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

So I'll take the first part in terms of how do we -- our cost structure. So yes, at $2.50 gas, it's a multiple of a conversion to ammonia. We're the most efficient multiple, I think, in the industry, let's take $30. So $2 gas down times 30 MMBtus at 60 plus your variable cost, gets you your cost of ammonia. But the important thing to remember is we have the -- back to your question on the ability to move our product to our own terminal. So we have the production base on top of the demand base. So let's take our plant in Iowa that's in Sioux City, Iowa, cheap gas and is trucked or railed a short distance to the end consumer compared to the Asian producer, the Middle Eastern producer who also has, let's say, $3 gas. That's what OCI reported from their Fertiglobe group, I think it was them. The $3 FOB Asia putting on a vessel, that vessel costs $40, convert that on a gas basis, that's another $1 to $2, putting it on a barge and shipping up the Mississippi to a terminal to then to truck that's another $2 to $3. So on a gas basis, when you extract that back to the FOB location, you're probably at $6, $7 gas where we're again at $2 gas. That's the structural advantage to CF. In that, 80% of our product stays in North America, to be consumed in North America. And then you can take...

I'm sorry, what was the second? Yes, their cost is pretty much similar to what European cost is. So they use anthracite and thermal coal. And anthracite coal is around today at about an equivalent of $8 per MMBtu. So the comparison goes very similar to what Bert said, where $8 per MMBtu versus $2, so I have a $6 differential and times 30 MMBtus for a ton of ammonia gives me a $180 implied margin before any freight that Bert talked about going up. So China and the U.S. are very similar -- I mean China and Europe, excuse me, very similar from their cost structure today. However, as Bert and Joel have mentioned, China at this particular point isn't really active in the export market. So it's more looking at Europe as a marginal producer.

But I think an interesting component to that is in a decarbonized world, where we're going to have bringing on the first decarbonized product available in China being this incredibly emitter, what is the future of that business, and how will the world respond to those tons?

Okay. Let's get into capital allocation and strategy, and we've a good segue into some of the low carbon stuff projects that you're looking at. So one of the first -- so you're adding CCS blue ammonia capacity to Donaldsonville by next year. You just started rolling out some green ammonia tons recently. First, I want to ask about is -- so well, actually let's talk about that. So on the green ammonia side, just trying to seed some tons, sort of see what's like in the market, very small tons, 20,000 tons and sell 19 million tons of product. So what's sort of been the feedback on the little amount of -- the dribbling of tons you've done this effect.

I would say a little bit important. And we made the step to do that investment to learn, and Chris can talk more about that. But the excitement is we have it. And the excitement is the world is changing, and we're a part of that change. And you'll be surprised on working with a different end consumers, and this is a part of a value chain question. So when you look at the value chain of corn, the value chain of wheat and where it goes and how -- and the part we play in fertilizer and the decarbonized product or 0 carbon product can play in the role of a low carbon and we think, a higher-value product, that's more to come. And that's -- I think when you're conversing with the CPGs of the world that -- and their scope emissions as well as our scope emissions, you're going to see this product received into the market.

And I mean, have you had discussions so early about what a green ammonia premium might look like versus current ammonia price on the 400s, let's say, what green ammonia premium might be like?

We have had those discussions, and they're going well.

I think it's going to be based also on -- to your point, we have 20,000 tons on 10 million gross ammonia tons we produce a year. So if we had 10 million tons of green ammonia, that premium would probably look different than when you're trying to sell 20,000 tons right now. But it's something, as a leader in nitrogen producing, that we thought we want to be on the front edge of this in understanding not only the manufacturing but the costs related with green. And I'd say right now, today, I mean, green ammonia is not going to be economical on a large scale. It's going to be decarbonized ammonia through CCSs where that's going to be the path for the next probably a decade or so.

Here's a weird question, why does nobody wanted to say what green ammonia pricing discussion looks like? I'm being funny, but I see Air Products and Linde and Yara and all these announcements around the world and John McNulty, who covers like Air Products and other chemical stocks or BMOs. He is always like [indiscernible] what are they seeing for price and like they don't say. Why is it such a big secret? People don't want to even get into is like, you're looking at me, like I'm not going to tell you what so why is such a big secret.

I don't think it's a secret. And I will tell you the reason is we don't have that product physically in our possession to go to customer A, B or C and say, "Here's the product." So part of a company's responsibility as we produce things and our team is to build the market for that, that's what we're doing. And I would say, seeding demand, the exact price...

Well, no, I was just going to say 2 parts to that question. One, Bert was just touching on, it's to foster of the development, whether it be through sustainable aviation fuel where there is a carbon intensity model that runs through -- that may be green -- this green ammonia would help to foster that. So that's 1 way we're looking at it. But when you look at the economics of green, we've put this in our investor presentations before, you're probably looking at with capital recovery close to $1,000 per ton, right? Now with the 45V, you get about $500 of that back. So your operational cost to operate it is about $500 per ton. So from a pricing standpoint, will you get the $500 a ton? Yes, you probably will. How much over that or whether we choose to use that 20,000 tons to seed and foster some other demand development is really the internal discussion.

