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

So other than just like really, really smart, how come you can run Waggaman a lot better utilization than...

If you look at our network, there's no one else even engineering consultants who have the amount of ammonia plants that we have. So we have 17 ammonia plants, 130, 150 chemical engineers that are working on those. They pretty much have seen everything across our network. If you're a single plant operator, you're doing a turnaround once every 4 years. We're doing 4 turnarounds every year. So what we see are planning on even the timing of doing turnarounds, this is a Kellogg plant we're buying. We have, I want to say, 13 Kellogg plants in our networks from a spare part, understanding of those plants. So we're very confident that we'll be able to see higher utilization on this particular plant.

So you talked about also, CF has talked about also looking with -- partnering Mitsui in building a new blue ammonia plant. And now you have Waggaman, how does that change how you view a newbuild Blue Marina project with Mitsui?

Well, I think if -- as we look at the Mitsui project just independently, we're going through a FEED study right now, and we'll make -- as we've talked about on our earnings calls and other calls, we'll make a disciplined financial decision based on what capital costs come back from those FEED numbers. We'll work with Bert's team and where he thinks pricing will be. I think what the Waggaman plant does for us, as I mentioned, being able to sequester CO2 from there, along with the Donaldsonville plant gives us a lot of flexibility to have a significant amount of blue sooner than anyone in the quantities of which we could serve, whether it's the Mitsui demand, the -- or rotate demand without building a new plant. Now in saying that we're ammonia producers. And if we see the economics make sense, we'll move forward with that site.

Do you think I mean at this point, a new build blue ammonia plant in the states is just too cost prohibitive?

Whether it's blue or gray because it's really where it's located. And I think your key term there was in the states because the one thing we have an advantage, specifically in the Gulf is where we can sequester that CO2 and then the IRA giving us incentive to do that helps with some of the capital costs going forward there. We're definitely in a higher engineering and capital cost environment right now. So we'll just have to see. So I would say all the announcements you saw when -- as Bert mentioned earlier, ammonia was $1,000 to use my boss's term. It's kind of vapor. Some of those will go away because it's a lot tougher to make a plant when you're in the $300 to $500 range of ammonia. And that's why I think in the end, these 30 plants announced, what you're going to see is, it's going to be the traditional producers who probably move forward who know how to construct a plant, have the network to move the product rather than some of these other ones that were announced.

That's also what's coming. When you see what Chris talks about just that side of it, what's coming in this new demand growth of -- in the 4 areas are coal combustion and that's being pushed very heavily in Asia, maritime, and that will be maybe longer dated. But you have the ammonia to hydrogen, there's so much demand if a portion of that even comes forward, you're going to need many, many plants. And what Chris just described is the geology, the gas, the systems, the engineering, the ability, the location, the Gulf Coast is ideal for that.

So let's talk about that. So if I think about -- it's been 2 or 3 years, maybe 3 years since CF started talking with me, 2 years. So you're talking about this, started putting some plans in place. What's market development like with customers that maybe you say, yes, I'm going to pay up for a blue or green product or a cleaner product. I'm going to pay you this much. Here's the premium like it seems like it's -- the market's gone a bit slower and development-wise than what you maybe would not say -- outside what would have helped years ago. Is that fair?

I don't think so personally. I think what you've seen is actually an acceleration in the co-firing. So you have JERA, who's Japan's largest utility who's doing 20% ammonia blend with their coal to reduce their emissions. And JERA's test is also being viewed by Thailand, Indonesia and also Korea as they're doing their own test. If those tests prove the reduction and relatively, they're understanding that there will be an increased cost, but what that cost would be and able to have the technology to do that, I think you're going to see that move very fast and very rapidly. I think when you look at some of the other areas of development, whether it be marine, those are going along the lines that we pretty much thought. When you look at the marine engine producers for ammonia, MAN and Wartsila being the primary two. They're looking to have their test pilot ammonia engines prepared for testing next year 2024 probably with some vessels later in this decade. I think the ammonia demand is for Marine, as we've always talked about, is probably 2030 and on, and that will be something that just incrementally builds as there's a rollout of other. So I think our position on the demand side is still pretty much what we thought when we launched this new strategy 2.5 years ago. I think what you do see, Joel, that maybe you're thinking about is there's some jocking between where these demand centers are, I think co-firing of ammonia with coal definitely has exceeded sort of the rapid testing that I thought it would and marines maybe pulled back a little bit.

