flooding going on and really work to our logistical advantages. And then in the fall, as we were doing our Q3 earnings, we had a blizzard that affected the ammonia application that was going down in the fall and really stopped ammonia application pretty much in its tracks. So a little bit came on in November and December. And as many of you know, nitrogen being a nondiscretionary product, that amount of product needs to go down, and is -- that deficit we saw in the fall of a couple of hundred thousand tons will now be applied in the spring. And the thing we're seeing from a larger ag standpoint is really -- even with a lot of the disruptions that are going on globally from the African swine fever to some of the coronavirus and different things, what we're seeing is that corn prices have held up fairly well. And in fact, the fundamentals point to plantings of more corn than soy, which is advantageous to us, even with what the USDA has as they're ending corn stocks last year. So I think as we look into the spring here, with some of the changes that have gone on globally, both with corn usage and other grains, we see a lower corn to stock usage coming out of 2019, a higher economic value for planting corn over soy, and that's why we're seeing acreage go up anywhere from 3 million to 5 million acres in 2020 estimates here. And also, that ammonia deficit that we saw in the fall that would have to be applied in the spring. And some of these larger macro events that have occurred are really just shifting some of the trade flows. So from some of the hog culling that's happened in China, it's really increasing protein production, not only here in the United States but also in Brazil. And that's being favorable also, and I think what's helping corn prices globally, along with the lower stocks that you see here in North America.

Okay. And given those things effect, we didn't get a lot down in the fall, given that we're going to have more corn acres this year, given normal weather and all that stuff, talk about a couple of -- one, what does that mean volumetrically for the amount of N that North American farmers would like to put on their fields, again, if everything works out weather-wise? And two, what does it do to the SKU of which nitrogen products gets used versus had we done it in the fall?

Yes. So back to, again, in the fall with that ammonia deficit, probably something that's around 300,000 tons less of ammonia. To your point, Duffy, that's going to be applied in some form here in the spring. And the way we're looking at it is that 300,000, probably 100,000 goes to incremental ammonia that will go down in the spring. And then 200,000 will go to upgrade products, that being either urea or UAN, which is very favorable to us in all situations, both from the ammonia, but the upgraded product has a higher margin content. And the farmer, again, because of the economics that they're seeing right now, is going to ensure that he gets his yield, unlike some of our other nutrients, P&K, you have to apply nitrogen every year and it's directly correlated to the yield. So those deficits and as painful as it was maybe in the second half of last year, not having ammonia, that's really going to play well for us this year. And then to your second point, just on corn acres, where you have corn almost at $4, we should see that increase in acres this year. Last year, the estimates were just under 90 million. This year, our estimate is 92 million to 94 million acres of corn, and we're probably on the high side of that. And I think there's others that are even higher than that. And that's really the stocks to use. We're pretty much at a 5-year low coming out of last year. Still, a lot of questions about the crop from last year as in some of the northern tier states, crop hasn't been removed yet out of the fields. And also, with your own farms, the density of the kernel is also, what's the yield really going to play out. So I think as we look at the spring here, we see a lot of positive elements from just the planting and agricultural, along with our product consumption.

Fair enough. And then maybe talk again, North American specific first, but just where do you think we sit with inventories of N in the system? And historically, if you took a 20-year view, how much can inventories, either from a good standpoint or bad standpoint, kind of skew? So if you thought of some kind of normalized consumption of 3%, let's say, with inventory swings, can that move it to 5% or to 1%? Or kind of how wide can inventory actually move? [ It may be apparent than that ].