That return is only for a -- for a U.S. producer. It's not for the world.

You're going to start to have a bunch of blue product maybe a year from now or 5 quarters from now, that math speaks for itself in that, hey, 45Q credit, $85 per ton of CO2 -- credit per ton CO2. I think your cost is like $40 tons something like that. So that speaks for itself. So do we even care what the blue premium is at this point?

I think we do because we don't invest just to be going it in the...

It's a good investment. No, but you're getting the money from...

But we're getting the money for the 45Q. We feel like we're doing the right thing as a company. This is a part of our mission. All being said, we're in the business to make money. And I think we're bringing a value product to the market, and that product is being, again, a little amongst many customers. I would say we would be oversubscribed today with what we're bringing on, and there will be a premium to it. What that premium is, we're coming out with it in 2025.

I think there's a couple of layers to that as well because you not only have the 45Q premium or incentive that we're receiving for it. But as you look at European putting in the carbon border adjustment mechanism, to have low carbon ammonia and be the first to do that before everyone else is doing it, it's going to provide us a margin advantage that's quite frankly, going to be very similar to what the 45Q incentive is. So that will be something Bert will have to trade off, are we exporting to Europe or are we taking up into the Midwest and see where the pricing premium would be there.

So Waggaman, which -- so you've had the plan now for 6 months from Incitec or from Donaldsonville, whatever. You're hoping that you can put in some more rigorous processes there to be able to wring out more production from that capacity, a little higher there. Can you talk about how that's going?

Just maybe as a reminder for everybody, we closed on a deal in December of last year, so we've had it about 5 or 6 months right now. It was for $1.675 billion, and the nameplate production was 880,000 tons -- short tons a year. Today, the plant is operating over 900,000 tons a year. We've had some changes that we've done there with our best practice teams during the cold weather stint. Waggaman was 1 of our sites that was down that lowered our utilization. We took that opportunity to pull forward some of the capital expenditures we were going to do later in the year. So we brought in a lot of our engineering teams and made those adjustments now. And the plant has been operating very, very well. And I think as we look at that transaction, and then transactions post and what it costs to build a new site, it's something that we're going to look back on, as we do already today very favorably about the price we paid for that.

And I think you also want to add maybe CCS to Waggaman. Has that been approved yet? I don't think so?

Yes. We haven't approved it. We have a little bit of a hierarchy on Waggaman. The focus is just getting the utilization rates to what we expect at CF, which is 95% or above so we can get the ammonia production out of that. And then it will look to CCS. From CCS, you mentioned the Donaldsonville project, which will be going live next year. And then after that, the 2 sites we're looking at. One is our Yazoo City, Mississippi site, where we have a little over 0.5 million tons of CO2 we sequester there. And then a little different than the 45Q incentive is our Medicine Hat plant where there's a carbon tax that becomes relatively punitive that we'll have a pretty high back on that by putting CCS in up there. And we're in discussions in both those areas.

And I know that the carbon tax in Canada is a huge political debate right now between different parties. And also, I think it was very topical on your earnings call a couple of weeks ago is understanding if you've got on the table, maybe the ability to build a new greenfield blue ammonia plant. You've got Mitsui, you've got JERA, as different parties and partners are doing some FEED studies. And you're also kind of waiting a bit to see what the different standards will be, some costs -- still get some clarification costs to make sure if you do build it with partners, it'd be the right plan with the right product. Maybe talk about thinking around that?

Yes. Like all our investment decisions, especially ones of this size that are $2.5 billion to $3 billion we're going to be very disciplined and thoughtful as we go through that. I think, historically, we've looked at it both from an economic and a strategic rationale and said, does it fit? And so we've taken our time going through this, but largely part of that time delay from when we thought we'd be announcing an FID on this earlier this year, is due to the understanding and getting the inputs that have yet to be defined, that being one, the carbon intensity. So looking at it globally, what are the carbon intensity requirements? I think Asia is getting closer to recommending and putting out what that is. And that's really going to inform the decision of what technology we use. Do we use our standard steam methane reforming or an autothermal reformer that can capture more of the process CO2? And all those, we have FEED studies going on that will be done later in the fourth quarter of this year. So I wouldn't expect any FID until we get really that criteria on what is the carbon intensity, what are the capital cost based off of those carbon intensity, and then lastly, what is the contract for difference. So we can see what the demand pull will be off of those plants.

So I got a question on the app and one I was going to ask as well. I did a seminar on marine fuel last year. I started off talking about methanol, but in talking to some of the experts that are building out ships and thinking about building out ship engines over the next 20 years, interesting is ammonia is really seen as maybe a strong marine fuel alternative down the road. Maybe talk about the outlook for that? It seems like it's next decade, but you've got to figure out some issues with ship engine technology. But think about ammonia as a marine fuel, what does that look like?