And I think about some of these points, taking a step back as an investor and a person who's deeply involved in this industry and ourselves who are fully invested in what we do. let's just look at what has happened or has transpired over the short term. The world understands something needs to be done. What needs to be done? Is it carbon? Yes. That's where the main areas we've identified, along with a few others. To get the government to move and governments, whether that's Europe or North America and to put the IRA in place that has incentivizing us to make the investments that we're making to get the Asian countries who are heavy coal users to be -- to purchase a product is probably going to be more expensive, but better economically overall and environmentally for their systems. They're taking those steps and they're making commitments. We're signing MOUs, we're signing contracts. And then you have the majors like Exxon, developing a whole new division for carbon sequestration. This is amazing in 2 years to have that kind of concerted focused and joined effort to tackle something we've all identified is, I think, impressive.

So you are seeing Rome is not built in a day?

Yes.

On the marine field opportunity, so we did a -- at BMO we did -- I did a seminar in January, February and it was a marine engine salesperson from [ Mana ], I had come across last year. And at first, I thought he -- I thought methanol's being to going to be interesting as a topic. So I brought him on -- and what was interesting was he was talking about this just sort of developed in the last year or 2 where they're still is trying to get now actual orders of ships and engines for methanol, fuel engines, methanol, ammonia. What's interesting to me was, yes, he is bullish on methanol, marine fuels starting to become a little more interested like actually being tangible in 2025 and become meaningful, but his forecast for ammonia as marine fuel are a little bit higher. So he's got -- I don't know the exact numbers, but it's like 22% of ships will have dual fuel engines in 20 years, methanol, 28, 29, I'm making them up ammonia. And there's obviously reasons why ammonia versus methanol a different advantage and disadvantages. How do you see this playing out? Are these companies coming to you and trying to figure out what they're going to do, like me, you talk about some of those discussions?

Yes. So we're pretty involved with a lot of whether it be the engine manufacturers or some of the other marine organizations like the [ Ameris McKinney more ] center to get an understanding of what they're looking at as a bridge fuel to ammonia and then also what their outlook is for ammonia. And I would say the numbers that you're talking about are pretty comparable, probably actually a little bit lower than what the IEA is with their marine fuel for ammonia given out in the next decade plus there. But from a methanol side, I mean, methanol does have a lower carbon intensity than the bunker fuel that's used today. However, it's still carbon, right? It's emitting carbon.

[indiscernible] in it, yes.

Yes. exactly. And as Bert mentioned, really to get to 0 carbon, it has to be ammonia. Where we're being involved is I mean we've operated ammonia plants for decades upon decades. Our engineering team from a safety, from a technical aspect, we're trying to contribute from that perspective, working with these particular parties. So we're very active in that. I just think, as you look to roll out the whole vessel, Bert is always the first one to point this out, people are going to run these vessels pretty long. So it's to get a whole new fleet in to get 20% and stuff will take some time. But if you were to get those type of numbers, you're going to double what the global ammonia consumption is today. And so it's not as if you need huge pieces of that and then also the other demand centers that we've talked about. And that's why we're bullish on this not only now, but as it goes forward in the future as well.