Yes. So let me start with the first part of that question, which is, we believe in the channel right now and also at the producers that -- specifically for ourselves, that our inventory levels are adequate. At the end of the year, we built up a little more urea, as we talked about on our earnings call, and that was really because we believe that the margins at that particular time where urea was trading in NOLA, was not advantageous for us to sell it. So we carried the inventory and we'll realize a higher price here in the spring. But from an overall inventory standpoint, you saw us do more exports of ammonia, and ammonia is really probably the most difficult from an inventory standpoint because it has to be stored in a cryogenic tank. And the producers are really the only ones who have those tanks. So you have a pretty good idea of what's in the channel from an ammonia standpoint. And at Q4, you saw us do more exports to manage our inventory levels, we're going into the spring here, we feel very comfortable about where we are. And then going across sort of your 20-year view, I think, again, when you look at inventory levels, the biggest part is going to be ammonia. And that's because it's not really stored by the retailers or anyone like that. And as long as you manage that, you're generally in pretty good shape because urea and UAN, you can continue to have storage for. I think the important thing to make a point here is even with what the North American producers have from an inventory storage point, the U.S. is still an import-dependent market. So we bring in 5 million to 6 million tons of urea on an annual basis. And given where pricing has been at NOLA, call it, Q4, you really didn't see a lot of those imports come in either than those tons that were index oriented, that had to come in from a contractual basis. So from an inventory standpoint, I still think, from North America, you're probably short from a urea standpoint. UAN, given what we've seen from the European tariffs, where Russia, Trinidad and the U.S. cannot export to Western Europe anymore, that's created a little bit of overhang on UAN. And what we've done there is just taken on and been a little more aggressive in areas in North America that we used to not participate in with additional lease storage and also some attractive logistic moves that we can get to these areas to be more competitive.

Okay. And the U.S. is still a net importer for a full calendar year for seasonal year. But there are certainly periods in the year where we're a net exporter. How does that play out? I mean, is that the industry sophisticated enough that you can kind of balance it? Or do you see distinct swings when we move from kind of a net importer seasonally to a net exporter? Does that really change what you would anticipate as kind of the netbacks for sales during those periods? And what are the months that you would say typically should be kind of net export months versus the net import months?

Yes. I think if you look at our system, in general, I mean, Bert Frost and his team do an outstanding job of sort of planning out when those time periods are and when they want to be exporting versus moving it up the river system. And at CF, I mean, it doesn't matter where we're putting the product. We are netback driven. So if an opportunity arises that we can make a higher netback by going to Argentina with UAN rather than taking it up the river system, we'll do that. So I think it's more so than a period of time in a year. I think it's really a week-to-week, and it's really about the flexibility that CF has that personally, I think, is undervalued. It's just the communication level between our operations and distribution units, along with the sales units that we're making these decisions whether to produce more urea or UAN on a daily basis, just as Bert's team is doing the same with, do we export or do we sell up the river to different spots. So it's all going to be based on netback driven and what's going to provide us the highest margin, both from product mix to where we're going with the product.

Okay. And if you had to look out maybe over the next 3 years, what do you think actually becomes kind of the marginal price setter globally? Obviously, for a net importer, somebody else is setting our price and you just look at the transportation differentials and some timing and all that stuff. But does that end up being China? Is it Ukrainian product coming out of the Black Sea? What do you think ends up kind of being the price setter for the globe over the next 3 years? And then how should we think about the cost of their production? So you can kind of put a floor in at that point and then think, okay, can we get tighter or looser and maybe make some rent.

Yes. So I don't think over the next 3 years, it changes. China is going to continue to be the marginal producer, and that's going to be China anthracite production. And the thing that we've seen is a lot of people were anticipating coal prices actually going down, therefore, sort of reducing what that marginal producer cost would be or, call it, the floor pricing of urea. Conversely, what we've actually seen is a tightening up of coal and actually maybe a little bit of an increase to coal. Part of that is due to what's going on over there with the coronavirus, but also just some of the strength that they're having in their production. So we continue to see China as the marginal producer. In 2019, we saw China maybe export about 5 million tons. Our expectations were about 2 million to 3 million tons. But when you look at what they did, they were making economically rational decisions. About 1 million of those tons went out at $290 per metric ton. So the thing we're seeing out of China that maybe didn't exist 5 years ago is more of an economically rational. When the demand in the world needs to pull in those tons, they're being pulled in and that's becoming the price setter. So we expect that to continue. I think, additionally, as we look at the next 2 to 3 years or even 4 years, you're going to see a tightening in the supply and demand balance. Going back to 2012 through '16, we had a lot of expansion projects going on and supply outpaced demand during that. It's now the reverse of that, where we're seeing demand growth outpace supply. And the nice thing about this industry is it takes 4 to 5 years to build a new plant. So your visibility on the supply side is actually very good. So as we look out over the next 4 years here, we see demand greater than supply, and we see China continuing to be the marginal producer of anthracite coal.

And obviously, quite a few people have talked about supply-demand tightening. A lot of other people would say, do you expect some announcements in the next 1 year of company A, B, C deciding to build a greenfield plant because they see that supply-demand and it does take 4 or 5 years to get here? So again, just to level set for investors, we should expect 1 or 2 or 3 announcements over the next year?