Yes. So I'll start and Bert can add. But I think we've always been of the view that you mentioned that this is a 2030 and beyond. You'll see -- you're seeing the engine technology now with dual fuel that would have ammonia as a fuel of being able to be used there. But there's also the bunkering that has to be considered. And then no one is -- while there's some ammonia vessels being built today, ammonia fueled vessels, you have 60,000 vessels out there today, and the attrition rate is 2% to 3%. So by the time you get the turn where you're having sizable volume of ammonia, that's being consumed, you're probably a decade plus from now. Now as I said, there's green shoots with that. And the fact that engine technology exists, we're doing a lot working from the safety perspective with different -- as they're looking into utilizing ammonia as a fuel. So we continue to work with these groups to foster that demand build, but I would say it's next decade before you get anything that's concrete.

Okay. And we see like on the methanol side, we're seeing ships actually get built. And maybe methanol is easier as a fuel, but also has a carbon atom in it, whereas ammonia doesn't have a carbon atom, so it seems like a longer-term solution, whereas methanol may be a transitional fuel. How do you think about that?

I mean I struggle with methanol as an interim being that its carbon footprint isn't much different than -- I mean, it's lower than bunker, but not significantly lower. And I think when we've talked to a lot of people, they're saying, why would I build methanol and just leapfrog to ammonia a decade from now or whatever. But you are seeing some methanol vessels. Again, you have 60,000 vessels. So if you're seeing 500 methanol vessels being built, it's not all that significant. I mean methanol does have the advantage where you can use a lot of the same bunkering infrastructure assets versus what will happen with ammonia so I could see that.

So stick on methanol, but not exactly because obviously we don't do that. So we've seen the last couple of weeks, a lot of headlines that in Iran. They seem to want to divert a lot of methanol production now to petrol, which is interesting because methanol uses a lot of gas in Iran. Would that have any impact on ammonia or nitrogen production in Iran, if we see something like that?

If you see them converting...

Bunch of ethanol to -- for petrol, could there be any kind of -- I don't know what's their expression is, back, like something that somehow affects nitrogen production Iran too?

I don't know. If there were a free country, everybody would be running to Iran to invest because of their gas and oil resources. But today, that's not happening, and it's kind of a black box. And then the sanctions are working in some places, but not really. So the tons are making it their way out.

Yes. Okay. Maybe just nothing on cap allocation, putting this all together, you're generating a lot of free cash flow. Earnings are great. You've got a bunch of different products you want to do on the clean ammonia and you may approve some, you may not approve some. How do you think about what you're right? And you've got, I think, a $3 billion authorization, you just -- a new one you just start to eat into recently. Maybe talk about how you think about -- how you manage all of this growth and buybacks?

Well, I think it's -- it really starts with what we did a couple of years ago, taking -- cutting our debt in half, at the same time increasing our production capacity by 35%. So we not only reduced our fixed charges, but increase the margin building power of the organization. So really, what it allows us to do is to do a little bit of all of the above. So we've -- as Joel mentioned, we have a $3 billion authorization until the end of next year on share repurchases. And we're about 1/3 of the way through there. And our intent is to close out the remaining $2 billion before its expiration at the end of the year. Additionally, over the last 2 years, we've increased our dividend by 67%, taking it from $0.30 a share per quarter, up to $0.50 per share per quarter. So our return of capital continues to be extremely strong. Along with that, allowing us to build cash. So we have just under $2 billion of cash at the end of Q1 on our balance sheet and also to continue to evaluate these growth opportunities. So I think our capital allocation philosophy hasn't changed. We'll look at growth first and then return to capital second. And we're fortunate enough right now, due to our free cash flow generation, that we can do both. I think what sets us apart really in not only in our peer space, but in the chemical industry, is our free cash flow conversion. So it sits at almost 60% of our EBITDA compared to others where sub-40% or sub-30%. And that free cash flow generation really allows us a lot of flexibility to do all of the above here.

The last couple of minutes we have here, maybe talk about what -- to investors considering investing in CF, what would you say is this is why you have to own us?

This is why you have to own us? I think -- I'm building on what I just said. I think if you take the time and you look at what our free cash flow generation is, so as we talk about first quarter, we had a challenging quarter, but we still generated free cash flow over $200 million of free cash flow during a challenging quarter. The one thing CF does extremely well is we know where we play in the value chain. We're not trying to get into retail. We're not trying to stretch into other ancillary chemical production. We're great manufacturers, logistics and distribution network, that's unmatched throughout the industry and Bert's team looking at chasing margin the best around the world globally. I think it positions us to continue to generate that free cash flow. And then if there is this clean energy demand that begins to materialize, whether that's next year with the blue ammonia plant coming on or longer term with marine and power generation consumption of ammonia, I think that's just all upside to what we've built today.

Thanks, gentlemen. I appreciate it.

Thank you. Good day.