When you look at global movement of goods from Capes, Panamaxes, Handy, Handymaxes, coasters, those are the different types of vessels. You can move products around the world. There are estimates of their maybe 60,000 vessels. It's a vessel like Chris said is an average life of 20 years, and then it goes into service to maybe a third world country. You could take that math, divide it and get how many vessels are rolling off each year and then how many vessels can roll in. It's about 1,500 vessels per year in terms of dry dock space, so you then can do the math and add that, what would be the rollout if the one, the engine has to be created; two, it has to probably have dual fuel capability, but that for us is a longer term, but a very, very exciting growth vehicle. And for us, we have the terminaling system already in place in many -- like we do in U.K., or we do in the U.S., or we do in Canada that we can move tons to and build those terminals to supply those vessels.

I think about some of the -- so you could go and buy more things or some small nitrogen plants out there that you could add to your network. One of your largest nitrogen competitors is under a strategic review. They've got some methanol assets, too. You may have, I don't know, talked about giving a merger with them some years ago. remember that. I mean, when you think about that, like if you are a true believer in this nextgen, maybe going after a company nitrogen, methanol, states, I mean, how do you think about that and how you position yourself strategically?

I mean I think how we're going about it right now is how we think about it. So we look at very key inorganic acquisitions, the Waggaman site being one that plugs in place right in, allows us a lot of opportunities just to fit into the network versus some of these other acquisitions that are out there that either will require a significant amount of capital or don't fit necessarily synergy-wise as well into our system. And then I think the Blue Point acquisition that we did just a little bit north of Donaldsonville, it's about 900 acres of land on the Mississippi, where we have the ability to put in 5 organic ammonia plants in that particular area, much of which we're partnering. If you look at the partnerships that we've signed, these are demand side, where there's a demand pull on the other side with the partners we're looking at. So I think we're looking to expand this based on sort of where we view this going over the next 5, 10, 15, 20 years of a decade.

Okay. So Chris, when I think about -- so the question I get a lot from investors right now is trying to figure out what -- with all the volatility we've seen last year, what is a good mid-cycle earnings number for the various fertilizer companies. What do you think is kind of CF when you think of all your views on commodity prices, what is a good mid-cycle EBITDA free cash flow number for CF. However you want to answer?

This is why I just have to tell Joel, we don't give our mid-cycle view out to putting me on the spot here. What I would say is I think it's significantly higher than where we were in the past. In the past, our mid-cycle never really took into account the addition of our platform, that being the Donaldsonville expansion along with the Port Neal expansion. I think additionally, now when you look at like what is mid-cycle, what would -- the way we look at mid-cycle is what would be needed from a urea price or ammonia price to bid in a new plant globally and that they would get a return on that, that the investors would feel comfortable with. And so when you look at that today, I think you also have to work in the 45Q, because a lot of our plants whether it be the Waggaman plant that we're looking to acquire or existing here in North America. If you think of the amount of tons just even at Donaldsonville that we're able to sequester there with 2 million tons a year and the 45Q gives you $85 per ton on that. Our OpEx in that is somewhere in between the $20 and $30 range. So let's just use $50 [ tons ] -- $2 million, that's $100 million additional in a mid-cycle view that we didn't have just a few years ago. As Bert mentioned, all these things coming in culmination new demand centers and such like that are going to just only increase sort of what our run rate is here at CF. I would say the one thing no matter what our mid-cycle or what our potential year-on-year earnings is. The one thing we've done over the last few years is really to lower our fixed charges. And as a result of that, our free cash flow conversion, like everybody wants to talk EBITDA, but it's really what's the free cash flow going to the balance sheet? What cash is going into the balance sheet? When you look at our conversion ratio, not only against our peer group, but really against any capital or chemical companies, it's extremely high. And that's because we have a very disciplined CapEx program. We brought our debt down by our share repurchases. We brought down our share count. So our dividend is in line, and those are the things that we look at.

It's great. You talked about a lot of reasons why there's upside ammonia. Some other things going in industry that maybe could hurt nitrogen demand over time would be a lot of development going on in biologicals and new products that maybe we could waste less nitrogen, so I'll get more plant available nitrogen. Some of the Precision Ag tools coming out from companies like John Deere, maybe if some of these digital ag tools, some of the digital like software tools, the analytic tools will start being able to apply nitrogen more optimally across the different plots of land. How do you think about that? And do you see any impacts to nitrogen demand from some of these tools?

Where I start is with the farmer and growing up in a farm family and a farmer community, farmers are smart. Farmers are economic beings. They're having to judge their -- all their purchases in running a business and then manage their outputs against weather, against supply and demand against government interaction of limits of exports or banning some imports. And so when you start with that, and someone is making a decision, about what they're going to do. They're going to be economically driven, and that's where we've seen Precision Ag has been a great thing because it's precise. Your -- their equipment, the intellect, the intellectual capital that's being invested in these assets like John Deere, and you're applying the right amount at the right time. at the right place, at the right rate, that's the 4 Rs. That's what we're seeing in Ag, not only in the United States but in Brazil and in Argentina as well. Then when you throw in some of these other changes, whether it's seed technology, microbials, that is something that we're -- obviously we're monitoring it, and we're seeing the development and the growth or the understanding of where they operate and what type of soils they operate and what type of temperatures and moisture profiles. So all that has to be developed. That's, I think, still on the come. but we're monitoring it.

Cover cropping, no-till, region, good or bad for CF?

All these things are good because the viability of the company, we are a low-cost company in a commodity business that are running a very tight ship, Chris and I and Tony and the team, we are going to stay low cost. If you come to Chicago and see how many people we have in our office. It's across the board is how we think about it. And these things are just good for agriculture. What's good for agriculture has to be good for us. So I don't see the negative. I think sometimes we're trying to find the negative and the positive. We've had the best year ever in the history of the company last year, it's $6 billion of EBITDA. We're going to have a great year this year, just not as good as that one. But these things are coming, and we're watching that.

So I think the hard part right now [indiscernible] is that what a great year. It was a really great year. And now I think what I'm hearing is, okay, well, we have the best price we could have, commodity prices have come off a bit. And now people are looking for the next catalyst. And what is CF's a spread play of energy cost differentials and European gas is slipping. Crop prices are really strong...

It is a great time to be a farmer.

Right. So for investors that are nervous to invest in CF because I say it's too volatile and you saw the best year and you can't replicate that. What would you say?

I would say that if you look at our first quarter, our first quarter, as Bert mentioned, last year was such a strong year and to be judged against that. But our first quarter was one of the best first quarters we've ever had. We did almost $900 million of EBITDA. We're converting, as I mentioned earlier, a significant amount of that to cash, ended the year with $2.8 billion of cash on the balance sheet. So I think when you look at where this year is like Bert said, this is going to be a great year. We're expecting to continue to build cash on our balance sheet throughout the year with this year. Couple that with what's happening from a new demand center that didn't exist as Bert mentioned, 2.5 years ago. And it's not just CF that's talking about it trying to create something here, this is global. This is a government being involved with the IRA. It's Asia, it's a large energy companies that are looking. This transition is needed. If that demand, even, a portion of that hits, that's disincredible for CF. But I think even if you look at CF itself, the one thing that's probably most annoying as being CFO is that we trade on what a barge is in Noah. And it could be one barge of 1,500 tons and everyone's trading on that for a every hour. Rather than the fundamental, what is CF done from a cash flow conversion? What have they done with that cash? If you look at the Waggaman acquisition, a very wise discipline. If you look at how we're looking at our new builds, be very disciplined from a financial.

Share buybacks.

Share buybacks. Over the last 12 months, we bought almost 15 million shares, so about 8% for outstanding float for $1.3 billion. We have a $3 billion share repurchase in front of us. Even with the Waggaman acquisition and the cash we're going to generate this year, we're going to be opportunistic. So if the market wants to give us this type of volatility, when we go in, we're going to go in deep and buyback shares at these significant discounts to what we think the intrinsic value is of the company.

Bert and Chris, thank you very much.

Thanks.

Thank you.